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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 N.W. 52ND AVENUE
MIAMI, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 17, 1999, 19,866,906 shares (including 160,703 held by a
wholly-owned subsidiary of the Registrant) of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding, and the aggregate market value of the
common stock held by non-affiliates was $13,200,000.
Documents Incorporated by Reference:
Portions of the definitive proxy statement to be filed within 120 days after the
end of the Registrant's fiscal year are incorporated by reference into Part III.
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ALL AMERICAN SEMICONDUCTOR, INC.
FORM 10-K - 1998
TABLE OF CONTENTS
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PART ITEM PAGE
NO. NO. DESCRIPTION NO.
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I 1 Business................................................................................ 1
2 Properties.............................................................................. 13
3 Legal Proceedings ...................................................................... 13
4 Submission of Matters to a Vote of Security-Holders..................................... 13
II 5 Market for the Registrant's Common Equity and Related Stockholder Matters............... 14
6 Selected Financial Data................................................................. 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 17
7A Quantitative and Qualitative Disclosures about Market Risk.............................. 22
8 Financial Statements and Supplementary Data............................................. 22
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................... 22
III 10 Directors and Executive Officers of the Registrant...................................... 22
11 Executive Compensation.................................................................. 22
12 Security Ownership of Certain Beneficial Owners and Management.......................... 22
13 Certain Relationships and Related Transactions.......................................... 22
IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 22
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PART I
ITEM 1. BUSINESS
GENERAL
All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a national
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices and other integrated circuits, as well as
passive components, such as capacitors, resistors, inductors and
electromechanical products, including cable, switches, connectors, filters and
sockets. These products are sold primarily to original equipment manufacturers
("OEMs") in a diverse and growing range of industries, including manufacturers
of computers and computer-related products; networking, satellite and
communications products; consumer goods; robotics and industrial equipment;
defense and aerospace equipment; and medical instrumentation. The Company also
sells products to contract electronics manufacturers ("CEMs") who manufacture
products for companies in all electronics industry segments. Through the Aved
Memory Products ("AMP") and Aved Display Technologies ("ADT") divisions of its
subsidiary, Aved Industries, Inc., the Company also designs and has manufactured
under the label of its subsidiary's divisions, certain board level products
including memory modules and flat panel display driver boards. See "Business
Strategy-Expansion" and "Products." These products are also sold to OEMs. In
1995 and 1996 the Company also distributed a limited offering of computer
products including motherboards, computer upgrade kits, keyboards and disk
drives. During the third quarter of 1996, the Company discontinued its computer
products division ("CPD"). See "Products."
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company was recognized by industry trade
publications as the seventh largest distributor of semiconductors and the 14th
largest electronic components distributor overall in the United States, out of
an industry group that numbers more than 1,000 distributors.
The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014.
THE ELECTRONICS DISTRIBUTION INDUSTRY
The electronics industry is one of the largest and fastest growing industries in
the United States. Industry associations estimate total U.S. factory sales of
electronic products at approximately $475 billion for 1998 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, networking, satellite and telecommunications equipment,
multimedia, Internet-related products; as well as the increased utilization of
electronic components in a wide range of industrial, consumer and military
products.
The three product groups included in the electronic components subsegment of the
electronics industry are semiconductors, passive/electromechanical components,
and systems and computer products (such as disk drives, terminals and computer
peripherals). The Company believes that semiconductors and
passive/electromechanical products account for approximately 33% and 28%,
respectively, of the electronic components distribution marketplace, while
systems and computer products account for the remaining 39%. Prior to June 1995,
the Company was a distributor of only semiconductors and
passive/electromechanical products. In mid 1995, the Company created a computer
products division ("CPD"). The operations of this division, which had carried a
very limited product offering, were discontinued in the third quarter of 1996.
See "Products."
Distributors are an integral part of the electronics industry. During 1998, an
estimated $22 billion of electronic components were sold through distribution in
the United States, up from $10 billion in 1992. In
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recent years, there has been a growing trend for distribution to play an
increasing role in the electronics industry. OEMs and CEMS which utilize
electronic components are increasingly looking to outsource their procurement,
inventory and materials management processes to third parties in order to
concentrate their resources (including management talent, personnel costs and
capital investment) on their core competencies, which include product
development, sales and marketing. Large distribution companies not only fill
these procurement and materials management roles, but further serve as a single
supply source for OEMs and CEMs, offering a much broader line of products,
incremental quality control measures and more support services than individual
electronic component manufacturers. Management believes that OEMs and CEMs will
continue to increase their service and quality requirements, and that this trend
will result in OEMs, CEMs and electronic component manufacturers continuing to
be dependent on distributors in the future.
Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. With their expanded technology and service capabilities,
large distributors have now become a reliable means for component manufacturers
to outsource their sales, marketing, customer service and distribution
functions. This trend particularly benefits larger distributors with nationwide
distribution capabilities such as the Company, as manufacturers continue to
allocate a larger amount of their business to a more limited number of full
service distribution companies. Management believes that this trend should also
provide consolidation opportunities within the electronic components
distribution industry.
As a result of the trends discussed above, management believes that distribution
will be involved in an increasing portion of the electronics industry.
BUSINESS STRATEGY
The Company's strategy is to continue its managed growth and to gain market
share by: (i) increasing the number of customers it sells to through a
combination of expanding existing sales offices, opening new sales offices and
making selective acquisitions, and (ii) increasing sales to existing customers
by continuing to expand its product offerings and service capabilities. While
the Company's aggressive growth plans caused an adverse effect on profitability
in 1996 and prior years, the Company believes that the investment in expansion
was necessary to position the Company to participate in the dynamics of its
rapidly changing industry and to achieve greater profitability in the future.
Once the Company achieved a critical mass, obtained the necessary geographic
coverage and expanded its distribution capacity to facilitate additional growth,
the Company began to shift its focus from increasing market share to a
combination of continued market share growth with a greater focus on increasing
profitability. In this regard, during 1996 the Company eliminated or reduced
certain aspects of its operations and services that were not economically
feasible to continue or expand and, in 1997, achieved record levels of
profitability. While the Company was poised to continue to improve its
profitability during 1998, the industry was changing. At the same time, the
industry was marred with continued price erosion and intensely increased
competitive market conditions. In an effort to better position itself to address
these changing conditions and to become a more formidable force in facing the
challenges of an increasingly competitive and consolidating industry, the
Company entertained a merger proposal which resulted in the Company entering
into a letter of intent to merge with the distribution operations of a sizeable
competitor. While efforts to complete the transaction were underway, financial
markets were in turmoil, industry market conditions were worsening and industry
dynamics were undergoing changes. As a result of these and other factors,
efforts to complete the transaction were prolonged for several months and
ultimately the transaction was terminated due to factors beyond the Company's
control. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Selling, General and Administrative
Expenses" and Note 5 to Notes to Consolidated Financial Statements. As a result
of the attempted merger, the Company put internal expansion on hold and lost its
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momentum for internally generated growth. Additionally, throughout 1998 the
Company was negatively impacted by the distraction resulting from the evaluation
of, and preparations for the integration of operations in connection with the
proposed merger. These merger-related factors, as well as negative market
conditions and price erosion, combined to result in a decline in the Company's
revenues in 1998.
Once the merger efforts were terminated in the fourth quarter of 1998,
management invested a significant amount of time refocusing the Company on
facing the industry challenges and once again achieving internal growth. While
management believes that it can increase market share and that it can increase
profitability, there can be no assurance that these goals will be achieved.
EXPANSION
The Company had undergone significant expansion prior to 1998, including opening
new offices, relocating and expanding existing offices and acquiring other
companies, all in order to increase its sales volume, expand its geographic
coverage and become recognized as a national distributor. See "Sales and
Marketing-Sales Office Locations" and Note 3 to Notes to Consolidated Financial
Statements.
As a result of the implementation of the Company's business strategy, the
Company had until 1998 experienced significant growth. In order to effectively
drive and manage its expansion, the Company had over the last several years
prior to 1998: (i) restructured, enhanced and expanded its sales staff and sales
management and marketing team; (ii) expanded its quality control programs,
including the implementation of its total quality management ("TQM") and
continuous process improvement programs that ensure quality service, enhance
productivity and, over time, reduce costs; (iii) created and staffed a corporate
operations department; (iv) developed state-of-the-art distribution technology,
(v) enhanced its asset management capabilities through new computer and
telecommunications equipment and (vi) opened an additional west coast credit
department and an east coast regional credit department. To keep up with
industry trends the Company has made significant investments in its web site and
Internet capabilities as well as other forms of electronic commerce; has
expanded its investment in its Field Application Engineer ("FAE") program; and
has increased its investment in its materials management solutions, or "MMS",
capabilities. To better service the large customer base in the western part of
the United States and to enhance relationships with a supplier base that is
predominantly based in California, during 1994 the Company opened a west coast
corporate office which initially housed sales and marketing executives and the
head of the Company's FAE program. In 1995 the Company also opened a west coast
distribution center in Fremont, California (near San Jose). In 1998 the Company
dramatically expanded its west coast corporate offices and relocated the
President and CEO of the Company to San Jose to be based where sales and
marketing functions are headquartered.
In December 1995 the Company purchased through two separate mergers with and
into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions";
see Note 3 to Notes to Consolidated Financial Statements) all of the capital
stock of Added Value Electronics Distribution, Inc. ("Added Value") and
A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain;" Rocky Mountain together with
Added Value, collectively the "Added Value Companies"). As a result of these
acquisitions, the Company added new sales locations, new operations facilities
and several new product offerings. See "Sales and Marketing-Sales Office
Locations" and "Products."
The Company expanded its international presence during 1998 with the opening of
a sales office in Guadalajara, Mexico. The Company plans to open new offices and
may acquire additional companies in the future. The Company also plans to
continue its focus on improving the financial performance and market penetration
of each existing location.
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
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made by its existing customers. As part of its efforts to attract new suppliers
and expand its product offerings, the Company expanded its service capabilities
and has opened new sales offices (see "Expansion") in order to achieve the
geographic coverage necessary to be recognized as a national distributor.
During 1998, the Company added new suppliers and expects to add additional
suppliers in the future. These new suppliers are intended to offer larger growth
opportunities than some of the smaller suppliers that the Company has done
business with in the past. New supplier relationships generally require up-front
investments that could take substantial time to provide a return.
SERVICE CAPABILITIES
During the past several years, customers have been reducing their approved
vendor base in an effort to place a greater percentage of their purchases with
fewer, more capable distributors. As part of its overall strategy to increase
market penetration, the Company has endeavored to develop state-of-the-art
service capabilities. The Company refers to these service capabilities as
"distribution technology." The Company believes that it has developed service
capabilities comparable to some of the largest distributors in the industry,
which service capabilities the Company believes are not yet readily available at
many distributors of comparable size to the Company. The Company further
believes that these capabilities are not generally made available by the largest
distributors to middle market customers, which represent the vast majority of
the Company's customer base. See "Competition." Management believes that smaller
distributors generally do not have the ability to offer as broad an array of
services as the Company. The Company differentiates itself from its competition
by making state-of-the-art distribution technology available to both large and
middle market customers. Although the Company believes that this differentiation
will assist the Company's growth, there can be no assurance that such
differentiation exists to the extent that the Company currently believes or that
it will continue in the future.
The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. During the past few years, the Company has expanded its
services capabilities to include just-in-time deliveries, bar coding, bonded
inventory programs, in-plant stores, in-plant terminals and automatic inventory
replenishment programs. The Company has also implemented electronic data
interchange ("EDI") programs. EDI programs permit the electronic exchange of
information between the Company and its customers and suppliers, thus
facilitating transactions between them by reducing labor costs, errors and
paperwork.
In an effort to reduce the number of distributors they deal with, and ultimately
reduce their procurement costs, many customers have been selecting distributors
that, in addition to providing their standard components, are also able to
provide products that are not part of the distributors' regular product
offerings. This service is referred to as "kitting." In order to expand its
service offerings to address this growing customer requirement, the Company
created a kitting department toward the end of 1994. One of the strategic
purposes of the Added Value Acquisitions was to enhance the Company's ability to
provide kitting services, as one of the acquired companies had kitting
capabilities. In addition to kitting capabilities, as a result of the Added
Value Acquisitions the Company began developing the expertise in turnkey
manufacturing which enables customers to outsource their entire procurement and
manufacturing process. Turnkey services are especially attractive to smaller
OEMs which do not have the capital resources necessary to invest in
state-of-the-art manufacturing equipment nor the capacity requirement necessary
to justify such an investment. In performing turnkey services, the Company
subcontracts out all of the manufacturing work to third party assemblers. The
Company offers warranties against defects in workmanship with respect to its
turnkey services, which is a pass-through from the assembler.
In order to better support its customer base and improve the utilization of its
distribution technology and kitting and turnkey services, the Company has
focused on consulting with customers to jointly develop complete materials
management solutions or "MMS". In the fourth quarter of 1996, the Company
created an MMS Group to facilitate the consultation as well as the development
and implementation of materials
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management solutions. The MMS Group is staffed with personnel experienced in the
manufacturing environment and in supply chain management who can better
understand the customers' processes and needs.
In order to further enhance its service capabilities, the Company also expanded
its technical support by creating an engineering or technical sales program in
1994. As part of this program, the Company has hired electrical engineers, or
Field Application Engineers (FAEs), at various sales offices across the country.
The Company expects to hire additional FAEs in the future. The program is
intended to generate sales by providing customers with engineering support and
increased service at the design and development stages. The program is also
intended to enhance the technical capabilities of the Company's entire sales
force through regular training sessions. Management believes that this
capability is also of great importance in attracting new suppliers.
Another rapidly growing segment of electronics distribution is the sale of
programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To participate in this growing segment of the industry, the
Company opened a semiconductor programming center during the third quarter of
1995 and in January 1996 moved its programming center into the Company's 20,000
square foot facility in Fremont, California (near San Jose). In order to service
growing customer demand as well as changing technologies, in early 1999 the
Company significantly increased its investments in its programming capabilities
by purchasing programming equipment and increasing its programming staff. In
addition to enabling the Company to address a rapidly growing market for
programmable products, this capability will allow the Company to attract new
product lines that require programming capabilities.
The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site which became
operational during the first quarter of 1997. In order to further expand its
visibility and functionality on the Internet, the Company has engaged with third
party Internet service companies. These engagements are expected to increase
revenues, reduce transaction costs and afford the Company an opportunity to do
business in a new and still developing marketplace. While these engagements have
increased operating costs in 1997 and 1998 and may increase costs further in
future years, many benefits are expected to be realized from these investments,
however, no assurances can be made that the Company will realize such benefits.
In an attempt to further drive the sales of value-added services, the Company
created its American Assemblies & Design division in Chicago during the fourth
quarter of 1994. American Assemblies & Design was intended to expand the
Company's value-added capabilities with respect to electromechanical products.
As a result of continued losses as well as a shift in the Company's focus, the
operations of American Assemblies were relocated and consolidated into the
Company's Miami distribution center in the first quarter of 1996. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Selling, General and Administrative Expenses."
QUALITY CONTROLS AND ISO CERTIFICATION
The Company has a TQM program in order to improve service, increase efficiency
and productivity and, over time, reduce costs. The expansion in capacity and
service capabilities discussed above were done within the confines of increasing
strictness in quality control programs and traceability procedures. As a result,
the Company's Miami and Fremont distribution centers and its Fremont programming
center have all successfully completed a procedure and quality audit that
resulted in their certification under the international quality standard of ISO
9002. This quality standard was established by the International Standards
Organization (the "ISO") created by the European Economic Community ("EEC"). The
ISO
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created uniform standards of measuring a company's processes, traceability
procedures and quality control in order to assist and facilitate business among
the EEC. The Company believes that this certification is becoming a requirement
of an increasing portion of the customer base.
PRODUCTS
ACTIVE AND PASSIVE COMPONENTS
The Company markets both semiconductors and passive products. Semiconductors,
which are active components, respond to or activate upon receipt of electronic
current. Active products include transistors, diodes, memory devices and other
integrated circuits. Passive components, on the other hand, are designed to
facilitate completion of electronic functions. Passive products include
capacitors, resistors, inductors and electromechanical products such as cable,
switches, connectors, filters and sockets. Virtually all of the Company's
customers purchase both active and passive products.
While the Company offers many of the latest technology semiconductor and passive
products, its focus historically had been on mature products that have a more
predictable demand, more stable pricing and more constant sourcing. The Company
believes that the greater predictability in the demand for these products and
the fact that component manufacturers are not likely to invest capital in order
to increase production of older technologies combine to reduce the risks
inherent in large volume purchases of mature products. By making large volume
purchases, the Company decreases its per-unit cost, thus increasing its
potential for higher profit margins upon resale of these mature products.
Although the Company continues to position itself as a leader in the more mature
product lines, as part of its growth strategy, the Company has expanded its
focus to include offering newer technology products as well as on selling high
volumes of commodity products. These newer technologies and commodity products
are playing a greater role in the overall sales mix of the Company and are
expected to play an even greater role in the overall sales mix to the extent the
Company's sales grow. Most of the commodity products, and many of the newer
technology products, have lower profit margins than the more mature product
lines.
The Company does not offer express warranties with respect to any of its
component products, instead passing on only those warranties, if any, granted by
its suppliers.
FLAT PANEL DISPLAY PRODUCTS
The Company believes that one of the faster growing segments of the electronics
industry will result from the expanded utilization of flat panel displays or
FPDs. Flat panel displays are commonly used in laptop computers and are
currently replacing standard cathode ray tubes in a variety of applications,
including medical, industrial and commercial equipment, as well as personal
computers and video monitors. FPDs are also being utilized in high definition
television ("HDTV").
In order to properly function in any application, flat panel displays need
certain electronic impulses. One solution for generating these electronic
impulses is the use of board level products that control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. In addition to the driver board, FPDs require a
back-light inverter to run the back-light, and cable assemblies to connect the
display, inverter and the driver board to each other and to the equipment of
which it is a part.
The Company has addressed the FPD market in three ways. First, the Company has
assembled a comprehensive offering of FPD products, including products from
manufacturers of FPDs, as well as manufacturers of the necessary support
products such as back-light inverters and driver boards. The second aspect in
addressing the FPD market is to develop the technical support necessary to
assist customers with integrating FPD applications. In this regard the Company's
FAE program and marketing department have been developing expertise in FPD
applications and integration. Additionally, the Company has added FPD
specialists to its sales and marketing groups.
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The third aspect to the Company's approach to the FPD marketplace was
accomplished with the creation of Aved Display Technologies ("ADT"). ADT, which
is run as a separate division, was established in 1996 with certain of the
personnel and assets acquired in the Added Value Acquisitions. ADT designs,
develops and has manufactured under its own label, several proprietary driver
board products for FPD applications. In addition to ADT, the Company also has
other suppliers of FPD driver board products.
MEMORY MODULES
As a result of the Added Value Acquisitions, the Company also designs, has
manufactured and sells memory modules under the Aved Memory Products, or AMP
label. Memory products, which include the memory module subsegment, represent
the largest product sector of semiconductor revenues. Memory modules facilitate
the incorporation of expanded memory in limited space. In addition to Aved
Memory Products, the Company has other suppliers of memory module products.
With respect to all products manufactured or assembled for ADT and AMP, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service and in their original,
unmodified condition.
COMPUTER PRODUCTS
While the Company currently believes that 39% of electronics distributors'
revenues relate to computer products, the Company has not in the past derived
significant revenues from the sale of these products. In June 1995, the Company
began to distribute motherboards, and in connection therewith, established a
computer products division or CPD. This division expanded its offering to
include computer upgrade kits, disk drives and keyboards. Sales from this
division generated substantially lower profit margins than were generated by the
Company's other products. As a result of supply problems and related losses, as
well as a decision by the Company to focus its resources on its active and
passive components business, the operations of CPD were discontinued in the
third quarter of 1996.
CUSTOMERS
The Company markets its products primarily to OEMs in a diverse and growing
range of industries. The Company's customer base includes manufacturers of
computers and computer-related products; networking, satellite and
communications products; consumer goods; robotics and industrial equipment;
defense and aerospace equipment; and medical instrumentation. The Company also
sells products to contract electronics manufacturers ("CEMs") who manufacture
products for companies in all electronics industry segments. The Company's
customer list includes approximately 12,000 accounts. During 1998, no customer
accounted for more than 4% of the Company's sales and the Company does not
believe that the loss of any one customer would have a material adverse impact
on its business.
SALES AND MARKETING
OVERALL STRATEGY
The Company differentiates itself from its competitors in the marketplace by the
combination of products and services that it can provide to its customers. The
Company is a broad-line distributor offering over 60,000 different products
representing approximately 85 different component manufacturers. In addition,
the Company employs a decentralized management philosophy whereby branch
managers are given latitude to run their operations based on their experience
within their particular regions and the needs of their particular customer base.
This decentralization results in greater flexibility and a higher level of
customer service. Thus, the Company believes it can provide the broad product
offering and competitive pricing normally associated with the largest national
distributors, while still providing the personalized service levels usually
associated only with regional or local distributors. Additionally, because of
its size and capabilities, the
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Company brings to the middle market customers a level of service capabilities
that the smaller distributor cannot provide.
The Company's marketing strategy is to be a preferred and expanding source of
supply for all middle market customers. The Company is achieving this by
providing a broader range of products and services than is available from
smaller and comparably sized distributors, and a higher level of attention than
these customers receive from the larger distributors. In addition, the Company
continues its efforts to become a more significant supplier for the top tier
customers by focusing on a niche of products not emphasized by the larger
distributors while providing the high level of quality, service and technical
capabilities required to do business with these accounts.
MARKETING TECHNIQUES
The Company expanded its marketing group by adding a west coast marketing
department strategically situated in Silicon Valley during 1996. The Company
uses various techniques in marketing its products which include: (i) direct
marketing through personal visits to customers by management, field salespeople
and sales representatives, supported by a staff of inside sales personnel who
handle the quoting, accepting, processing and administration of sales orders;
(ii) ongoing advertising in various national industry publications and trade
journals; (iii) general advertising, sales referrals and marketing support from
component manufacturers; (iv) the Company's telemarketing efforts; and (v) a web
site on the Internet. The Company also uses its expanded service capabilities,
FAE Program, its MMS Group and its status as an authorized distributor as
marketing tools. See "Business Strategy-Service Capabilities" and "Suppliers."
SALES PERSONNEL
As of March 1, 1999, the Company employed 290 people in sales on a full-time
basis, of which 113 are field salespeople, 114 are inside salespeople, 24 are in
management, 23 are in administration and 16 are electrical engineers in the
technical sales or FAE Program. The Company also had 19 sales representatives
covering various territories where the Company does not have sales offices.
Salespeople are generally compensated by a combination of salary and commissions
based upon the gross profits obtained on their sales. Each branch is run by a
general manager who reports to a regional manager, who in turn reports to an
area manager. All area managers report to the Company's Senior Vice President of
Sales. Area, regional and general managers are compensated by a combination of
salary and incentives based on achieving gross profit and operating income
goals.
SALES OFFICE LOCATIONS
The Company currently operates 30 sales offices in 20 states, Canada and Mexico.
The locations of the sales offices are in each of the following geographic
markets: Huntsville, Alabama; Phoenix, Arizona; Orange County, San Diego, San
Fernando Valley, San Jose and Tustin, California; Toronto, Canada; Denver,
Colorado; Fort Lauderdale, Miami and Tampa, Florida; Atlanta, Georgia; Chicago,
Illinois; Kansas City, Kansas; Baltimore, Maryland; Boston, Massachusetts;
Guadalajara, Mexico; Detroit, Michigan; Minneapolis, Minnesota; Long Island and
Rochester, New York; Cleveland, Ohio; Portland, Oregon; Philadelphia,
Pennsylvania; Austin and Dallas, Texas; Salt Lake City, Utah; Seattle,
Washington and Milwaukee, Wisconsin. The Company also retains field sales
representatives to market other territories throughout the United States,
Canada, Puerto Rico and Mexico. The Company may consider opening branches in
these other territories if the representatives located there achieve certain
sales levels.
TRANSPORTATION
All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.
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SEASONALITY
The Company's sales have not historically been materially greater in any
particular season or part of the year.
FOREIGN SALES
Sales to foreign countries aggregated approximately $9.4 million, $5.4 million
and $1.9 million for 1998, 1997 and 1996, respectively.
BACKLOG
As is typical of distributors, the Company has a backlog of customer orders.
While these customer orders are cancelable, the Company believes its backlog is
an indicator of future sales. At December 31, 1998, the Company had a backlog in
excess of $43 million, compared to a backlog in excess of $50 million at
December 31, 1997 and $49 million at December 31, 1996. In 1993, 1994 and 1995,
the Company operated in a highly allocated market where the demand for products
was much greater than the supply. As a result of these product shortages,
customers had a practice of placing longer term product needs on order with
distributors to increase their probabilities of receiving their products on time
and to protect against rising prices. At the end of 1995 and during 1996,
product availability increased and there was a dramatic shift to an oversupply
market which continued through 1997 and 1998. In response to this dramatic shift
customers began canceling order backlogs to lower their inventories and to take
advantage of the better pricing which became available. Today the customer
practice is to keep much lower levels of product on order as delivery times are
much shorter than they were in 1993, 1994 and 1995. Additionally, the Company
has increased its practices of EDI transactions where the Company purchases
inventory based on electronically transmitted customer forecasts that do not
become an order until the date of shipment and, therefore, are not reflected in
the Company's backlog. As a result of the dramatic shift in the supply-demand
balance and the increase in EDI transactions, the Company's backlog is lower
than it was in the past two years and the Company believes that the backlog
figures have a different indication of future sales levels than the backlog
figures of the 1993 through 1995 period.
By February 28, 1999, the Company's backlog had risen to approximately $50
million. The Company believes that a substantial portion of its backlog
represents products due to be delivered within the next three months.
Approximately 40% of the backlog relates to purchase orders which call for
scheduled shipments of inventory over a period of time, with the balance
representing products that are on back-order with suppliers. The scheduled
shipments enable the Company to plan purchases of inventory over extended time
periods to satisfy such requirements.
SUPPLIERS
The Company generally purchases products from component manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. Suppliers also limit the number of distributors in order to
reduce the costs associated with managing multiple distributors. As a factory
authorized distributor, the Company obtains sales referrals, as well as sales,
marketing and engineering support, from component manufacturers. This support
assists the Company in closing sales and obtaining new customers. The Company's
status as an authorized distributor is a valuable marketing tool as customers
recognize that when dealing with an authorized distributor they receive greater
support from the component manufacturers.
The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is that distributor's geographic coverage. In meeting its
goal of being recognized as a national distributor, the Company has opened and
acquired sales offices in a number of markets throughout the United States and
has advertised in national industry
9
<PAGE>
publications to demonstrate its distribution capabilities to current and
potential customers and suppliers. Another important factor that suppliers
consider is whether the distributor has in place an engineering staff capable of
designing-in the suppliers' products at the customer base. To address this
requirement, the Company established an engineering or FAE Program in 1994 which
is currently staffed with 16 electrical engineers.
As a result of the Company's strategy, from 1980 to 1996, the Company increased
the number of suppliers it represented from 20 to over 100 in order to expand
its product offerings and better serve its customers. As a result of its rapid
growth and the acquisitions it has completed over the years, the Company has an
overlap of suppliers in many product areas and, while still maintaining an
expanded offering of products, the Company began in 1996 to reduce the number of
suppliers with which it does business. While this causes the Company to incur
costs and may require the Company to increase inventory reserves, this move is
expected to increase the return on investment with, and the productivity of, the
remaining suppliers in future periods. The Company presently represents 85
suppliers.
All distribution agreements are cancelable by either party, typically upon 30 to
90 days notice. For the year ended December 31, 1998, the Company's three
largest suppliers accounted for 20%, 7% and 5% of consolidated purchases,
respectively. Most of the products that the Company sells are available from
other sources. While the Company believes that the loss of a key supplier could
have an adverse impact on its business in the short term, the Company would
attempt to replace the products offered by that supplier with the products of
other suppliers. If the Company were to lose its rights to distribute the
products of any particular supplier, there can be no assurance that the Company
would be able to replace the products which were available from that particular
supplier. The loss of a significant number of suppliers in a short period of
time could have a material adverse effect on the Company. The Company, from time
to time, alters its list of authorized suppliers in an attempt to provide its
customers with a better product mix.
As a distributor of electronic components, the Company believes that it benefits
from technological change within the electronics industry as new product
introductions accelerate industry growth and provide the Company with additional
sales opportunities. The Company believes its inventory risk due to
technological obsolescence is significantly reduced by certain provisions
typically found in its distribution agreements including price protection, stock
rotation privileges, obsolescence credits and return privileges. Price
protection is typically in the form of a credit to the Company for any inventory
the Company has of products for which the manufacturer reduces its prices. Stock
rotation privileges typically allow the Company to exchange inventory in an
amount up to 5% of a prior period's purchases. Obsolescence credits allow the
Company to return any products which the manufacturer discontinues. Upon
termination of a distribution agreement, the return privileges typically require
the manufacturer to repurchase the Company's inventory at the Company's average
purchase price, however, if the Company terminates the distribution agreement,
there is typically a 10% to 15% restocking charge.
The vast majority of the Company's inventory is purchased pursuant to its
distribution agreements. The Company does not generally purchase product for
inventory unless it is a commonly sold product, there is an outstanding customer
order to be filled, a special purchase is available or unless it is an initial
stocking package in connection with a new line of products.
FACILITIES AND SYSTEMS
FACILITIES
The Company's corporate headquarters and main distribution center are located in
a 110,800 square foot facility in Miami, Florida. The Company occupies this
facility through a lease which expires in 2014, subject to the Company's right
to terminate at any time after May 1999 upon twenty-four months prior written
notice and the payment of all outstanding debt owed to the landlord. The lease
for this facility contains three six-year options to renew at the then fair
market value rental rates. The lease, which began in May 1994, provides for
annual fixed rental payments totaling approximately $264,000 in the first year;
$267,000 in the
10
<PAGE>
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. Although continued growth is not assured, the Company estimates that this
facility has capacity to handle over $400 million in annual revenues.
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility presently contains the separate divisions created
for flat panel displays (ADT) and memory module (AMP) operations as well as a
distribution center. See "Products." During 1998 the Denver sales operations
were moved to a separate office. The 7,600 square foot facility is now dedicated
solely to certain value-added services and a regional distribution center.
During 1995, the Company entered into a lease for a west coast distribution and
semiconductor programming center located in Fremont, California (near San Jose).
This facility contains approximately 20,000 square feet of space. The Company
moved into this facility in January 1996. The Company has used this space to
expand its semiconductor programming and component distribution capabilities and
to further improve quality control and service capabilities for its west coast
customers. Additionally, this space was originally intended to house the
Company's distribution and operational support for its computer products
division. As a result of the Company's decision to discontinue operations of its
CPD, this additional facility was initially underutilized. The Company has been
moving more of its component distribution inventory to this facility and, with
the additional investment in programming equipment made in early 1999, the
Company expects that any excess capacity will be utilized. No future growth of
its programming and components distribution businesses can be assured in future
periods.
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and CEO of the Company and 8,000 square feet of the
space is being utilized for the sales operation. The remaining area of
approximately 4,000 square feet is not presently being utilized and the Company
is currently pursuing a tenant to sublet this space. In addition, the Company
leases space for its other sales offices, which offices range in size from
approximately 1,000 square feet to 8,000 square feet. See "Sales and
Marketing-Sales Office Locations."
Due to the dramatic price erosion during the past few years, the Company
believes its unit volume shipped has increased. As a result, the Company has
utilized some of its excess capacity. Although the excess capacity is somewhat
diminished, the Company still has excess capacity with its distribution centers
in Miami, Florida; Fremont, California; and Denver, Colorado. To the extent that
the Company increases sales in future periods, management expects to realize
improved operating efficiencies and economies of scale. There can be no
assurance, however, that any sales growth will be obtained.
SYSTEMS
The Company's systems and operations are designed to facilitate centralized
warehousing which allows salespeople across the country to have real-time access
to inventory and pricing information and allows a salesperson in any office to
enter orders electronically, which instantaneously print in the appropriate
distribution facility for shipping and invoicing. The combination of the
centralized distribution centers and the electronic order entry enable the
Company to provide rapid order processing at low costs. The system also provides
for automatic credit checks, which prohibit any product from being shipped until
the customer's credit has been approved. Additionally, the systems allow the
Company to participate with customers and suppliers in electronic data
interchange, or EDI, and to expand customer services, including just-in-time
deliveries, kitting programs, bar coding, automatic inventory replenishment
programs, bonded inventory programs, in-plant stores and in-plant terminals.
11
<PAGE>
As a result of rapidly increasing advances in technology, the Company has
recognized that its computer and communications systems will be subject to
continual enhancements. In order to meet the increasing demands of customers and
suppliers, to maintain state-of-the-art capabilities, and to participate in
electronic commerce, since 1995 the Company has expanded, and in the future will
continue to develop and expand, its systems capabilities, including hardware and
software upgrades to meet its computer and communications needs. The Company
believes that these systems enhancements should assist in increasing sales and
in improving efficiencies and the potential for greater profitability in future
periods through increased employee productivity, enhanced asset management,
improved quality control capabilities and expanded customer service
capabilities. See "Business Strategy-Service Capabilities." There can be no
assurance, however, that these benefits will be achieved.
FOREIGN MANUFACTURING AND TRADE REGULATION
A significant number of the components sold by the Company are manufactured
outside the United States and purchased by the Company from United States
subsidiaries or affiliates of those foreign manufacturers. As a result, the
Company and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, economic or financial turbulence abroad, strikes or delays in air
or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. The
Company's ability to be competitive in or with the sales of imported components
could also be affected by other governmental actions and changes in policies
related to, among other things, anti-dumping legislation and currency
fluctuations. The Company believes that these factors may have had an adverse
impact on its business during the past year, and there can be no assurance that
such factors will not have a more significant adverse affect on the Company in
the future. Since the Company purchases from United States subsidiaries or
affiliates of foreign manufacturers, the Company's purchases are paid for in
U.S. dollars.
EMPLOYEES
As of March 1, 1999, the Company employed 523 persons, of which 290 are involved
in sales and sales management; 77 are involved in marketing; 54 are involved in
the distribution centers; 38 are involved in operations; 10 are involved in
management; 35 are involved in bookkeeping and clerical; and 19 are involved in
management information systems. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that management's
relations with its employees are good.
COMPETITION
The Company believes that there are over 1,000 electronic components
distributors throughout the United States, ranging in size from less than $1
million in revenues to companies with annual sales exceeding $8 billion
worldwide. These distributors can generally be divided into global distributors
who have operations around the world, national distributors who have offices
throughout the United States, regional distributors and local distributors. With
sales offices in 20 states, the Company competes as a national distributor.
Additionally, the Company is one of the few national distributors which has
offices in Canada and Mexico. The Company, which was recently recognized by
industry sources as the seventh largest distributor of semiconductors and the
14th largest electronic components distributor overall in the United States,
believes its primary competition comes from the top 50 distributors in the
industry. Recently, there has been an emergence of additional competition from
the advent of third party logistics companies and businesses commonly referred
to as e-brokers which have grown as a result of the expanded use of the
Internet.
The Company competes with many companies that distribute electronic components
and, to a lesser extent, companies that manufacture such products and sell them
directly. Some of these companies have greater assets and possess greater
financial and personnel resources than does the Company. The competition in the
electronics distribution industry can be segregated by target customers: major
(or top tier) accounts; middle market accounts; and emerging growth accounts.
Competition to be the primary supplier for the major customers is dominated by
the top six distributors as a result of the product offerings, pricing and
12
<PAGE>
distribution technology offered by these distributors. The Company competes for
a portion of the available business at these major industry customers by seeking
to provide the very best service and quality and by focusing on products that
are not emphasized by the top six distributors, or are fill-in or niche
products. With its expanded service capabilities and quality assurance
procedures in place, the Company believes that it can compete for a bigger
portion of the business at the top tier customer base, although there can be no
assurance that the Company will be successful in doing so. The Company believes
competition from the top six distributors for the middle 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 strong efforts on
servicing this middle market customer base. The Company competes for this
business by seeking to offer a broader product base, better pricing and more
sophisticated distribution technology than the regional or local distributors,
by seeking to offer more sophisticated distribution technology than
comparably-sized distributors and by seeking to offer to such middle market
companies a higher service level than is offered to them by the major national
and global distributors. The Company believes that today the top six
distributors are seeking to penetrate the middle market customer base more than
they have in the past.
ITEM 2. PROPERTIES
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 10 to Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation relating to claims
arising out of its operations in the ordinary course of business. Many of such
claims are covered by insurance or, if they relate to products manufactured by
others for which it distributes, the Company would expect that the manufacturers
of such products would indemnify the Company, as well as defend such claims on
the Company's behalf, although no assurance can be given that any manufacturer
would do so. The Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations.
There has been a recent trend throughout the United States of increased
grievances over various employee matters. While the Company is presently not
involved in any material litigation relating to such matters, the Company
believes that costs associated with such matters may increase in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) On December 10, 1998, the Company held its 1998 annual meeting of
shareholders (the "Annual Meeting").
(b) One matter voted on at the Annual Meeting was the election of three
directors of the Company. The three nominees, who were existing directors
of the Company and nominees of the Company's Board of Directors, were
re-elected at the Annual Meeting as directors of the Company, receiving the
number and percentage of votes for election and abstentions as set forth
next to their respective names below:
NOMINEE FOR DIRECTOR FOR ABSTAIN
-------------------- ---------- --------
Sheldon Lieberbaum 18,519,025 97.5% 468,149 2.5%
S. Cye Mandel 18,612,733 98.0% 374,441 2.0%
Daniel M. Robbin 18,613,653 98.0% 373,521 2.0%
The other directors whose term of office as directors continued after the
Annual Meeting are Paul Goldberg, Bruce M. Goldberg, Howard L. Flanders and
Rick Gordon.
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<PAGE>
(c) The following additional matter was separately voted upon at the Annual
Meeting and received the votes of the holders of the number of shares of
the Company's common stock voted in person or by proxy at the Annual
Meeting and the percentage of total votes cast as indicated below:
Ratification of selection of independent accountants for 1998 fiscal year
For 18,735,779 98.7%
Against 143,195 0.8%
Abstain 108,200 0.5%
(d) Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock currently trades on The Nasdaq Stock Market (Nasdaq
National Market) under the symbol SEMI. The following table sets forth the range
of high and low sale prices for the Company's common stock as reported on The
Nasdaq Stock Market during each of the quarters presented:
QUARTER OF FISCAL YEAR HIGH LOW
- ---------------------- ---- ---
1997
- ----
First Quarter 1 7/16 15/16
Second Quarter 1 3/32 27/32
Third Quarter 1 21/32 31/32
Fourth Quarter 2 1/2 1 3/8
1998
- ----
First Quarter 2 1 3/8
Second Quarter 2 15/32 1 7/16
Third Quarter 2 3/16 27/32
Fourth Quarter 1 7/16 3/4
1999
- ----
First Quarter (through March 17, 1999) 1 1/16 3/4
As of March 17, 1999, there were approximately 500 holders of record of the
Company's common stock, based on the stockholders list maintained by the
Company's transfer agent. Many of these record holders hold these securities for
the benefit of their customers. The Company believes that it has over 6,300
beneficial holders of its common stock.
On March 17, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market that, based upon its review of the
Company's closing stock price for the past thirty days, that the Company's
common stock had failed to maintain a closing bid price of greater than or equal
to $1.00 for any trading day during such period as required under The Nasdaq
Stock Market maintenance standards for a stock to be continued to be listed on
The Nasdaq Stock Market. Although no delisting action was initiated at this
time, the Company was provided ninety (90) calendar days in which to regain
compliance with this maintenance standard. In the event that during the period
ending June 17, 1999 (or any extended period granted by The Nasdaq Stock Market
in its sole discretion upon application by the Company), the closing bid price
of the Company's common stock is not greater than or equal to $1.00 for a
minimum of ten (10) consecutive trading days, the Company's common stock would
be delisted. If the Company's common stock is not listed on The Nasdaq Stock
Market, trading, if any, in the Company's common stock would thereafter be
conducted in the non-Nasdaq over-the-counter market in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." The Company is currently
reviewing its options with respect to the
14
<PAGE>
Company's listing on The Nasdaq Stock Market. There can be no assurance that the
Company's common stock will continue to remain eligible for listing on The
Nasdaq Stock Market.
DIVIDEND POLICY
The Company has never paid cash dividends. In 1989, the Company's Board of
Directors declared a 25% stock split effected in the form of a stock dividend.
Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors. It is not
anticipated, however, that the Company will pay cash dividends on its common
stock in the foreseeable future, inasmuch as it expects to employ all available
cash in the continued growth of its business. In addition, the Company's
revolving line of credit agreement prohibits the payment of any dividends. See
Note 7 to Notes to Consolidated Financial Statements.
SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold any unregistered securities during the
quarter ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company for and as of
the years 1994 through 1998 has been derived from the audited Consolidated
Financial Statements of the Company. Such information should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Statement of Operations Data
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996 1995(1) 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (2)....................... $ 250,044,000 $ 265,640,000 $ 237,846,000 $ 177,335,000 $ 101,085,000
Cost of Sales (3)................... (194,599,000) (207,173,000) (185,367,000) (138,089,000) (74,632,000)
------------- ------------- ------------- ------------- -------------
Gross Profit........................ 55,445,000 58,467,000 52,479,000 39,246,000 26,453,000
Selling, General and
Administrative Expenses........... (46,880,000) (48,257,000) (51,675,000) (32,321,000) (23,374,000)
Restructuring and Other Nonrecurring
Expenses (4)...................... (2,860,000) - (4,942,000) (1,098,000) (548,000)
-------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations........................ 5,705,000 10,210,000 (4,138,000) 5,827,000 2,531,000
Interest Expense (5)................ (4,313,000) (4,797,000) (7,025,000) (2,739,000) (1,772,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes.... 1,392,000 5,413,000 (11,163,000) 3,088,000 759,000
Income Tax (Provision) Benefit...... (561,000) (2,163,000) 2,942,000 (1,281,000) (407,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Discontinued
Operations and Extraordinary Items 831,000 3,250,000 (8,221,000) 1,807,000 352,000
Discontinued Operations (6)......... - - (1,757,000) 79,000 -
Extraordinary Items (7)............. - - 58,000 - -
------------- ------------- ------------- ------------- -------------
Net Income (Loss)................... $ 831,000 $ 3,250,000 $ (9,920,000) $ 1,886,000 $ 352,000
============= ============= ============= ============= =============
Earnings (Loss) Per Share (8):
Basic............................. $.04 $.17 $(.50) $.12 $.03
Diluted........................... $.04 $.16 $(.49) $.12 $.03
</TABLE>
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<PAGE>
Balance Sheet Data
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital..................... $ 68,192,000 $ 63,308,000 $ 69,823,000 $ 59,352,000 $ 39,800,000
Total Assets........................ 118,957,000 112,286,000 112,921,000 114,474,000 57,858,000
Long-Term Debt, Including
Current Portion................... 50,978,000 46,900,000 58,221,000 37,604,000 27,775,000
Shareholders' Equity................ 26,509,000 25,674,000 22,396,000 32,267,000 16,950,000
Book Value Per Common Share......... $1.33 $1.29 $1.13 $1.62 $1.37
</TABLE>
- -------------------------
(1) On December 29, 1995, the Company completed the Added Value Acquisitions.
The statement of operations data for 1995 reflects only the nonrecurring
expenses associated with such acquisitions, while the balance sheet data
reflects the assets and liabilities of the acquired companies at December
31, 1995.
(2) Net sales, including sales generated by the Company's computer products
division which was discontinued in the third quarter of 1996, were
$244,668,000 for 1996 and $180,794,000 for 1995.
(3) 1996 includes non-cash inventory write-offs of $2,000,000 associated with
the Company's restructuring of its kitting and turnkey operations.
(4) 1998 reflects a nonrecurring charge relating to the failed merger of Reptron
Electronics, Inc.'s distribution operations with the Company. The
nonrecurring charge includes expansion costs incurred in anticipation of
supporting the proposed combined entity, employee-related expenses,
professional fees and other merger-related out of pocket costs. 1996
includes non-recurring expenses consisting of: $1,092,000 relating to
restructuring the Company's kitting and turnkey operations, $587,000
relating to the termination of certain employment agreements, $445,000
relating to relocating the Company's cable assembly division, $625,000
relating to the accrual of a postretirement benefit cost associated with an
amendment to an employment agreement with one of the Company's executive
officers, and $2,193,000 relating to an impairment of goodwill primarily
related to the acquisitions of the Added Value Companies. 1995 reflects a
charge for front-end incentive employment compensation associated with the
Added Value Acquisitions. 1994 includes a charge for relocation of plant
facilities in the amount of $185,000 and a write-off of the Company's
product development investment of $363,000.
(5) Interest expense for 1996 includes amortization and a write-down of deferred
financing fees relating to obtaining the Company's $100 million credit
facility of approximately $2,148,000.
(6) Includes income (losses) from discontinued operations of $(166,000) (net of
$125,000 income tax benefit) and $79,000 (net of $56,000 income tax
provision) for 1996 and 1995, respectively, and a loss on disposal of
$(1,591,000) (net of $1,200,000 income tax benefit) in 1996 relating to
management's decision to discontinue its computer products division.
(7) Reflects an after-tax gain of $272,000 (net of $205,000 income tax
provision) associated with the Company's settlement of a civil litigation
and an after-tax non-cash expense of $214,000 (net of $161,000 income tax
benefit) resulting from the early extinguishment of the Company's $15
million senior subordinated promissory note.
(8) Weighted average common shares outstanding for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 were 19,685,106, 19,672,559, 19,742,849,
15,241,458 and 12,338,932, respectively, for basic earnings per share and
were 19,994,009, 19,784,837, 20,105,761, 15,866,866, and 12,941,264,
respectively, for diluted earnings per share.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the years ended December 31, 1998, 1997 and
1996, certain items in the Company's Consolidated Statements of Operations
expressed as a percentage of net sales. All percentages are based on net sales
after excluding sales from discontinued operations.
<TABLE>
<CAPTION>
Items as a Percentage
of Net Sales
--------------------------------
Years Ended
December 31
--------------------------------
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Net Sales.................................................................. 100.0% 100.0% 100.0%
Gross Profit............................................................... 22.2 22.0 22.1
Selling, General and Administrative Expenses............................... (18.7) (18.2) (21.7)
Restructuring and Other Nonrecurring Expenses.............................. (1.1) - (2.1)
Income (Loss) from Continuing Operations................................... 2.3 3.8 (1.7)
Interest Expense........................................................... (1.7) (1.8) (3.0)
Income (Loss) from Continuing Operations Before Income Taxes............... 0.6 2.0 (4.7)
Income (Loss) from Continuing Operations Before Discontinued
Operations and Extraordinary Items....................................... 0.3 1.2 (3.5)
Discontinued Operations.................................................... - - (.7)
Extraordinary Items........................................................ - - *
Net Income (Loss).......................................................... 0.3 1.2 (4.2)
</TABLE>
- -------------------
* not meaningful
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
SALES
Net sales for the year ended December 31, 1998 were $250.0 million, compared to
net sales of $265.6 million for 1997. The decrease in net sales was partially
attributable to price erosion and adverse market conditions within our industry.
Sales for 1998 were also negatively impacted by the distractions resulting from
a failed merger. See "Selling, General and Administrative Expenses" below and
Note 5 to Notes to Consolidated Financial Statements.
GROSS PROFIT
Gross profit was $55.4 million in 1998 compared to $58.5 million in 1997. The
decrease in gross profit was due to the decrease in net sales. Gross profit
margins as a percentage of net sales were 22.2% for 1998 compared to 22.0% for
1997. While the gross profit margin for the year was slightly higher than for
the prior year, the gross profit margin began declining toward the end of 1998,
reflecting increased competition and a greater number of low margin, large
volume transactions. In addition, the Company has experienced lower margins
relating to the development of long-term strategic relationships with accounts
which have required aggressive pricing programs. The Company has also
experienced margin pressures resulting from price increases from certain
suppliers that the Company has not been able to pass on to its customers at the
same rate. Management expects downward pressure on gross profit margins to
continue in the future.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") was $46.9 million for
1998, down from $48.3 million for 1997. The decrease in SG&A reflects a
reduction in variable expenses associated with the decrease in gross profit as
well as the continued benefits of the Company's cost control programs. SG&A as a
percentage of net sales was 18.7% for 1998, compared to 18.2% for 1997. The
increase in SG&A as a percentage of net sales reflects the impact of the
reduction in net sales discussed above. As a result of the industry-wide price
erosion experienced over the past three years, the Company has had to ship more
units for each dollar of revenue. As a result, the Company's excess capacity has
been diminished. Additionally, customer requirements have increased
significantly, resulting in the Company increasing its infrastructure to support
the additional customer needs. Due to these factors, the Company expects that
SG&A will increase in future periods.
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998 with Reptron Electronics, Inc.
("Reptron") regarding the merger of Reptron's distribution operations with the
Company ("the Merger"). Throughout 1998 the Company was actively involved in the
evaluation of, and preparations for the integration of operations in connection
with the proposed Merger. In October 1998, the Merger negotiations between the
Company and Reptron were terminated. As a result, the Company recorded a
nonrecurring charge in 1998, which included expansion costs incurred in
anticipation of supporting the proposed combined entity, certain
employee-related expenses, professional fees and other Merger-related out of
pocket costs, all of which aggregated $2,860,000. See Note 5 to Notes to
Consolidated Financial Statements.
INCOME FROM CONTINUING OPERATIONS
Income from operations was $8.6 million for 1998 excluding the $2.9 million
nonrecurring charge, compared to income from operations of $10.2 million for
1997. The decrease in income from operations was attributable to the decrease in
net sales which more than offset the decrease in SG&A. After reflecting the
nonrecurring charge, income from operations was $5.7 million for 1998.
INTEREST EXPENSE
Interest expense decreased to $4.3 million for the year ended December 31, 1998
compared to $4.8 million for 1997. The decrease in interest expense resulted
from lower average borrowings during 1998 as well as a decrease in the Company's
borrowing rate. See "Liquidity and Capital Resources" and Note 7 to Notes to
Consolidated Financial Statements.
NET INCOME
After giving effect to the nonrecurring charge, net income was $831,000, or $.04
per share (basic), for the year ended December 31, 1998, compared to net income
of $3.3 million, or $.17 per share (basic), for 1997. The decrease in net income
reflects the decrease in sales and the nonrecurring expenses (approximately $1.7
million on an after-tax basis) which more than offset the decreases in SG&A and
interest expense.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
SALES
For the year ended December 31, 1997, net sales were $265.6 million, up from net
sales of $237.8 million in 1996. The increase in net sales was accomplished
without acquisitions or new branch openings and reflects higher sales in most
territories. Substantially all of the increase was attributable to volume
increases and the introduction of new products. The increase in volume more than
offset the decline in unit prices on certain products. In addition, the Company
continued to benefit from its expanded service capabilities including electronic
commerce programs.
18
<PAGE>
GROSS PROFIT
Gross profit was $58.5 million in 1997 compared to $52.5 million for 1996. The
increase in gross profit was primarily due to the growth in net sales which more
than offset the decrease in gross profit margins as a percentage of net sales.
The 1996 figure included a $2.0 million inventory write-off associated primarily
with the restructuring of the Company's kitting and turnkey operations. Gross
profit margins as a percentage of net sales were 22.0% for 1997 compared to
22.9% for 1996 without giving effect to the inventory write-off. The decrease in
gross profit margins reflects a greater number of low margin, large volume
transactions during 1997 than in the previous year, as well as continued changes
in the Company's product mix. In addition, the Company has experienced lower
margins relating to the development of long-term strategic relationships with
accounts which have required aggressive pricing programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A was $48.3 million for 1997 down from $51.7 million for 1996. Even with an
increase in net sales, SG&A decreased in absolute dollars reflecting the
benefits of the expense control programs and the restructurings initiated during
the second half of 1996.
SG&A as a percentage of net sales improved dramatically to 18.2% for the year
ended December 31, 1997, compared to 21.7% for 1996. The improvement in SG&A as
a percentage of sales reflects the decrease in SG&A in absolute dollars as well
as the increase in sales.
INCOME (LOSS) FROM CONTINUING OPERATIONS
After achieving a broad geographic coverage and a critical mass through its
aggressive growth strategies in previous years, the Company began to shift its
focus from increasing market share to a combination of continued market share
growth with a greater focus on increasing profitability. As a result, income
from continuing operations reached a record $10.2 million for 1997, compared to
a loss from continuing operations of $(4.1) million for 1996 which included
restructuring and nonrecurring expenses aggregating $6.9 million. The
significant increase in income from continuing operations was attributable to
the increase in net sales, the benefits derived from the Company's
restructurings, improved operating efficiencies and economies of scale as well
as the decrease in SG&A in both absolute dollars and as a percentage of net
sales.
The restructuring and nonrecurring expenses during 1996 included the above
mentioned inventory write-offs; an impairment of goodwill in connection with the
acquisition of the Added Value Companies; restructuring expenses associated with
the kitting and turnkey operations; the termination of certain employment
agreements entered into in connection with certain acquisitions; the relocation
of the Company's cable assembly division; and the acceleration of an existing
accrual schedule associated with certain postretirement benefits for one of the
Company's executive officers. See Notes 5 and 10 to Notes to Consolidated
Financial Statements.
INTEREST EXPENSE
Interest expense decreased significantly to $4.8 million for the year ended
December 31, 1997 compared to $7.0 million for 1996. The decrease in interest
expense resulted from lower average borrowings during 1997 primarily as a result
of an increase in cash provided from operations and a decrease in amortization
of deferred financing fees associated with a write-down of $1.7 million of
deferred financing fees in 1996. See Note 7 to Notes to Consolidated Financial
Statements.
NET INCOME
Net income was $3.3 million for the year ended December 31, 1997, compared to a
net loss of $(9.9) million for 1996. Earnings per share (basic) increased to
$.17 in 1997 from a loss of $(.50) per share in 1996. The increase in earnings
for 1997 reflects the increase in sales, improved operating efficiencies, the
dramatic
19
<PAGE>
improvement in SG&A and the reduction in interest expense all as previously
discussed. Included in 1996 were the restructuring and nonrecurring items
described above, as well as an after-tax loss from discontinued operations of
$1.8 million associated with the discontinuance of the Company's computer
products division.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 was $68.2 million, compared to working
capital of $63.3 million at December 31, 1997. The current ratio was 2.63:1 at
December 31, 1998, compared to 2.58:1 at December 31, 1997. The increases in
working capital and in the current ratio were due primarily to increases in
accounts receivable and inventory. These changes more than offset an increase in
accounts payable. Accounts receivable levels at December 31, 1998 were $37.8
million, compared to $32.9 million at December 31, 1997. The increase in
accounts receivable reflects an increase in the rate of sales during the end of
1998 compared to the end of 1997. The Company achieved a slight improvement in
the average number of days that accounts receivables were outstanding from 53
days as of December 31, 1997 to 50 days as of December 31, 1998. Inventory
levels were $69.1 million at December 31, 1998 compared to $67.9 million at
December 31, 1997. The increase primarily reflects higher inventory levels
needed to support sales of new products. Accounts payable and accrued expenses
increased to $41.2 million at December 31, 1998 from $39.2 million at December
31, 1997, primarily as a result of the purchases of inventory.
On May 3, 1996 the Company entered into a $100 million line of credit facility
with a group of banks (the "Credit Facility") which expires May 3, 2001. The
Credit Facility replaced the Company's then existing $45 million line of credit
which was to expire in May 1997 and bore interest, at the Company's option,
either at one-quarter of one percent (.25%) below prime or two percent (2%)
above certain LIBOR rates. See Note 7 to Notes to Consolidated Financial
Statements. At the time of entering into the Credit Facility, borrowings under
the Credit Facility bore interest, at the Company's option, at either prime plus
one-quarter of one percent (.25%) or LIBOR plus two and one-quarter percent
(2.25%), which interest rate was increased slightly and then in 1998 reduced by
said increase, as described below. Borrowings under the Credit Facility are
secured by all of the Company's assets including accounts receivable,
inventories and equipment. The amounts that the Company may borrow under the
Credit Facility are based upon specified percentages of the Company's eligible
accounts receivable and inventories, as defined. Under the Credit Facility, the
Company is required to comply with certain affirmative and negative covenants as
well as to comply with certain financial ratios. These covenants, among other
things, place limitations and restrictions on the Company's borrowings,
investments and transactions with affiliates and prohibit dividends and stock
redemptions. Furthermore, the Credit Facility requires the Company to maintain
certain minimum levels of tangible net worth throughout the term of the
agreement and a minimum debt service coverage ratio which is tested on a
quarterly basis. During 1996, the Company's Credit Facility was amended whereby
certain financial covenants were modified and the Company's borrowing rate was
increased by one-quarter of one percent (.25%). During the first quarter of
1998, as a result of the Company satisfying certain conditions, the Company's
borrowing rate under its Credit Facility was decreased by one-quarter of one
percent (.25%). The Company's Credit Facility was further amended on March 23,
1999 whereby certain financial covenants were modified. See Note 7 to Notes to
Consolidated Financial Statements. At December 31, 1998, outstanding borrowings
under the Credit Facility aggregated $43.3 million compared to $39.0 million at
December 31, 1997.
The Company expects that its cash flows from operations and additional
borrowings available under the Credit Facility will be sufficient to meet its
current financial requirements over the next twelve months.
INFLATION AND CURRENCY FLUCTUATIONS
The Company does not believe that inflation significantly impacted its business
during 1998; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's
20
<PAGE>
results in the future. The Company believes that currency fluctuations may have
had an indirect adverse effect on its business during 1998 due to limitation of
customer production resulting from declining exports and limitation of the
Company's offshore suppliers' exports to the United States. The Company believes
that currency fluctuations may continue to have a negative impact in the future.
YEAR 2000 ISSUE
The Company has evaluated its business information technology (IT) systems as
well as its non-IT systems and has surveyed its major vendors. The Company
currently believes that its internal systems are in compliance with Year 2000
requirements or, to the extent any further required modifications are necessary,
will comply with Year 2000 requirements without material expenditures of funds
or internal resources. Based upon the survey of the Company's major suppliers,
the Company currently believes that Year 2000 issues of its suppliers should not
have a material adverse effect on the Company's business, operations or
financial condition. Nevertheless, to the extent the Company's vendors
(particularly its major vendors) experience Year 2000 difficulties, the Company
may face delays in obtaining or even be unable to obtain certain products and
services and therefore may be unable to make shipments to customers resulting in
a material adverse effect on the Company's business, operations and financial
condition. The Company has not surveyed its customers and on a limited basis has
surveyed certain other third parties with which it has a business relationship.
As no assessment has been made of any potential impact by customers'
non-compliance (such as the ability of customers to electronically interface
with the Company), the Company does not have a cost estimate to address any
non-compliance by these customers nor can any assurance be given that such
non-compliance will not result in a material adverse effect on the Company's
business, operations and financial condition. The Company has not undertaken an
analysis (nor does it currently intend to analyze) the effect of a worst-case
Year 2000 scenario on the Company's business, operations or financial condition
and, accordingly, the materiality of such effect (if any) is uncertain and the
Company does not have a contingency plan and currently does not intend to create
one.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning the Company's future
performance and operating results, its products, services, markets and industry,
and/or future events relating to or effecting the Company and its business and
operations. When used in this Form 10-K, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," and similar expressions as they
relate to the Company or its management are intended to identify forward-looking
statements. The actual results or achievements of the Company could differ
materially from those indicated by the forward-looking statements because of
various risks and uncertainties. Factors that could adversely affect the
Company's future results, performance or achievements include, without
limitation, the effectiveness of the Company's business and marketing
strategies, timing of delivery of products from suppliers, price increases from
suppliers that cannot be passed on to the Company's customers at the same rate,
the product mix sold by the Company, the Company's development of new customers,
existing customer demand as well as the level of demand for products of its
customers, utilization by the Company of excess capacity, availability of
products from and the establishment and maintenance of relationships with
suppliers, price erosion in and price competition for products sold by the
Company, the ability of the Company to enter or expand new market areas, the
ability of the Company to expand its product offerings and to continue to
enhance its service capabilities, the ability of the Company to open new
branches in a timely and cost-effective manner, the availability of acquisition
opportunities and the associated costs, management of growth and expenses, the
Company's ability to collect accounts receivable, price decreases on inventory
that is not price protected, gross profit margins, including decreasing margins
relating to the Company being required to have aggressive pricing programs,
increased competition from third party logistics companies and e-brokers through
the use of the Internet as well as from its traditional competitors,
availability and terms of financing to fund capital needs, the continued
enhancement of telecommunication, computer and information systems, the
achievement by
21
<PAGE>
the Company and its vendors and customers and other third parties with which the
Company has a business relationship of Year 2000 compliance in a timely and cost
efficient manner, the continued and anticipated growth of the electronics
industry and electronic components distribution industry, the impact on certain
of the Company's suppliers and customers of economic or financial turbulence in
off-shore economies and/or financial markets, change in government tariffs or
duties, currency fluctuations, a change in interest rates, the state of the
general economy, the success of the Company in avoiding the delisting of its
common stock from The Nasdaq Stock Market, and the other risks and factors
detailed in this Form 10-K and in the Company's other filings with the
Securities and Exchange Commission. These risks and uncertainties are beyond the
ability of the Company to control. In many cases, the Company cannot predict the
risks and uncertainties that could cause actual results to differ materially
from those indicated by the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 14(a)(1) and (2)
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT PAGE
----
1. FINANCIAL STATEMENTS
Management's Responsibility for Financial Reporting............... F-1
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheets....................................... F-2
Consolidated Statements of Operations............................. F-3
Consolidated Statements of Changes in Shareholders' Equity........ F-4
Consolidated Statements of Cash Flows............................. F-5
Notes to Consolidated Financial Statements........................ F-6
2. FINANCIAL STATEMENT SCHEDULES
None
22
<PAGE>
3. EXHIBITS
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibits 3.1 to the Company's Registration Statement
on Form S-1, File No. 33-15345-A, and to the Company's Form 10-K
for the fiscal year ended December 31, 1991), as further amended
by Certificate of Amendment of Certificate of Incorporation dated
August 21, 1995 of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-K for the year ended
December 31, 1995).
3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June
30, 1994).
4.1 Specimen Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-2, File No. 33-47512).
4.2 Fiscal Agency Agreement, dated as of June 8, 1994, between the
Company and American Stock Transfer & Trust Co. ("American Stock
Transfer"), as fiscal agent, paying agent and securities
registrar (incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K dated June 14, 1994 and filed with the
Securities and Exchange Commission on June 15, 1994).
4.3 Warrant Agreement, dated as of June 8, 1994, between the Company
and American Stock Transfer, as warrant agent (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K dated June 14,
1994 and filed with the Securities and Exchange Commission on
June 15, 1994).
4.4 Placement Agent's Warrant Agreement, dated as of June 8, 1994,
between the Company and RAS Securities Corp. (incorporated by
reference to Exhibit 4.3 to the Company's Form 8-K dated June 14,
1994 and filed with the Securities and Exchange Commission on
June 15, 1994).
4.5 Underwriter's Warrant Agreement between the Company and Lew
Lieberbaum & Co., Inc. (incorporated by reference to Exhibit 4.2
to Amendment No. 1 to the Company's Registration Statement on
Form S-1, File No. 33-58661).
9.1 Form of Voting Trust Agreement attached as Exhibit "E" to
Purchase Agreement (incorporated by reference to Exhibit 9.1 to
the Company's Registration Statement on Form S-4, File No.
033-64019).
10.1 Form of Indemnification Contracts with Directors and Executive
Officers (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam
Berman d/b/a Drake Enterprises ("Drake") and the Company
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.3 Lease Agreement for west coast corporate office and northern
California sales office in San Jose, California dated October 1,
1998 between San Jose Technology Properties, LLC and the
Company.*
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).
10.5 Promissory Note, dated May 1, 1995, payable to Drake, the
Company's landlord, in the amount of $90,300 (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).
10.6 Agreement between Drake and the Company dated May 1, 1994
(incorporated by reference to Exhibit 10.5 to the Company's Form
10-K for the year ended December 31, 1994).
10.7 Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.36 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No.
33-58661).**
10.8 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
23
<PAGE>
10.9 Master Lease Agreement dated March 21, 1994, together with lease
schedules for computer and other equipment (incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for the year
ended December 31, 1994).
10.10 Employment Agreement dated as of May 24, 1995, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.22 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661), as amended by First Amendment to
Employment Agreement dated as of December 31, 1996, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.9 to the Company's Form 10-K for the year ended December 31,
1996), as amended by Second Amendment to Employment Agreement
dated as of August 21, 1998, between the Company and Paul
Goldberg (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998).**
10.11 Employment Agreement dated as of May 24, 1995, between the
Company and Bruce M. Goldberg (incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Bruce M. Goldberg (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1998).**
10.12 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).
10.13 Merger Purchase Agreement (the "Purchase Agreement") dated as of
October 31, 1995, among the Company, All American Added Value,
Inc., All American A.V.E.D., Inc. and the Added Value Companies
(incorporated by reference to Appendix A to the Proxy
Statement/Prospectus included in and to Exhibit 2.1 to the
Company's Registration Statement on Form S-4, File No.
033-64019).
10.14 Loan and Security Agreement (without exhibits or schedules) among
Harris Trust and Savings Bank, as a lender and administrative
agent, American National Bank and Trust Company of Chicago, as a
lender and collateral agent, and the Other Lenders Party thereto
and the Company, as borrower, together with six (6) Revolving
Credit Notes, all dated May 10, 1996, aggregating $100,000,000
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1996).
10.15 Amendment No. 1 to Loan and Security Agreement dated August 2,
1996 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 1996).
10.16 Amendment No. 2 to Loan and Security Agreement dated November 14,
1996 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 1996).
10.17 Amendment No. 3 to Loan and Security Agreement dated July 31,
1998 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 1998).
10.18 Amendment No. 4 to Loan and Security Agreement dated March 23,
1999.*
10.19 Consulting Contract dated July 1, 1995 by and between All
American Semiconductor, Inc. and The Equity Group, Inc.
(incorporated by reference to Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 1995).
10.20 All American Semiconductor, Inc. 401(k) Profit Sharing Plan
(incorporated by reference to Exhibit 10.25 to the Company's Form
10-K for the year ended December 31, 1994).**
10.21 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), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Howard L. Flanders (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended September 30, 1998).**
24
<PAGE>
10.22 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), as amended by First Amendment to
Employment Agreement dated as of August 21, 1998, between the
Company and Rick Gordon (incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q for the quarter ended September
30, 1998).**
10.23 Settlement Agreement dated December 17, 1996, by and among the
Company, certain of its subsidiaries and certain selling
stockholders of the Added Value Companies (incorporated by
reference to Exhibit 10.35 to the Company's Form 10-K for the
year ended December 31, 1996).
10.24 Settlement Agreement dated January 22, 1997, by and among the
Company, certain of its subsidiaries and Thomas Broesamle
(incorporated by reference to Exhibit 10.36 to the Company's Form
10-K for the year ended December 31, 1996).
10.25 Form of Salary Continuation Plan (incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the year ended
December 31, 1996).**
10.26 Promissory Note, dated October 1, 1996, payable to Sam Berman,
d/b/a Drake Enterprises, in the amount of $161,500 (incorporated
by reference to Exhibit 10.38 to the Company's Form 10-K for the
year ended December 31, 1996).
10.27 Note dated August 21, 1998, by Bruce Mitchell Goldberg and Jayne
Ellen Goldberg in favor of the Company in the principal amount of
$125,000 (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended September 30, 1998).
11.1 Statement Re: Computation of Per Share Earnings.*
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar Levine & Felix LLP, independent certified public
accountants.*
27.1 Financial Data Schedule.*
- ------------------
* Filed herewith
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
No reports were filed during the fourth quarter of 1998.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ALL AMERICAN SEMICONDUCTOR, INC.
(Registrant)
By: /s/ PAUL GOLDBERG
-------------------------------------------
Paul Goldberg, Chairman of the Board
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 31, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ PAUL GOLDBERG Chairman of the Board, Director
- -------------------------------
Paul Goldberg
/s/ BRUCE M. GOLDBERG President and Chief Executive Officer, Director
- ------------------------------- (Principal Executive Officer)
Bruce M. Goldberg
/s/ HOWARD L. FLANDERS Executive Vice President and Chief Financial Officer,
- ------------------------------- Director
Howard L. Flanders (Principal Financial and Accounting Officer)
/s/ RICK GORDON Senior Vice President of Sales, Director
- -------------------------------
Rick Gordon
/s/ SHELDON LIEBERBAUM Director
- -------------------------------
Sheldon Lieberbaum
/s/ S. CYE MANDEL Director
- -------------------------------
S. Cye Mandel
/s/ DANIEL M. ROBBIN Director
- -------------------------------
Daniel M. Robbin
</TABLE>
26
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Company's management is responsible for the preparation of the Consolidated
Financial Statements in accordance with generally accepted accounting principles
and for the integrity of all the financial data included in this Form 10-K. In
preparing the Consolidated Financial Statements, management makes informed
judgements and estimates of the expected effects of events and transactions that
are currently being reported.
Management maintains a system of internal accounting controls that is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are executed and recorded in accordance with management's policies
for conducting its business. This system includes policies which require
adherence to ethical business standards and compliance with all laws to which
the Company is subject. The internal controls process is continuously monitored
by direct management review.
The Board of Directors, through its Audit Committee, is responsible for
determining that management fulfils its responsibility with respect to the
Company's Consolidated Financial Statements and the system of internal auditing
controls.
The Audit Committee, comprised solely of directors who are not officers or
employees of the Company, meets annually with representatives of management and
the Company's independent accountants to review and monitor the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The Company's independent accountants have full and
free access to the Audit Committee.
/s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS
- ---------------------------- ---------------------------
Bruce M. Goldberg Howard L. Flanders
President, Executive Vice President,
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
All American Semiconductor, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of All American
Semiconductor, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 1998. 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, 1998 and 1997 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ LAZAR LEVINE & FELIX LLP
- --------------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 5, 1999, except as to Note 14, the date of which is
March 17, 1999 and Note 7, the date of which is March 23, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash ....................................................... $ 473,000 $ 444,000
Accounts receivable, less allowances for doubtful
accounts of $1,412,000 and $1,166,000 .................... 37,821,000 32,897,000
Inventories ................................................ 69,063,000 67,909,000
Other current assets ....................................... 2,574,000 2,074,000
------------- -------------
Total current assets ..................................... 109,931,000 103,324,000
Property, plant and equipment - net .......................... 4,506,000 4,779,000
Deposits and other assets .................................... 3,458,000 3,157,000
Excess of cost over fair value of net assets acquired - net .. 1,062,000 1,026,000
------------- -------------
$ 118,957,000 $ 112,286,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 269,000 $ 304,000
Accounts payable and accrued expenses ...................... 41,229,000 39,154,000
Income taxes payable ....................................... 56,000 389,000
Other current liabilities .................................. 185,000 169,000
------------- -------------
Total current liabilities ................................ 41,739,000 40,016,000
Long-term debt:
Notes payable .............................................. 43,306,000 39,084,000
Subordinated debt .......................................... 6,187,000 6,293,000
Other long-term debt ....................................... 1,216,000 1,219,000
------------- -------------
92,448,000 86,612,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued .................................. - -
Common stock, $.01 par value, 40,000,000 shares authorized,
19,866,906 and 20,353,894 shares issued, 19,866,906 and
19,863,895 shares outstanding ............................ 199,000 199,000
Capital in excess of par value ............................. 25,592,000 25,588,000
Retained earnings .......................................... 1,169,000 338,000
Treasury stock, at cost, 180,295 shares .................... (451,000) (451,000)
------------- -------------
26,509,000 25,674,000
------------- -------------
$ 118,957,000 $ 112,286,000
============= =============
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES ................................ $ 250,044,000 $ 265,640,000 $ 237,846,000
Cost of sales ............................ (194,599,000) (207,173,000) (185,367,000)
------------- ------------- -------------
Gross profit ............................. 55,445,000 58,467,000 52,479,000
Selling, general and
administrative expenses ................ (46,880,000) (48,257,000) (51,675,000)
Impairment of goodwill ................... - - (2,193,000)
Restructuring and other nonrecurring
expenses ............................... (2,860,000) - (2,749,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ............................. 5,705,000 10,210,000 (4,138,000)
Interest expense ......................... (4,313,000) (4,797,000) (7,025,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ......... 1,392,000 5,413,000 (11,163,000)
Income tax (provision) benefit ........... (561,000) (2,163,000) 2,942,000
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY
ITEMS .................................. 831,000 3,250,000 (8,221,000)
Discontinued operations:
Loss from operations (net of $125,000
income tax benefit) .................... - - (166,000)
Loss on disposal (net of $1,200,000
income tax benefit) .................... - - (1,591,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................... 831,000 3,250,000 (9,978,000)
Extraordinary items:
Gain from settlement of litigation (net of
$205,000 income tax provision) ......... - - 272,000
Loss on early retirement of debt (net of
$161,000 income tax benefit) ........... - - (214,000)
------------- ------------- -------------
NET INCOME (LOSS) ........................ $ 831,000 $ 3,250,000 $ (9,920,000)
============= ============= =============
EARNINGS (LOSS) PER SHARE:
Basic:
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................... $ .04 $ .17 $ (.41)
Discontinued operations ................ - - (.09)
Extraordinary items .................... - - -
----- ----- ------
NET INCOME (LOSS) ...................... $ .04 $ .17 $ (.50)
===== ===== ======
Diluted:
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................... $ .04 $ .16 $ (.40)
Discontinued operations ................ - - (.09)
Extraordinary items .................... - - -
---- ----- ------
NET INCOME (LOSS) ...................... $ .04 $ .16 $ (.49)
===== ===== ======
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN RETAINED TOTAL
COMMON EXCESS OF EARNINGS TREASURY SHAREHOLDERS'
SHARES STOCK PAR VALUE (DEFICIT) STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 19,863,895 $ 199,000 $ 25,511,000 $ 7,008,000 $ (451,000) $ 32,267,000
Exercise of stock options....... 5,000 - 9,000 - - 9,000
Issuance of equity securities... 60,000 - 150,000 - - 150,000
Reacquisition and cancellation
of equity securities.......... (95,000) (1,000) (109,000) - - (110,000)
Net loss........................ - - - (9,920,000) - (9,920,000)
---------- ---------- ------------ ------------ ------------ --------------
Balance, December 31, 1996...... 19,833,895 198,000 25,561,000 (2,912,000) (451,000) 22,396,000
Exercise of stock options....... 30,000 1,000 27,000 - - 28,000
Net income...................... - - - 3,250,000 - 3,250,000
---------- ---------- ------------ ------------ ------------ --------------
Balance, December 31, 1997...... 19,863,895 199,000 25,588,000 338,000 (451,000) 25,674,000
EXERCISE OF STOCK OPTIONS....... 3,011 - 4,000 - - 4,000
NET INCOME...................... - - - 831,000 - 831,000
---------- ---------- ------------ ------------ ------------ --------------
BALANCE, DECEMBER 31, 1998...... 19,866,906 $ 199,000 $ 25,592,000 $ 1,169,000 $ (451,000) $ 26,509,000
========== ========== ============ ============ ============ ==============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 831,000 $ 3,250,000 $ (9,920,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.................................. 1,236,000 1,440,000 2,757,000
Non-cash interest expense...................................... 352,000 254,000 2,273,000
Nonrecurring expenses.......................................... - - 4,428,000
Changes in assets and liabilities of continuing operations:
Decrease (increase) in accounts receivable................... (4,924,000) (972,000) 1,569,000
Decrease (increase) in inventories........................... (1,154,000) (3,697,000) 1,206,000
Decrease (increase) in other current assets.................. (500,000) 3,039,000 (2,014,000)
Increase (decrease) in accounts payable and
accrued expenses........................................... 2,075,000 7,356,000 (14,032,000)
Increase (decrease) in other current liabilities............. (317,000) 62,000 (669,000)
Decrease in net assets of discontinued operations.............. - 830,000 1,796,000
------------ ------------ ------------
Net cash provided by (used for) operating activities....... (2,401,000) 11,562,000 (12,606,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................ (564,000) (298,000) (2,293,000)
Increase in other assets......................................... (944,000) (83,000) (4,438,000)
Net investing activities of discontinued operations.............. - - (39,000)
------------ ------------ ------------
Net cash used for investing activities..................... (1,508,000) (381,000) (6,770,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit agreements...... 4,263,000 (11,000,000) 20,290,000
Increase in notes payable........................................ 10,000 - 15,161,000
Repayments of notes payable...................................... (339,000) (290,000) (15,835,000)
Net proceeds from issuance of equity securities.................. 4,000 28,000 9,000
------------ ------------ ------------
Net cash provided by (used for) financing activities....... 3,938,000 (11,262,000) 19,625,000
------------ ------------ ------------
Increase (decrease) in cash...................................... 29,000 (81,000) 249,000
Cash, beginning of year.......................................... 444,000 525,000 276,000
------------ ------------ ------------
Cash, end of year................................................ $ 473,000 $ 444,000 $ 525,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................... $ 4,223,000 $ 4,906,000 $ 3,839,000
============ ============ ============
Income taxes paid (refunded) - net............................... $ 1,756,000 $ (989,000) $ 1,108,000
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1997 a capital lease in the amount of $634,000 for computer equipment,
which first took effect in 1994, was renewed for an additional three years.
Effective January 1, 1996, the Company purchased all of the capital stock of
Programming Plus Incorporated ("PPI"). The consideration paid by the Company for
such capital stock consisted of 549,999 shares of common stock of the Company
valued at $1,375,000 (or $2.50 per share); however, only 60,000 shares of common
stock (valued at $150,000) were released to the PPI selling shareholders at
closing. The balance, which was retained in escrow subject to certain conditions
subsequent, has been canceled and retired.
See notes to consolidated financial statements
F-5
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a national distributor of electronic components manufactured by
others. The Company primarily distributes a full range of semiconductors (active
components), including transistors, diodes, memory devices and other integrated
circuits, as well as passive components, such as capacitors, resistors,
inductors and electromechanical products, including cable, switches, connectors,
filters and sockets. The Company's products are sold primarily to original
equipment manufacturers ("OEMs") in a diverse and growing range of industries,
including manufacturers of computers and computer-related products; networking;
satellite and communications products; consumer goods; robotics and industrial
equipment; defense and aerospace equipment; and medical instrumentation. The
Company also sells products to contract electronics manufacturers ("CEMs") who
manufacture products for companies in all electronics industry segments. The
Company also designs and has manufactured certain board level products including
memory modules and flat panel display driver boards, both of which are sold to
OEMs.
The Company's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). Those principles considered
particularly significant are detailed below. GAAP requires management to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses. While actual results may differ from these estimates,
management does not expect the variances, if any, to have a material effect on
the Consolidated Financial Statements.
BASIS OF CONSOLIDATION AND PRESENTATION
The Consolidated Financial Statements of the Company include the accounts of all
subsidiaries, all of which are wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation. The Company has a
Canadian subsidiary which conducts substantially all of its business in U.S.
dollars.
Prior years' financial statements have been reclassified to conform with the
current year's presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company,
from time to time, maintains cash balances which exceed the federal depository
insurance coverage limit. The Company performs periodic reviews of the relative
credit rating of its bank to lower its risk. The Company believes that
concentration with regards to accounts receivable is limited due to its large
customer base. Fair values of cash, accounts receivable, accounts payable and
long-term debt reflected in the December 31, 1998 and 1997 Consolidated Balance
Sheets approximate carrying value at these dates.
MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results.
INVENTORIES
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
F-6
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
FIXED ASSETS
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment is provided on straight-line and accelerated
methods over the estimated useful lives of the respective assets. Amortization
of leasehold improvements is provided using the straight-line method over the
term of the related lease or the life of the respective asset, whichever is
shorter. Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
The excess of cost over the fair value of net assets acquired is being amortized
over periods ranging from 15 years to 40 years using the straight-line method.
The Company periodically reviews the value of its excess of cost over the fair
value of net assets acquired to determine if an impairment has occurred. As part
of this review the Company measures the estimated future operating cash flows of
acquired businesses and compares that with the carrying value of excess of cost
over the fair value of net assets. See Note 4 to Notes to Consolidated Financial
Statements.
INCOME TAXES
The Company has elected to file a consolidated federal income tax return with
its subsidiaries. Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than for income tax
purposes. The Company utilizes Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the difference is expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. See Note 8 to Notes to
Consolidated Financial Statements.
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS 128"), which changed the method for calculating
earnings per share. SFAS 128 requires the presentation of "basic" and "diluted"
earnings per share on the face of the statement of operations. Prior period
earnings per share data has been restated in accordance with SFAS 128. Earnings
per common share is computed by dividing net income by the weighted average,
during each period, of the number of common shares outstanding and for diluted
earnings per share also common equivalent shares outstanding.
The following average shares were used for the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------
Basic........................... 19,685,106 19,672,559 19,742,849
Diluted......................... 19,994,009 19,784,837 20,105,761
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.
F-7
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK-BASED COMPENSATION
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note 9 to Notes
to Consolidated Financial Statements.
COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income", which prescribes standards for reporting
comprehensive income and its components. The Company had no items of other
comprehensive income in any period presented and accordingly is not required to
report comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for reporting about operating segments. The Company
has determined that no operating segment outside of its core business met the
quantitative thresholds for separate reporting. Accordingly, no separate
information has been reported.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
The effect of the adoption of this statement was not material.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture and equipment.................. $ 4,179,000 $ 4,074,000
Computer equipment.............................. 3,924,000 3,554,000
Leasehold improvements.......................... 2,017,000 1,800,000
---------------- ---------------
10,120,000 9,428,000
Accumulated depreciation and amortization....... (5,614,000) (4,649,000)
---------------- ---------------
$ 4,506,000 $ 4,779,000
================ ===============
</TABLE>
NOTE 3 - ACQUISITIONS
Effective January 1, 1996, the Company purchased all of the capital stock of
Programming Plus Incorporated ("PPI"), which provided programming and tape and
reel services with respect to electronic components. The purchase price for PPI
consisted of $1,375,000 of common stock of the Company, valued at $2.50 per
share. Only 60,000 shares of the Company's common stock, valued at $150,000,
were released to the PPI selling shareholders at closing. The $1,225,000 balance
of the consideration ("Additional Consideration"), represented by 489,999 shares
of common stock of the Company, was retained in escrow by the Company, as escrow
agent. The Additional Consideration was to be released to the PPI selling
shareholders annually if certain levels of pre-tax net income were attained by
the acquired company for the years ended December 31, 1996 through December 31,
2000. For the year ended December 31, 1996, the acquired company did not attain
that certain level of pre-tax net income and, accordingly, none of the
Additional Consideration was released. During 1997, the Company and the PPI
selling shareholders agreed to cease the operations of PPI. As a result, all of
the Additional Consideration held in escrow was canceled and retired.
F-8
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On December 29, 1995, the Company purchased through two separate mergers with
and into the Company's wholly-owned subsidiaries (the "Added Value
Acquisitions") all of the capital stock of Added Value Electronics Distribution,
Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain," and
together with Added Value, collectively the "Added Value Companies"). The
purchase price for the Added Value Companies included approximately $2,936,000
in cash and 2,013,401 shares of common stock of the Company valued at
approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued
in the transaction to a wholly-owned subsidiary of the Company). In addition,
the Company paid an aggregate of $1,200,000 in cash to the selling stockholders
in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash
as front-end incentive employment compensation paid to certain key employees of
the Added Value Companies. The Company also assumed substantially all of the
sellers' disclosed liabilities of approximately $8,017,000, including
approximately $3,809,000 in bank notes which have since been repaid. The Company
has also paid approximately $107,000 of additional consideration to certain of
the selling stockholders of the Added Value Companies since the aggregate value
of the shares of the Company's common stock issued to these individuals did not,
by June 30, 1998, appreciate in the aggregate by $107,000. The additional
consideration is included in excess of cost over fair value of net assets
acquired in the accompanying Consolidated Balance Sheet as of December 31, 1998.
The Company has not included in excess of cost over fair value of net assets
acquired as of December 31, 1998 approximately $159,000 of additional
consideration that would have been payable to another selling stockholder of the
Added Value Companies since such additional consideration has been applied by
the Company to partially satisfy certain claims alleged by the Company against
such selling stockholder arising with respect to the transaction with the Added
Value Companies. The Company entered into a settlement agreement with certain of
the selling stockholders in December 1996 and with an additional selling
stockholder in January 1997 (collectively the "Settlement Agreements"). The
Settlement Agreements provided, among other things, that the additional
consideration that could have been payable to those selling stockholders be
eliminated, that certain of the selling stockholders reconvey to the Company an
aggregate of 95,000 shares of common stock of the Company which were issued as
part of the purchase price for the Added Value Companies and that the Company
grant to certain selling stockholders stock options to purchase an aggregate of
50,000 shares of the Company's common stock at an exercise price of $1.50 per
share exercisable through December 30, 2001. The acquisitions were accounted for
by the purchase method of accounting which resulted in the recognition of
approximately $2,937,000 of excess cost over fair value of net assets acquired.
As a result of a reduction in the estimated future cash flows from the Added
Value Companies, the Company recognized an impairment of goodwill of
approximately $2,200,000 in 1996. See Note 4 to Notes to Consolidated Financial
Statements. The assets, liabilities and operating results of the acquired
companies are included in the Consolidated Financial Statements of the Company
from the date of the acquisitions, December 29, 1995.
In connection with the acquisition of substantially all of the assets of GCI
Corp. in 1994, a Philadelphia-area distributor of electronic components, the
seller was able to 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 were met. The gross profit targets were not met and, therefore,
no additional purchase price was earned.
NOTE 4 - IMPAIRMENT OF GOODWILL
In connection with the Company's acquisitions of the Added Value Companies and
PPI, at September 30, 1996, the Company recognized an impairment of goodwill.
This non-cash charge was primarily related to the Added Value Companies and had
no associated tax benefit. A variety of factors contributed to the impairment of
the goodwill relating to the Added Value Companies. These factors included a
significant reduction in the revenues and operating results generated by the
Added Value Companies' customer base acquired by the Company, a restructuring of
the Added Value Companies' kitting and turnkey operations due to the Company
determining that it was not economically feasible to continue and expand such
division as originally planned, as well as the termination of certain principals
and senior management of the Added Value Companies who became employees of the
Company at the time of the closing of the acquisitions.
F-9
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
See Note 5 to Notes to Consolidated Financial Statements. These factors greatly
reduced the estimated future cash flows from the Added Value Companies. In
determining the amount of the impairment charge, the Company developed its best
estimate of projected operating cash flows over the remaining period of expected
benefit. Projected future cash flows were discounted and compared to the
carrying value of the related goodwill and as a result a write-down of
approximately $2,400,000 with respect to the Added Value Companies was recorded
in 1996.
In December 1996 and January 1997, as part of the Settlement Agreements (see
Note 3 to Notes to Consolidated Financial Statements), the Company reacquired
and canceled 95,000 shares of the Company's common stock valued at approximately
$110,000, which, together with certain excess distributions made to certain
principals of the Added Value Companies in connection with the acquisitions,
reduced the impairment of goodwill to $2,193,000.
NOTE 5 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998 with Reptron Electronics, Inc.
("Reptron") regarding the merger of Reptron's distribution operations with the
Company ("the Merger"). Throughout 1998 the Company was actively involved in the
evaluation of, and preparations for the integration of operations in connection
with the proposed Merger. In October 1998, the Merger negotiations between the
Company and Reptron were terminated. As a result, the Company recorded a
nonrecurring charge in 1998, which included expansion costs incurred in
anticipation of supporting the proposed combined entity, certain
employee-related expenses, professional fees and other Merger-related out of
pocket costs, all of which aggregated $2,860,000.
During 1996, the Company recorded restructuring and nonrecurring expenses
aggregating $2,749,000. Of this total, $1,092,000 represented expenses in
connection with the restructuring of the Company's kitting and turnkey
operations, $625,000 represented a non-cash charge associated with the Company
accelerating a postretirement benefit accrual relating to an amendment of an
executive officer's employment agreement, $587,000 represented the aggregate
payments made in connection with the termination of certain employment
agreements relating to prior acquisitions, and $445,000 represented expenses
associated with the closing and relocation of the Company's cable assembly
division.
In addition, during 1996, the Company wrote-off $2,000,000 of inventory
associated primarily with the restructuring of the kitting and turnkey
operations which is reflected in cost of sales in the accompanying Consolidated
Statement of Operations for the year ended December 31, 1996.
NOTE 6 - DISCONTINUED OPERATIONS
In June 1995, the Company established a computer products division ("CPD") which
operated under the name Access Micro Products. This division sold
microprocessors, motherboards, computer upgrade kits, keyboards and disk drives.
During 1996, the Company was notified by the division's primary supplier that it
had discontinued the production of certain products that were the mainstay of
the Company's computer products division. Although the Company obtained
additional product offerings, revenues of Access Micro Products were severely
impacted without these mainstay products and, as a result, management decided to
discontinue CPD. Accordingly, this division was accounted for as discontinued
operations and the results of operations for 1996 are segregated in the
accompanying Consolidated Statement of Operations. Sales from this division were
$6,822,000 for 1996. The loss on disposal of $2,791,000, on a pretax basis,
included the estimated costs and expenses associated with the disposal of
$2,326,000 as well as a provision of $465,000 for operating losses during the
phase-out period, which continued through March 31, 1997.
F-10
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - LONG-TERM DEBT
LINE OF CREDIT
In May 1996, the Company entered into a new $100 million line of credit facility
with a group of banks (the "Credit Facility") which expires May 3, 2001. At the
time of entering into such facility, borrowings under the Credit Facility bore
interest, at the Company's option, at either prime plus one-quarter of one
percent (.25%) or LIBOR plus two and one-quarter percent (2.25%). Outstanding
borrowings under the Credit Facility, which are secured by all of the Company's
assets including accounts receivable, inventories and equipment, amounted to
$43,263,000 at December 31, 1998 compared to $39,000,000 at December 31, 1997.
The amounts that the Company may borrow under the Credit Facility are based upon
specified percentages of the Company's eligible accounts receivable and
inventories, as defined. Under the Credit Facility, the Company is required to
comply with certain affirmative and negative covenants as well as to comply with
certain financial ratios. These covenants, among other things, place limitations
and restrictions on the Company's borrowings, investments and transactions with
affiliates and prohibit dividends and stock redemptions. Furthermore, the Credit
Facility requires the Company to maintain certain minimum levels of tangible net
worth throughout the term of the agreement and a minimum debt service coverage
ratio which is tested on a quarterly basis. In connection with obtaining the
Credit Facility the Company paid financing fees which aggregated $3,326,000.
During 1996, the Company's Credit Facility was amended whereby certain financial
covenants were modified and the Company's borrowing rate was increased by
one-quarter of one percent (.25%). During the first quarter of 1998, as a result
of the Company satisfying certain conditions, the Company's borrowing rate under
its Credit Facility was decreased by one-quarter of one percent (.25%). The
Company's Credit Facility was further amended on March 23, 1999 whereby certain
financial covenants were modified.
During 1996, as a result of a projected decrease in the Company's future
anticipated utilization of the Credit Facility based on projected cash flows as
well as certain changes to the terms of the initial agreement, $1,704,000 of the
deferred financing fees was written off to interest expense in 1996, since it
was deemed to have no future economic benefit.
In connection with the Credit Facility, in May 1996, the Company repaid all
outstanding borrowings under the Company's previous $45 million line of credit
which was to expire in May 1997 and bore interest, at the Company's option,
either at one-quarter of one percent (.25%) below prime or two percent (2%)
above certain LIBOR rates and repaid the Company's $15 million senior
subordinated promissory note (the "Subordinated Note"). The Subordinated Note
had been issued in March 1996 and was scheduled to mature on July 31, 1997. As a
result of the early extinguishment of the Subordinated Note, the Company
recognized an extraordinary after-tax expense of $214,000, net of a related
income tax benefit of $161,000, in 1996.
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. In addition, the Company executed a promissory note in the
approximate amount of $37,300 payable to GCI Corp. in connection with the
earn-out provision contained in the asset purchase agreement. This note bears
interest at 7% per annum, payable quarterly. This note, which is subordinate to
the Company's institutional lenders, matures in 2001.
In June 1994, the Company completed a private placement (the "1994 Private
Placement") of 51.5 units, with each unit consisting of a 9% non-convertible
subordinated debenture due 2004 in the principal amount of $100,000 issuable at
par, together with 7,500 common stock purchase warrants exercisable at $3.15 per
F-11
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 386,250 warrants. See Note 9 to Notes to
Consolidated Financial Statements. The debentures are payable in semi-annual
installments of interest only commencing December 1, 1994, with the principal
amount maturing in full on June 13, 2004. The Company is not required to make
any mandatory redemptions or sinking fund payments. The debentures are
subordinated to the Company's senior indebtedness including the Credit Facility
and notes issued to the Company's landlord. The 386,250 warrants were valued at
$.50 per warrant as of the date of the 1994 Private Placement and, accordingly,
the Company recorded the discount in the aggregate amount of $193,125 as
additional paid-in capital. This discount is being amortized over the ten-year
term of the debentures and approximately $19,000 was expensed in 1998, 1997 and
1996.
In May 1994, the Company executed a promissory note in the amount of $865,000 in
favor of the Company's landlord to finance substantially all of the tenant
improvements necessary for the Company's Miami facility. This $865,000 note
requires no payments in the first year (interest accrues and is added to the
principal balance), is payable interest only in the second year and has a
repayment schedule with varying monthly payments over the remaining 18 years. At
the same time, the Company entered into another promissory note with the
Company's landlord for $150,000 to finance certain personal property for the
facility. This $150,000 note is payable interest only for six months and
thereafter in 60 equal self-amortizing monthly payments of principal and
interest. These notes, which are subordinate to the Credit Facility, bear
interest at 8% per annum and are payable monthly. Certain additional
improvements to the Company's Miami corporate facility aggregating approximately
$90,300 were financed as of May 1, 1995 by the landlord. This $90,300 is
evidenced by a promissory note payable in 240 consecutive, equal self-amortizing
monthly installments of principal and interest. This note, which is subordinate
to the Credit Facility, accrues interest at a fixed rate of 8% per annum. In
October 1996, the Company executed a promissory note in the amount of $161,500
with the Company's landlord to finance certain additional improvements to the
Company's Miami corporate facility. This note, which is subordinate to the
Credit Facility, is payable monthly with interest at 8.5% per annum and matures
in October 2011.
Long-term debt of the Company as of December 31, 1998, other than the Credit
Facility, matures as follows:
1999......................................................... $ 230,000
2000......................................................... 96,000
2001......................................................... 99,000
2002......................................................... 88,000
2003......................................................... 75,000
Thereafter................................................... 7,053,000
--------------
$ 7,641,000
==============
OBLIGATIONS UNDER CAPITAL LEASES
During 1997 the Company renewed a capital lease for computer equipment which
will expire in 2000. The assets, aggregating $634,000, and liabilities under the
capital lease are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are depreciated over
their estimated productive lives. As of December 31, 1998, accumulated
depreciation of these assets aggregated approximately $408,000. Depreciation of
assets under this capital lease is included in depreciation expense.
F-12
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Minimum future lease payments under this capital lease as of December 31, 1998
and for each of the remaining years and in the aggregate are approximately as
follows:
1999......................................................... $ 51,000
2000......................................................... 38,000
--------------
Total minimum lease payments................................. 89,000
Less amount representing interest............................ (15,000)
--------------
Total obligations under capital leases....................... 74,000
Current portion.............................................. (39,000)
--------------
$ 35,000
==============
The interest rate on this capital lease is 8.50% per annum and is imputed based
on the lower of the Company's incremental borrowing rate at the inception of the
lease or the lessor's implicit rate of return.
NOTE 8 - INCOME TAXES
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 1998 and 1997 are as follows:
Deferred tax assets: 1998 1997
-------------- -------------
Accounts receivable.................. $ 524,000 $ 433,000
Inventory............................ 384,000 334,000
Accrued expenses..................... 1,569,000 761,000
Postretirement benefits.............. 481,000 481,000
Other................................ 649,000 671,000
-------------- -------------
3,607,000 2,680,000
Deferred tax liabilities:
Fixed assets......................... 387,000 319,000
-------------- -------------
Net deferred tax asset................. $ 3,220,000 $ 2,361,000
============== =============
At December 31, 1998 $1,930,000 of the net deferred tax asset was included in
"Other Current Assets" and $1,290,000 was included in "Deposits and Other
Assets" in the accompanying Consolidated Balance Sheet.
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------
Current
- -------
Federal................... $ 1,210,000 $ 1,836,000 $ (2,018,000)
State..................... 210,000 207,000 (262,000)
-------------- -------------- -------------
1,420,000 2,043,000 (2,280,000)
-------------- -------------- -------------
Deferred
- --------
Federal................... (749,000) 105,000 (1,657,000)
State..................... (110,000) 15,000 (286,000)
-------------- -------------- -------------
(859,000) 120,000 (1,943,000)
-------------- -------------- -------------
$ 561,000 $ 2,163,000 $ (4,223,000)
============== ============== =============
F-13
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The provision for income tax expense (benefit) included in the Consolidated
Financial Statements is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations................................. $ 561,000 $ 2,163,000 $ (2,942,000)
Discontinued operations............................... - - (1,325,000)
Extraordinary items................................... - - 44,000
-------------- -------------- -------------
$ 561,000 $ 2,163,000 $ (4,223,000)
============== ============== =============
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective tax rate is as
follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax statutory rate................ 34.0% 34.0% (34.0)%
State income tax, net of federal income tax benefit... 5.4 2.7 (2.6)
Goodwill amortization................................. 4.2 .9 16.6
Other - including non-deductible items................ (2.1) 2.4 (9.9)
------ ----- -----
Effective tax rate.................................... 41.5% 40.0% (29.9)%
====== ===== =====
</TABLE>
NOTE 9 - CAPITAL STOCK, OPTIONS AND WARRANTS
Effective January 1996, in connection with the acquisition of PPI, the Company
issued an aggregate of 549,999 shares of its common stock, valued at $2.50 per
share. Only 60,000 shares of the Company's common stock, valued at $150,000,
were released to the PPI selling shareholders at closing. The remaining 489,999
shares of common stock were retained in escrow by the Company, as escrow agent,
and were to be released to the PPI selling shareholders annually if certain
levels of pre-tax net income were attained by PPI for the years ended December
31, 1996 through December 31, 2000. For the year ended December 31, 1996, the
acquired company did not attain that certain level of pre-tax net income and,
accordingly, none of the Additional Consideration was released. During 1997, the
Company and the PPI selling shareholders agreed to cease the operations of PPI.
As a result, all of the Additional Consideration held in escrow was canceled and
retired as of December 31, 1997.
In December 1995, in connection with the acquisition of the Added Value
Companies, the Company issued an aggregate of 2,174,104 shares of common stock.
As a result of Added Value previously owning approximately 37% of Rocky
Mountain, 160,703 shares, valued at approximately $391,000, issued as part of
the Rocky Mountain merger were acquired by the Company's wholly-owned
subsidiary. In addition, in connection with such acquisitions, certain selling
stockholders were granted an aggregate of 50,000 stock options (30,000 stock
options of which have since been canceled) to acquire the Company's common stock
at an exercise price of $2.313 per share exercisable, subject to a six-year
vesting period, through December 29, 2002. In connection with the Company
entering into a settlement agreement with certain of the selling stockholders in
December 1996, an aggregate of 95,000 shares of the Company's common stock was
canceled and the Company granted to certain selling shareholders (who are
employees of the Company) stock options to purchase an aggregate of 50,000
shares of the Company's common stock at an exercise price of $1.50 per share
exercisable through December 30, 2001. At December 31, 1998, 37,500 of these
options remained unexercised and 12,500 were canceled.
In July 1995, the Company issued to a consulting firm a warrant to acquire
45,000 shares of the Company's common stock at an exercise price of $2.50 per
share exercisable through July 20, 2000. The warrant was issued in consideration
of such consulting firm entering into a new one-year consulting agreement with
the Company covering financial public relations/investor relations services. At
December 31, 1998, these warrants remained unexercised. The same consulting firm
had previously been issued warrants to acquire
F-14
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
an aggregate of 180,000 shares in September 1987 and May 1993 in connection with
prior consulting agreements as discussed below.
In connection with new employment agreements between the Company and each of its
four executive officers entered into in May 1995, an aggregate of 1,000,000
stock options were granted on June 8, 1995 to such four executive officers
pursuant to the Employees', Officers', Directors' Stock Option Plan, as
previously amended and restated (the "Option Plan"). These options have an
exercise price of $1.875 per share and are exercisable through June 7, 2005,
subject to a vesting schedule.
In connection with the public offering in 1995, 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. At December 31, 1998, these warrants had not been
exercised.
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 7 to Notes to Consolidated Financial Statements). The warrants are
exercisable at any time between December 14, 1994 and June 13, 1999 at an
exercise price of $3.15 per share. In connection with this private placement,
the placement agent received warrants to purchase 38,625 shares of the Company's
common stock. The placement agent's warrants are exercisable for a four-year
period commencing June 14, 1995 at an exercise price of $3.78 per share. At
December 31, 1998, these warrants had not been exercised.
In May 1993, in connection with a consulting agreement, the Company issued
warrants to acquire 90,000 shares of its common stock at $1.35 per share. These
warrants were not exercised and expired in May 1998. In addition, a warrant to
acquire 90,000 shares of the Company's common stock at $1.60 per share expired
in June 1997.
The Company has reserved 3,250,000 shares of common stock for issuance under the
Option Plan. A summary of options granted and related information for the years
ended December 31, 1996, 1997 and 1998 under the Option Plan follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------------ --------------
<S> <C> <C>
Outstanding, December 31, 1996 2,374,813 $1.77
Weighted average fair value of options
granted during the year .24
Granted 1,551,000 1.15
Exercised (30,000) .94
Canceled (1,167,500) 1.68
------------
Outstanding, December 31, 1997 2,728,313 1.46
Weighted average fair value of options
granted during the year .42
Granted 195,000 1.44
Exercised (3,011) 1.12
Canceled (88,750) 1.39
------------
Outstanding, December 31, 1998 2,831,552 1.46
============
Weighted average fair value of options
granted during the year .27
Options exercisable:
December 31, 1996 860,495 1.43
December 31, 1997 468,124 1.27
December 31, 1998 832,080 1.22
</TABLE>
F-15
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Exercise prices for options outstanding as of December 31, 1998 ranged from
$1.00 to $2.53. The weighted-average remaining contractual life of these options
is approximately 5 years. Outstanding options at December 31, 1998 were held by
83 individuals.
The Company applies APB 25 and related Interpretations in accounting for the
Option Plan. Accordingly, no compensation cost has been recognized for the
Option Plan. Had compensation cost for the Option Plan been determined using the
fair value based method, as defined in SFAS 123, the Company's net earnings
(loss) and earnings (loss) per share would have been adjusted to the pro forma
amounts indicated below:
YEARS ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------
Net earnings (loss):
As reported $831,000 $3,250,000 $(9,920,000)
Pro forma 800,000 2,859,000 (9,967,000)
Basic earnings (loss) per share:
As reported $.04 $.17 $(.50)
Pro forma .04 .15 (.50)
Diluted earnings (loss) per share:
As reported $.04 $.16 $(.49)
Pro forma .04 .14 (.50)
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: expected volatility of 60.0%,
50.0% and 43.4%; risk-free interest rate of 5.7%, 6.1% and 6.5%; and expected
lives of 5 to 8 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1995. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.
In connection with the acquisition of the assets of GCI Corp. in 1994, 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 connection with the acquisition of the assets of Components Incorporated in
1994, the Company issued 98,160 unqualified stock options at an exercise price
of $1.65 per share. These options expired in January 1999.
NOTE 10 - COMMITMENTS/RELATED PARTY TRANSACTIONS
In May 1994, the Company entered into a new lease with its then existing
landlord to lease a 110,800 square foot facility for its corporate headquarters
and Miami distribution center. The lease has a term expiring in 2014 (subject to
the Company's right to terminate at any time after the fifth year of the term
upon twenty-four months prior written notice and the payment of all outstanding
debt owed to the landlord). The lease gives the Company three six-year options
to renew at the fair market value rental rates. The lease 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.
F-16
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility presently contains the separate divisions created
for flat panel displays (ADT) and memory module (AMP) operations as well as a
distribution center. See "Products." During 1998 the Denver sales operations
were moved to a separate office. The 7,600 square foot facility is now dedicated
solely to certain value-added services and a regional distribution center.
During 1995, the Company entered into a lease for a west coast distribution and
semiconductor programming center located in Fremont, California (near San Jose).
This facility contains approximately 20,000 square feet of space. The Company
moved into this facility in January 1996. The Company has used this space to
expand its semiconductor programming and component distribution capabilities and
to further improve quality control and service capabilities for its west coast
customers.
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and CEO of the Company and 8,000 square feet of the
space is being utilized for the sales operation. The remaining area of
approximately 4,000 square feet is not presently being utilized and the Company
is currently pursuing a tenant to sublet this space.
The Company leases space for its other sales offices, which range in size from
approximately 1,000 square feet to 8,000 square feet. The leases for these
offices expire at various dates and include various escalation clauses and
renewal options.
Approximate minimum future lease payments required under operating leases for
office leases as well as equipment leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1998, are as
follows for the next five years:
YEAR ENDING DECEMBER 31
1999............................................................ $3,281,000
2000............................................................ 2,583,000
2001............................................................ 1,343,000
2002............................................................ 699,000
2003............................................................ 660,000
Total rent expense for office leases, including real estate taxes and net of
sublease income, amounted to approximately $2,165,000, $1,940,000 and $1,772,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Board of Directors approved a loan to the President and CEO of the
Company in the amount of $125,000 in connection with his relocation to Silicon
Valley. This loan is evidenced by a promissory note, which bears interest at 5%
per annum and is payable interest only for the first five years and four months;
principal and interest thereafter until maturity on a twenty-year
self-amortizing annual basis; and any unpaid principal and accrued interest is
payable in full in August 2013. This note receivable is included in "Deposits
and Other Assets" in the accompanying Consolidated Balance Sheet at December 31,
1998.
Effective January 1, 1988, the Company established a deferred compensation plan
(the "1988 Deferred Compensation Plan") for executive officers and key employees
of the Company. The employees eligible to participate in the 1988 Deferred
Compensation Plan (the "Participants") are chosen at the sole discretion of
F-17
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
the Board of Directors upon a recommendation from the Board of Directors'
Compensation Committee. Pursuant to the 1988 Deferred Compensation Plan,
commencing on a Participant's retirement date, he or she will receive an annuity
for ten years. The amount of the annuity shall be computed at 30% of the
Participant's Salary, as defined. Any Participant with less than ten years of
service to the Company as of his or her retirement date will only receive a pro
rata portion of the annuity. Retirement benefits paid under the 1988 Deferred
Compensation Plan will be distributed monthly. The Company paid benefits under
this plan of approximately $15,600 during each of 1998, 1997 and 1996, none of
which was paid to any executive officer. The maximum benefit payable to a
Participant (including each of the executive officers) under the 1988 Deferred
Compensation Plan is presently $30,000 per annum. At December 31, 1998, the cash
surrender values of insurance policies owned by the Company under the 1988
Deferred Compensation Plan, which provide for the accrued deferred compensation
benefits, aggregated approximately $133,000.
During 1996, the Company established a second deferred compensation plan (the
"Salary Continuation Plan") for executives of the Company. The executives
eligible to participate in the Salary Continuation Plan are chosen at the sole
discretion of the Board of Directors upon a recommendation from the Board of
Directors' Compensation Committee. The Company may make contributions each year
in its sole discretion and is under no obligation to make a contribution in any
given year. For 1996, 1997, and 1998 the Company committed to contribute
$63,000, $160,000, and $192,000 respectively, under this plan. Participants in
the plan will vest in their plan benefits over a ten-year period. If the
participant's employment is terminated due to death, disability or due to a
change in control of management, they will vest 100% in all benefits under the
plan. Retirement benefits will be paid, as selected by the participant, based on
the sum of the net contributions made and the net investment activity.
In connection with an employment agreement with an executive officer an unfunded
postretirement benefit obligation of $1,171,000 is included in the Consolidated
Balance Sheets at December 31, 1998 and 1997.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company over the age of 21 are eligible to participate in the
401(k) Plan after completing 90 days of employment. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, limited to $10,000 in 1998. The Company makes matching
contributions and in 1998 its contributions were in the amount of 25% on the
first 6% contributed of each participating employee's salary. The Company
expensed $521,000, $472,000 and $305,000 for such matching contributions for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 11 - SETTLEMENT OF LITIGATION
In June 1996, the Company settled a civil action in connection with the
Company's prior acquisition of certain computer equipment. In connection with
the settlement agreement, the Company recognized an extraordinary after-tax gain
of $272,000, net of related expenses, which is reflected in the Consolidated
Statement of Operations for the year ended December 31, 1996.
NOTE 12 - CONTINGENCIES
From time to time the Company may be named as a defendant in suits for product
defects, breach of warranty, breach of implied warranty of merchantability,
patent infringement or other actions relating to products which it distributes
which are manufactured by others. In those cases, the Company expects that the
manufacturer of such products will indemnify the Company, as well as defend such
actions on the Company's behalf although there is no guarantee that the
manufacturers will do so. In addition, as a result of the acquisitions of the
Added Value Companies, the Company offers a warranty with respect to its
manufactured products for a period of one year against defects in workmanship
and materials under normal use and service and in the original, unmodified
condition.
F-18
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13 - ECONOMIC DEPENDENCY
For each of the years ended December 31, 1998, 1997 and 1996, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $39,893,000, $43,435,000 and $35,579,000, respectively.
The net outstanding accounts payable to this supplier at December 31, 1998, 1997
and 1996 amounted to approximately $5,832,000, $2,854,000 and $2,285,000,
respectively.
NOTE 14 - SUBSEQUENT EVENT
On March 17, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market that the Company has failed to maintain a
closing bid price for its common stock in excess of $1 per share as required
under The Nasdaq Stock Market maintenance standards. Although no delisting
action was initiated at this time, the Company was provided ninety (90) calendar
days in which to regain compliance with this maintenance standard. Failure to
meet this standard could result in delisting from The Nasdaq Stock Market. The
Company is currently reviewing its options with respect to the Company's listing
on The Nasdaq Stock Market. There can be no assurance that the Company's common
stock will continue to remain eligible for listing on The Nasdaq Stock Market.
See "Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters."
F-19
EXHIBIT 10.3
LEASE
BY AND BETWEEN
SAN JOSE TECHNOLOGY PROPERTIES, LLC,
A DELAWARE LIMITED LIABILITY COMPANY,
AS LANDLORD
AND
ALL AMERICAN SEMICONDUCTOR OF
NORTHERN CALIFORNIA, INC.
A CALIFORNIA CORPORATION
AS TENANT
AFFECTING PREMISES COMMONLY KNOWN AS
1851 ZANKER ROAD AND 230 DEVCON DRIVE, SAN JOSE, CA
1
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 - DEFINITIONS 7
ARTICLE 2 - DEMISE, CONSTRUCTION, AND ACCEPTANCE 9
ARTICLE 3 - RENT 10
ARTICLE 4 - USE OF PREMISES 12
ARTICLE 5 - TRADE FIXTURES AND ALTERATIONS 14
ARTICLE 6 - REPAIR AND MAINTENANCE 16
ARTICLE 7 - WASTE DISPOSAL AND UTILITIES 18
ARTICLE 8 - COMMON OPERATING EXPENSES 19
ARTICLE 9 - INSURANCE 21
ARTICLE 10 - LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 23
ARTICLE 11 - DAMAGE TO PREMISES 24
ARTICLE 12 - CONDEMNATION 25
ARTICLE 13 - DEFAULT AND REMEDIES 26
ARTICLE 14 - ASSIGNMENT AND SUBLETTING 28
ARTICLE 15 - GENERAL PROVISIONS 32
EXHIBITS
Exhibit A - Site plan of the Project containing a description of the
Premises
Exhibit B - Work Letter for Tenant Improvements (with Exhibit B-1, the
Space Plan)
Exhibit C - Acceptance Agreement
Addendum No. 1
2
<PAGE>
SUMMARY OF BASIC LEASE TERMS
SECTION TERMS
(LEASE REFERENCE)
A. LEASE REFERENCE DATE: October 1, 1998
(Introduction)
B. LANDLORD: SAN JOSE TECHNOLOGY PROPERTIES,
(Introduction) LLC a Delaware limited
liability company
C. TENANT: ALL AMERICAN SEMICONDUCTOR OF
(Introduction) NORTHERN CALIFORNIA, INC. a
California corporation
D. PREMISES: That area consisting of (a)
(ss.1.21) approximately 9,400 square feet
of gross leasable area, the
address of which is 1851 Zanker
Road, San Jose, CA (the "Zanker
Road Space"), and (b)
approximately 10,791 square
feet of gross leasable area,
the address of which is 230
Devcon Drive, San Jose, CA (the
"Devcon Drive Space"). The
Zanker Road Space and the
Devcon Drive Space are both
located within the Building as
shown on EXHIBIT A.
E. PROJECT: The land and improvements shown
(ss.1.22) on EXHIBIT A consisting of the
Building and three other
commercial buildings the
aggregate gross leasable area
of which is 163,073 square
feet.
F. BUILDING: The building in which the
(ss.1.7) Premises are located, as
outlined in Exhibit A attached
hereto, which building contains
approximately 45,123 square
feet of gross leasable area.
G. TENANT'S SHARE: Prior to the Commencement Date
(ss.1.29) for the Devcon Drive Space,
Tenant's Share shall be 20.83%
of the Building (i.e.,
9,400/45,123) and 5.76 of the
Project (i.e., 9,400/163,073).
From and after the Commencement
Date for the Devcon Drive
Space, Tenant's Share shall be
44.75% of the Building (i.e.,
20,191/45,123) and 12.38% of
the Project
(i.e.,20,191/163,073).
H. TENANT'S ALLOCATED
(ss.4.5) PARKING STALLS: A total of eighty-one (81)
parking stalls for all of the
Premises (i.e., the Zanker Road
Space and the Devcon Drive
Space). Prior to the
Commencement Date for the
Devcon Drive Space, Tenant
shall be allocated 38 parking
stalls for the Zanker Road
Space and upon the Commencement
Date for the Devcon Drive
Space, an additional 43 parking
stalls. Based approximately on
a ratio of four stalls per
1,000 square feet of space.
3
<PAGE>
I. SCHEDULED COMMENCEMENT February 1, 1999 for the Zanker
(ss.1.26) DATE: Road Space, and March 1, 1999
for the Devcon Drive Space.
Tenant has been leasing the
Devcon Drive Space pursuant to
the terms of the certain
Industrial Real Estate Lease
dated November 11, 1993,
initially by and between the
State Teachers' Retirement
System and Tenant (the
"Existing Devcon Space Lease").
Landlord has succeeded to the
interests of the Landlord under
the Existing Devcon Space
Lease. Effective as of March 1,
1999, Tenant will be leasing
the Devcon Drive Space pursuant
to the terms of this Lease and
the Existing Devcon Space Lease
shall be terminated
automatically.
J. LEASE TERM: For the Zanker Road Space,
(ss.1.18) commencing on the earlier of
(a) "Substantial Completion" of
the "Tenant Improvements" (as
such terms are defined in
Exhibit B attached hereto), or
(b) the date that Tenant takes
possession of the Zanker Road
Space and expiring on February
28, 2004; and for the Devcon
Drive Space, commencing on
March 1, 1999, with the Lease
Term expiring for all of the
Premises (i.e., the Zanker Road
Space and Devcon Drive Space)
on February 28, 2004. If the
Commencement Date is other than
the first day of the calendar
month and such date is prior to
March 1, 1999, the first
calendar month shall include
such partial month in which
such Commencement Date occurs
plus the next full calendar
month and Base Monthly Rent for
such first month shall include
the full monthly rent for the
first full calendar month plus
monthly rent for the partial
month in which the Commencement
Date occurs prorated on a daily
basis at the monthly rent
provided for the first calendar
month.
SEE ADDENDUM NO. 1 FOR TENANT'S
OPTION TO EXTEND.
4
<PAGE>
<TABLE>
<CAPTION>
K. Base Monthly Rent:
(ss.3.1) ------------------
Monthly Amount Monthly Amount
Months Zanker Road Space Devcon Drive Space
------ ----------------- ------------------
<S> <C> <C> <C>
1st month - 2/28/99 $14,570.00 Governed by Existing
Devcon Space Lease
3/1/99 - 2/28/00 $14,570.00 $16,726.05
3/1/00 - 2/28/01 $15,298.50 $17,562.35
3/1/01 - 2/28/02 $16,063.43 $18,440.47
3/1/02 - 2/28/03 $16,866.60 $19,362.49
3/1/03 - 2/28/04 $17,709.93 $20,330.62
</TABLE>
L. PREPAID RENT: $14,570.00, plus Tenant's Share of
(ss.3.3) Common Operating Expenses for the Zanker Road Space.
M. SECURITY DEPOSIT: The sum of $38,071.78, of which
(ss.3.5) $6,700.00 is currently held by
Landlord as the security
deposit under the Existing
Devcon Space Lease and will be
applied to the security deposit
required under this Lease
immediately following the
expiration of the term of the
Existing Devcon Space Lease.
N. PERMITTED USE: administrative offices,
(ss.4.1) engineering and sales offices,
light manufacturing and
warehouse for electronic
components for the
semiconductor industry and uses
incidental thereto.
O. PERMITTED TENANT'S ALTERATIONS LIMIT: $5,000.00, which
(ss.5.2) is applicable separately for each alteration project.
As provided in Exhibit B attached hereto, the
Construction Plans may also reflect work that may be
done in approximately 6,000 square feet of space in
the front of the Zanker Road Space ("Future Alteration
Work") , which is the area that Tenant may sublet as
hereinafter provided. Landlord's approval of the
Construction Plans in accordance with Exhibit B shall
constitute approval for the construction of the Future
Alteration Work to the extent such work is shown in
the Construction Plans even though such work will not
be done by the Landlord in connection with the
construction of the Tenant Improvements.
P. TENANT'S LIABILITY
(ss.9.1) INSURANCE MINIMUM: $3,000,000.00
Q. LANDLORD'S ADDRESS: c/o Divco West Group, LLC
(ss.1.3)
100 Park Center Plaza, Ste. 425
San Jose, California 95113
Attn: Property Manager
With a copy to: Divco West Group, LLC
150 Almaden Boulevard, Ste. 700
San Jose, CA 95113
Attn.: Asset Manager
5
<PAGE>
R. TENANT'S ADDRESS: All American Semiconductor of
(ss. 1.3) Northern California, Inc.
230 Devcon Drive
San Jose,CA 95112
Attn.: Bruce Goldberg
With a copy to: All American Semiconductor,Inc.
16115 N.W. 52nd Avenue
Miami, Florida 33014
Attention: Howard Flanders
S. RETAINED REAL ESTATE BROKERS: Craig Fordyce and
(ss.15.13) Michael Rosendin, of Colliers Parrish International,
Inc., representing the Landlord, and Tom Taylor and
Christian Marent of Bishop Hawk, Inc., representing
the Tenant.
T. LEASE: This Lease includes the summary of the
(ss.1.17) Basic Lease Terms, the Lease, and the
following exhibits and addenda:
EXHIBIT A - Project Site Plan and
Outline of the Premises
EXHIBIT B - Work Letter for Tenant
Improvements (with Exhibit B-1,
the Space Plan)
EXHIBIT C - Acceptance Agreement
ADDENDUM NO. 1
The foregoing Summary is hereby incorporated into and made a part of
this Lease. Each reference in this Lease to any term of the Summary shall mean
the respective information set forth above and shall be construed to incorporate
all of the terms provided under the particular paragraph pertaining to such
information. In the event of any conflict between the Summary and the Lease, the
Summary shall control.
LANDLORD: TENANT:
SAN JOSE TECHNOLOGY PROPERTIES, LLC, By: ALL AMERICAN SEMICONDUCTOR
a Delaware limited liability company OF NORTHERN CALIFORNIA, INC.
a California corporation
By: Divco West Group, LLC,
a Delaware limited liability company By: /s/ BRUCE M. GOLDBERG
Its Manager ---------------------------
Name: Bruce M. Goldberg
Title: Pres. & CEO
By: /s/ SCOTT SMITHERS
------------------------
Name: Scott Smithers
Its: President
6
<PAGE>
LEASE
This Lease is dated as of the lease reference date specified in SECTION
A of the Summary and is made by and between the party identified as Landlord in
SECTION B of the Summary and the party identified as Tenant in SECTION C of the
Summary.
ARTICLE 1
DEFINITIONS
1.1 GENERAL: Any initially capitalized term that is given a special
meaning by this Article 1, the Summary, or by any other provision of this Lease
(including the exhibits attached hereto) shall have such meaning when used in
this Lease or any addendum or amendment hereto unless otherwise clearly
indicated by the context.
1.2 ADDITIONAL RENT: The term "Additional Rent" is defined in P.
3.2.
1.3 ADDRESS FOR NOTICES: The term "Address for Notices" shall mean
the addresses set forth in SECTIONS Q AND R of the Summary; provided, however,
that after the Commencement Date, Tenant's Address for Notices shall be the
address of the Premises.
1.4 AGENTS: The term "Agents" shall mean the following: (i) with
respect to Landlord or Tenant, the agents, employees, and contractors of such
party; and (ii) in addition with respect to Tenant, Tenant's subtenants and
their respective agents, employees and contractors.
1.5 AGREED INTEREST RATE: The term "Agreed Interest Rate" shall mean
that interest rate determined as of the time it is to be applied that is equal
to the lesser of (i) 5% in excess of the discount rate established by the
Federal Reserve Bank of San Francisco as it may be adjusted from time to time,
or (ii) the maximum interest rate permitted by Law.
1.6 BASE MONTHLY RENT: The term "Base Monthly Rent" shall mean the
fixed monthly rent payable by Tenant pursuant to P. 3.1 which is specified in
SECTION K of the Summary.
1.7 BUILDING: The term "Building" shall mean the building in which
the Premises are located which Building is identified in SECTION F of the
Summary, the gross leasable area of which is referred to herein as the "Building
Gross Leasable Area."
1.8 COMMENCEMENT DATE: The term "Commencement Date" is the date the
Lease Term commences, which term is defined in P. 2.2.
1.9 COMMON AREA: The term "Common Area" shall mean all areas and
facilities within the Project that are not designated by Landlord for the
exclusive use of Tenant or any other lessee or other occupant of the Project,
including the parking areas, access and perimeter roads, pedestrian sidewalks,
landscaped areas, trash enclosures, recreation areas and the like.
1.10 COMMON OPERATING EXPENSES: The term "Common Operating Expenses"
is defined in P. 8.2.
7
<PAGE>
1.11 EFFECTIVE DATE: The term "Effective Date" shall mean the date
the last signatory to this Lease whose execution is required to make it binding
on the parties hereto shall have executed this Lease.
1.12 EVENT OF TENANT'S DEFAULT: The term "Event of Tenant's Default"
is defined in P. 13.1.
1.13 HAZARDOUS MATERIALS: The terms "Hazardous Materials" and
"Hazardous Materials Laws" are defined in P. 7.2E.
1.14 INSURED AND UNINSURED PERIL: The terms "Insured Peril" and
"Uninsured Peril" are defined in P. 11.2E.
1.15 LAW: The term "Law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any municipal, county, state, federal or other government
agency or authority having jurisdiction over the parties to this Lease or the
Premises, or both, in effect either at the Effective Date or any time during the
Lease Term, including, without limitation, any Hazardous Material Law (as
defined in P. 7.2E) and the Americans with Disabilities Act, 42 U.S.C. ss.ss.
12101 et. SEQ. and any rules, regulations, restrictions, guidelines,
requirements or publications promulgated or published pursuant thereto.
1.16 LEASE: The term "Lease" shall mean the Summary and all elements
of this Lease identified in SECTION T of the Summary, all of which are attached
hereto and incorporated herein by this reference.
1.17 LEASE TERM: The term "Lease Term" shall mean the term of this
Lease which shall commence on the Commencement Date and continue for the period
specified in SECTION J of the Summary.
1.18 LENDER: The term "Lender" shall mean any beneficiary, mortgagee,
secured party, lessor, or other holder of any Security Instrument.
1.19 PERMITTED USE: The term "Permitted Use" shall mean the use
specified in SECTION N of the Summary.
1.20 PREMISES: The term "Premises" shall mean that building area
described in SECTION D of the Summary that is within the Building. Prior to the
Commencement Date for the Devcon Drive Space, the term "Premises" shall mean the
Zanker Road Space and from and after the Commencement Date for the Devcon Drive
Space, the term "Premises" shall mean the Zanker Road Space and the Devcon Drive
Space.
1.21 PROJECT: The term "Project" shall mean that real property and
the improvements thereon which are specified in SECTION E of the Summary, the
aggregate gross leasable area of which is referred to herein as the "Project
Gross Leasable Area."
1.22 PRIVATE RESTRICTIONS: The term "Private Restrictions" shall mean
all recorded covenants, conditions and restrictions, private agreements,
reciprocal easement agreements, and any other recorded instruments affecting the
use of the Premises which (i) exist as of the Effective Date, or (ii) are
recorded after the Effective Date and are approved by Tenant.
1.23 REAL PROPERTY TAXES: The term "Real Property Taxes" is defined
in P. 8.3.
8
<PAGE>
1.24 SCHEDULED COMMENCEMENT DATE: The term "Scheduled Commencement
Date" shall mean the date specified in SECTION I of the Summary.
1.25 SECURITY INSTRUMENT: The term "Security Instrument" shall mean
any underlying lease, mortgage or deed of trust which now or hereafter affects
the Project, and any renewal, modification, consolidation, replacement or
extension thereof.
1.26 SUMMARY: The term "Summary" shall mean the Summary of Basic
Lease Terms executed by Landlord and Tenant that is part of this Lease.
1.27 TENANT'S ALTERATIONS: The term "Tenant's Alterations" shall mean
all improvements, additions, alterations, and fixtures installed in the Premises
by Tenant at its expense which are not Trade Fixtures.
1.28 TENANT'S SHARE: The term "Tenant's Share" shall mean the
percentage obtained by dividing Tenant's Gross Leasable Area by the Building
Gross Leasable Area for Tenant's Share of the Building and by the Project Gross
Leasable Area for Tenant's Share of the Project, which as of the Effective Date
is the percentage identified in SECTION G of the Summary.
1.29 TRADE FIXTURES: The term "Trade Fixtures" shall mean (i)
Tenant's inventory, furniture, signs, and business equipment, and (ii) anything
affixed to the Premises by Tenant at its expense for purposes of trade,
manufacture, ornament or domestic use (except replacement of similar work or
material originally installed by Landlord) which can be removed without material
injury to the Premises unless such thing has, by the manner in which it is
affixed, become an integral part of the Premises.
ARTICLE 2
DEMISE, CONSTRUCTION, AND ACCEPTANCE
2.1 DEMISE OF PREMISES: Landlord hereby leases to Tenant, and Tenant
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises for Tenant's own use in the conduct of Tenant's business
together with (i) the non-exclusive right to use the number of Tenant's
Allocated Parking Stalls within the Common Area (subject to the limitations set
forth in P. 4.5), and (ii) the non-exclusive right to use the Common Area for
ingress to and egress from the Premises. Landlord reserves the use of the
exterior walls, the roof and the area beneath and above the Premises, together
with the right to install, maintain, use, and replace ducts, wires, conduits and
pipes leading through the Premises in locations which will not materially
interfere with Tenant's use of the Premises.
2.2 COMMENCEMENT DATE: The Scheduled Commencement Date for the
Zanker Road Space is only an estimate of the actual Commencement Date for such
space, and the term of this Lease for the Zanker Road Space shall begin on the
earlier of: (a) "Substantial Completion" of the "Tenant Improvements" (as such
terms are defined in Exhibit B attached hereto), or (b) the date that Tenant
takes possession of the Zanker Road Space (herein referred to as the
"Commencement Date" as it pertains to the Zanker Road Space. As of the date of
this Lease, Tenant is currently leasing the Devcon Drive Space pursuant to the
Existing Devcon Space Lease which is scheduled to expire on February 28, 1998.
Immediately following the expiration of the Existing Devcon Space Lease, Tenant
shall lease the Devcon Space pursuant to this Lease and the "Commencement Date"
for the Devcon Drive Space shall be the date set forth as the Scheduled
Commencement Date for such space notwithstanding that the Tenant Improvements
for such space may not be completed by such date.
2.3 CONSTRUCTION OF IMPROVEMENTS: Landlord shall construct the
Tenant Improvements in the Premises in accordance with, the terms of EXHIBIT B.
2.4 DELIVERY AND ACCEPTANCE OF POSSESSION: If Landlord is unable to
deliver possession of the Zanker Road Space to Tenant with the Tenant
Improvements for such space Substantially Completed as provided in Exhibit B on
or before the Scheduled Commencement Date for such space, this Lease shall not
be void or voidable, and Landlord shall not be liable to Tenant for any loss or
damage resulting therefrom. However, if the Commencement Date is delayed due to
any Tenant Delay (as defined in Exhibit B attached hereto), then the
Commencement Date shall be deemed the date the Tenant Improvements would have
been completed but for the Tenant Delays and Tenant shall be obligated to
commencement paying Base Monthly Rent, Additional Rent and all other charges
notwithstanding that it may not be able to occupy or use the Premises at the
time.
9
<PAGE>
If the Tenant Improvements have not been Substantially Completed
(as defined in Exhibit B attached hereto) within the later of sixty (60) days
after (a) the approval of the Construction Plans by Landlord, Tenant and the
local governmental authority and the issuance to Landlord of all building
permits by the local governmental authority, or (b) the date provided in the
construction contract between Landlord and its general contractor to
Substantially Complete the Tenant Improvements, subject to in any event Tenant
Delays and Force Majeure Delays (as defined in Exhibit B attached hereto), then
Tenant shall have the right as its sole and exclusive remedy to terminate this
Lease upon written notice to Landlord within the earlier of (i) ten days after
receipt of notice from Landlord of the delay or (b) ten days after the end of
said sixty (60) day period but prior to Substantial Completion of the Tenant
Improvements.
Tenant acknowledges that it has been leasing the Devcon Drive
Space and is thoroughly familiar with such space, the Common Areas and the
Project. Tenant also acknowledges that it has had an opportunity to conduct, and
has conducted, such inspections of the Zanker Road Space as it deems necessary
to evaluate its condition. Tenant agrees to accept possession of the Premises
in, "as-is", including all patent and latent defects, subject to completion of
the Tenant Improvements. Tenant's taking possession of any part of the Premises
shall be deemed to be an acceptance by Tenant of any work of improvement done by
Landlord in such part as complete and in accordance with the terms of this Lease
except for defects of which Tenant has given Landlord written notice prior to
the time Tenant takes possession. After Substantial Completion of the separate
Tenant Improvements for the Zanker Road Space and Devcon Drive Space, Tenant, at
the request of Landlord, shall execute an acceptance agreement in the form
attached as EXHIBIT C, appropriately completed.
2.5 EARLY OCCUPANCY: If Tenant enters or permits its contractors to
enter the Zanker Road Space prior to the Commencement Date with the written
permission of Landlord, it shall do so upon all of the terms of this Lease
(including its obligations regarding indemnity and insurance) except those
regarding the obligation to pay rent, which shall commence on the Commencement
Date.
ARTICLE 3
RENT
3.1 BASE MONTHLY RENT: Commencing on the Commencement Date and
continuing throughout the Lease Term, Tenant shall pay to Landlord the Base
Monthly Rent set forth in SECTION K of the Summary.
3.2 ADDITIONAL RENT: Commencing on the Commencement Date and
continuing throughout the Lease Term, Tenant shall pay the following as
additional rent (the "Additional Rent"): (i) any late charges or interest due
Landlord pursuant to P. 3.4; (ii) Tenant's Share of Common Operating Expenses as
provided in P. 8.1; (iii) Landlord's share of any Subrent received by Tenant
upon certain assignments and sublettings as required by P. 14.1; (iv) any legal
fees and costs due Landlord pursuant to P. 15.9; and (v) any other charges due
Landlord pursuant to this Lease.
3.3 PAYMENT OF RENT: Concurrently with the execution of this Lease
by Tenant, Tenant shall pay to Landlord the amount set forth in SECTION L of the
Summary as prepayment of rent for credit against the first installment(s) of
Base Monthly Rent. All rent required to be paid in monthly installments shall be
paid in advance on the first day of each calendar month during the Lease Term.
If SECTION K of the Summary provides that the Base Monthly Rent is to be
increased during the Lease Term and if the date of such increase does not fall
on the first day of a calendar month, such increase shall become effective on
the first day of the next calendar month. All rent shall be paid in lawful money
of the United States, without any abatement, deduction or offset whatsoever
(except as specifically provided in P. 11.4 and P. 12.3), and without any prior
demand therefor. Rent shall be paid to Landlord at its address set forth in
SECTION Q of the Summary, or at such other place as Landlord may designate from
time to time. Tenant's obligation to pay Base Monthly Rent and Tenant's Share of
Common Operating Expenses shall be prorated at the commencement and expiration
of the Lease Term.
10
<PAGE>
3.4 LATE CHARGE, INTEREST AND QUARTERLY PAYMENTS:
(a) LATE CHARGE. Tenant acknowledges that the late payment
by Tenant of any installment of rent, or any other sum of money required to be
paid by Tenant under this Lease, will cause Landlord to incur certain costs and
expenses not contemplated under this Lease, the exact amount of such costs being
extremely difficult and impractical to fix. Such costs and expenses will
include, without limitation, attorneys' fees, administrative and collection
costs, and processing and accounting expenses and other costs and expenses
necessary and incidental thereto. If any Base Monthly Rent or Additional Rent is
not received by Landlord from Tenant within three (3) business days after
receipt of written notice, then Tenant shall immediately pay to Landlord a late
charge equal to 5% of such delinquent rent as liquidated damages for Tenant's
failure to make timely payment, provided, however, that if Landlord has provided
two notices of a late payment or default during any calendar year, Landlord
shall not be obligated to provide any notice during the remainder of the
calendar year in order for Tenant to be obligated to pay such late charge. In no
event shall this provision for a late charge be deemed to grant to Tenant a
grace period or extension of time within which to pay any rent or prevent
Landlord from exercising any right or remedy available to Landlord upon Tenant's
failure to pay any rent due under this Lease in a timely fashion, including any
right to terminate this Lease pursuant to this Lease.
(b) INTEREST. If any rent remains delinquent for a period in
excess of five (5) business days then, in addition to such late charge, Tenant
shall pay to Landlord interest on any rent that is not paid when due at the
Agreed Interest Rate following the date such amount became due until paid.
(c) QUARTERLY PAYMENTS. If Tenant during any calendar year
shall be more than five (5) business days after receipt of written notice
delinquent in the payment of any rent or other amount payable by Tenant
hereunder on three (3) or more occasions, then, notwithstanding anything herein
to the contrary, Landlord may, by written notice to Tenant, elect to require
Tenant to pay all Base Monthly Rent and Additional Rent quarterly in advance.
Such right shall be in addition to and not in lieu of any other right or remedy
available to Landlord hereunder or at law on account of Tenant's default
hereunder
3.5 SECURITY DEPOSIT: On the Effective Date, Tenant shall deposit
with Landlord the amount set forth in SECTION M of the Summary as security for
the performance by Tenant of its obligations under this Lease, and not as
prepayment of rent (the "Security Deposit"). Landlord may from time to time
apply such portion of the Security Deposit as is reasonably necessary for the
following purposes: (i) to remedy any default by Tenant in the payment of rent;
(ii) to repair damage to the Premises caused by Tenant; (iii) to clean the
Premises upon termination of the Lease only if Tenant fails to clean the
Premises to the extent required by this Lease; and (iv) to remedy any other
default of Tenant to the extent permitted by Law and, in this regard, Tenant
hereby waives any restriction on the uses to which the Security Deposit may be
put contained in California Civil Code Section 1950.7. In the event the Security
Deposit or any portion thereof is so used, Tenant agrees to pay to Landlord
promptly upon demand an amount in cash sufficient to restore the Security
Deposit to the full original amount. Landlord shall not be deemed a trustee of
the Security Deposit, may use the Security Deposit in business, and shall not be
required to segregate it from its general accounts. Tenant shall not be entitled
to any interest on the Security Deposit. If Landlord transfers the Premises
during the Lease Term, Landlord may pay the Security Deposit to any transferee
of Landlord's interest in conformity with the provisions of California Civil
Code Section 1950.7 and/or any successor statute, in which event the
transferring Landlord will be released from all liability for the return of the
Security Deposit.
11
<PAGE>
ARTICLE 4
USE OF PREMISES
4.1 LIMITATION ON USE: Tenant shall use the Premises solely for the
Permitted Use specified in SECTION N of the Summary. Any change in use shall be
subject to the prior written consent of Landlord, which will not be unreasonably
withheld. Tenant shall not do anything in or about the Premises which will (i)
cause structural injury to the Building, or (ii) cause damage to any part of the
Building except to the extent reasonably necessary for the installation of
Tenant's Trade Fixtures and Tenant's Alterations, and then only in a manner
which has been first approved by Landlord in writing. Tenant shall not operate
any equipment within the Premises which will (i) materially damage the Building
or the Common Area, (ii) overload existing electrical systems or other
mechanical equipment servicing the Building, (iii) impair the efficient
operation of the sprinkler system or the heating, ventilating or air
conditioning ("HVAC") equipment within or servicing the Building, or (iv)
damage, overload or corrode the sanitary sewer system. Tenant shall not attach,
hang or suspend anything from the ceiling, roof, walls or columns of the
Building or set any load on the floor in excess of the load limits for which
such items are designed nor operate hard wheel forklifts within the Premises.
Any dust, fumes, or waste products generated by Tenant's use of the Premises
shall be contained and disposed so that they do not (i) create an unreasonable
fire or health hazard, (ii) damage the Premises, or (iii) result in the
violation of any Law. Except as approved by Landlord, Tenant shall not change
the exterior of the Building or install any equipment or antennas on or make any
penetrations of the exterior or roof of the Building. Tenant shall not commit
any waste in or about the Premises, and Tenant shall keep the Premises in a
neat, clean, attractive and orderly condition, free of any nuisances. If
Landlord designates a standard window covering for use throughout the Building,
Tenant shall use this standard window covering to cover all windows in the
Premises. Tenant shall not conduct on any portion of the Premises or the Project
any sale of any kind, including any public or private auction, fire sale,
going-out-of-business sale, distress sale or other liquidation sale.
4.2 COMPLIANCE WITH REGULATIONS: Tenant shall not use the Premises
in any manner which violates any Laws or Private Restrictions which affect the
Premises. Tenant shall abide by and promptly observe and comply with all Laws
and Private Restrictions. Tenant shall not use the Premises in any manner which
will cause a cancellation of any insurance policy covering Tenant's Alternations
or any improvements installed by Landlord at its expense or which poses an
unreasonable risk of damage or injury to the Premises. Tenant shall not sell, or
permit to be kept, used, or sold in or about the Premises any article which may
be prohibited by the standard form of fire insurance policy. Tenant shall comply
with all reasonable requirements of any insurance company, insurance
underwriter, or Board of Fire Underwriters which are necessary to maintain the
insurance coverage carried by either Landlord or Tenant pursuant to this Lease.
4.3 OUTSIDE AREAS: No materials, supplies, tanks or containers,
equipment, finished products or semi-finished products, raw materials,
inoperable vehicles or articles of any nature shall be stored upon or permitted
to remain outside of the Premises except in fully fenced and screened areas
outside the Building which have been designed for such purpose and have been
approved in writing by Landlord for such use by Tenant.
4.4 SIGNS: Tenant shall not place on any portion of the Premises any
sign, placard, lettering in or on windows, banner, displays or other advertising
or communicative material which is visible from the exterior of the Building
without the prior written approval of Landlord. All such approved signs shall
strictly conform to all Laws, Private Restrictions, and Landlord's sign criteria
then in effect, and shall be installed at the expense of Tenant. Tenant shall
maintain such signs in good condition and repair.
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As of the date hereof, there exists a monument sign by Devcon
Drive with Tenant's name located thereon. In lieu of using such existing
monument sign, Tenant shall have the right to have installed as part of the
Tenant Improvements a new monument sign by the corner of Devcon Drive and Zanker
Road, subject to the reasonable approval of Landlord and compliance by Tenant at
its expense with Landlord's signage criteria and all governmental ordinances and
requirements. Tenant acknowledges and agrees that it may only use one monument
sign and may not have rights to use the foregoing new monument sign and the
existing monument sign. As part of the Tenant Improvements, Tenant may also have
a sign installed on the Building by its Premises which is consistent with the
identification signs in the Project and subject to the reasonable approval of
Landlord and compliance by Tenant at its expense with Landlord's signage
criteria and all governmental ordinances and requirements. At its expense,
Tenant shall be responsible for removing such signs and repairing any damage by
the expiration or earlier termination of this Lease.
4.5 PARKING: Tenant is allocated and shall have the non-exclusive
right to use free of charge not more than the number of Tenant's Allocated
Parking Stalls contained within the Project described in SECTION H of the
Summary for its use and the use of Tenant's Agents, the location of which may be
designated from time to time by Landlord. Tenant shall not at any time use more
parking spaces than the number so allocated to Tenant or park its vehicles or
the vehicles of others in any portion of the Project not designated by Landlord
as a non-exclusive parking area. Tenant shall not have the exclusive right to
use any specific parking space. If Landlord grants to any other tenant the
exclusive right to use any particular parking space(s), Tenant shall not use
such spaces. Landlord reserves the right, after having given Tenant reasonable
notice, to have any vehicles owned by Tenant or Tenant's Agents utilizing
parking spaces in excess of the parking spaces allowed for Tenant's use to be
towed away at Tenant's cost. All trucks and delivery vehicles shall be (i)
parked at the rear of the Building, (ii) loaded and unloaded in a manner which
does not interfere with the businesses of other occupants of the Project, and
(iii) permitted to remain on the Project only so long as is reasonably necessary
to complete loading and unloading. In the event Landlord elects or is required
by any Law to limit or control parking in the Project, whether by validation of
parking tickets or any other method of assessment, Tenant agrees to participate
in such validation or assessment program under such reasonable rules and
regulations as are from time to time established by Landlord.
So long as Tenant is in occupancy at the Leased Premises (other
than for any subleases entered into in the space described in section 14.1G),
Landlord agrees not to grant another tenant in the Project an exclusive right to
parking in the portion of the areas that are in front of the Building facing
Zanker Road and Devcon Drive as outlined in EXHIBIT A attached hereto, nor shall
Landlord require Tenant to park in any specific areas in the Project.
4.6 RULES AND REGULATIONS: Landlord may from time to time promulgate
reasonable and nondiscriminatory rules and regulations applicable to all
occupants of the Project for the care and orderly management of the Project and
the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there is a conflict between the rules
and regulations and any of the provisions of this Lease, the provisions of this
Lease shall prevail. Landlord shall not be responsible for the violation by any
other tenant of the Project of any such rules and regulations.
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ARTICLE 5
TRADE FIXTURES AND ALTERATIONS
5.1 TRADE FIXTURES: Throughout the Lease Term, Tenant may provide
and install, and shall maintain in good condition, any Trade Fixtures required
in the conduct of its business in the Premises. All Trade Fixtures shall remain
Tenant's property.
5.2 TENANT'S ALTERATIONS: Construction by Tenant of Tenant's
Alterations shall be governed by the following:
A. Tenant shall not construct any of Tenant's Alterations
or otherwise alter the Premises without Landlord's prior written approval.
Landlord approves of the Future Alteration Work to the extent the Construction
Plans approved by Landlord in accordance with Exhibit B attached hereto include
the Future Alteration Work. Tenant shall be entitled, without Landlord's prior
approval, to make Tenant's Alterations (i) which do not affect the structural or
exterior parts or water tight character of the Building, and (ii) the reasonably
estimated cost of which, plus the original cost of any part of the Premises
removed or materially altered in connection with such Tenant's Alterations,
together do not exceed the Permitted Tenant Alterations Limit specified in
SECTION O of the Summary for each work of improvement. In the event Landlord's
approval for any Tenant's Alterations is required, Tenant shall not construct
the Leasehold Improvement until Landlord has approved in writing the plans and
specifications therefor, and such Tenant's Alterations shall be constructed
substantially in compliance with such approved plans and specifications by a
licensed contractor first approved by Landlord. All Tenant's Alterations
constructed by Tenant shall be constructed by a licensed contractor approved by
Landlord and otherwise in accordance with all Laws using new materials of good
quality.
B. Tenant shall not commence construction of any Tenant's
Alterations until (i) all required governmental approvals and permits have been
obtained, (ii) all requirements regarding insurance imposed by this Lease have
been satisfied, (iii) Tenant has given Landlord at least five days' prior
written notice of its intention to commence such construction, and (iv) if
reasonably requested by Landlord, Tenant has obtained contingent liability and
broad form builders' risk insurance in an amount reasonably satisfactory to
Landlord if there are any perils relating to the proposed construction not
covered by insurance carried pursuant to Article 9.
C. All Tenant's Alterations shall remain the property of
Tenant during the Lease Term but shall not be altered or removed from the
Premises. At the expiration or sooner termination of the Lease Term, all
Tenant's Alterations shall be surrendered to Landlord as part of the realty and
shall then become Landlord's property, and Landlord shall have no obligation to
reimburse Tenant for all or any portion of the value or cost thereof; provided,
however, that if Landlord requires Tenant to remove any Tenant's Alterations,
Tenant shall so remove such Tenant's Alterations prior to the expiration or
sooner termination of the Lease Term. Notwithstanding the foregoing, Tenant
shall not be obligated to remove any Tenant's Alterations with respect to which
the following is true: (i) Tenant was required, or elected, to obtain the
approval of Landlord to the installation of the Leasehold Improvement in
question; (ii) at the time Tenant requested Landlord's approval, Tenant
requested of Landlord in writing that Landlord inform Tenant of whether or not
Landlord would require Tenant to remove such Leasehold Improvement at the
expiration of the Lease Term; and (iii) at the time Landlord granted its
approval, it did not inform Tenant that it would require Tenant to remove such
Leasehold Improvement at the expiration of the Lease Term.
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5.3 ALTERATIONS REQUIRED BY LAW: Tenant shall make any alteration,
addition or change of any sort to the Premises that is required by any Law
because of (i) Tenant's particular use or change of use of the Premises; (ii)
Tenant's application for any permit or governmental approval, excluding,
however, any application for a permit for construction of the Tenant
Improvements pursuant to EXHIBIT B attached hereto, including without limitation
any Future Alteration Work, which additional work shall be considered part of
the Tenant Improvements and the cost included as part of the Constructions Costs
under EXHIBIT B attached hereto; or (iii) Tenant's construction or installation
of any Tenant's Alterations or Trade Fixtures. Any other alteration, addition,
or change required by Law which is not the responsibility of Tenant pursuant to
the foregoing shall be made by Landlord (subject to Landlord's right to
reimbursement from Tenant specified in P. 5.4). As provided in Exhibit B
attached hereto, the Tenant Improvements to be constructed by Landlord's
contractor shall be completed in a manner to comply with all Laws as the same
exist and apply as of the date hereof.
5.4 AMORTIZATION OF CERTAIN CAPITAL IMPROVEMENTS: Tenant shall pay
its proportionate share, as Additional Rent, of the following amortized costs as
provided in paragraph A below, in the event Landlord reasonably elects or is
required to make any of the following kinds of capital improvements to the
Project: (i) capital improvements required to be constructed in order to comply
with any Law (excluding any Hazardous Materials Law) not in effect or applicable
to the Project as of the Effective Date; (ii) modification of existing or
construction of additional capital improvements or building service equipment
for the purpose of reducing the consumption of utility services or Common
Operating Expenses of the Project; and (iii) replacement of capital improvements
or building service equipment existing as of the Effective Date when required
because of normal wear and tear. The amount of Additional Rent Tenant is to pay
with respect to each such capital improvement shall be determined as follows:
A. All costs paid by Landlord to construct such
improvements (including financing costs) shall be amortized over the useful life
of such improvement (as reasonably determined by Landlord in accordance with
generally accepted accounting principles) with interest on the unamortized
balance at the then prevailing market rate Landlord would pay if it borrowed
funds to construct such improvements from an institutional lender, and Landlord
shall inform Tenant of the monthly amortization payment required to so amortize
such costs, and shall also provide Tenant with the information upon which such
determination is made.
B. As Additional Rent, Tenant shall pay at the same time
the Base Monthly Rent is due an amount equal to Tenant's Share of that portion
of such monthly amortization payment fairly allocable to the Building (as
reasonably determined by Landlord) for each month after such improvements are
completed until the first to occur of (i) the expiration of the Lease Term (as
it may be extended), or (ii) the end of the term over which such costs were
amortized.
5.5 MECHANIC'S LIENS: Tenant shall keep the Project free from any
liens and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant or Tenant's Agents
relating to the Project. If any claim of lien is recorded (except those caused
by Landlord or Landlord's Agents), Tenant shall bond against or discharge the
same within 10 days after Tenant's receipt of actual notice that the same has
been recorded against the Project. Should any lien be filed against the Project
or any action be commenced affecting title to the Project, the party receiving
notice of such lien or action shall immediately give the other party written
notice thereof.
5.6 TAXES ON TENANT'S PROPERTY: Tenant shall pay before delinquency
any and all taxes, assessments, license fees and public charges levied, assessed
or imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises which become due during the Lease Term. If
any tax or other charge is assessed by any governmental agency because of the
execution of this Lease, such tax shall be paid by Tenant. On demand by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of these
payments.
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ARTICLE 6
REPAIR AND MAINTENANCE
6.1 TENANT'S OBLIGATION TO MAINTAIN: Except as otherwise provided in
P. 6.2, P. 11.1, and P. 12.3, Tenant shall be responsible for the following
during the Lease Term:
A. Tenant shall clean and maintain in good order,
condition, and repair and replace when necessary the Premises and every part
thereof, through regular inspections and servicing, including, but not limited
to: (i) all plumbing and sewage facilities (including all sinks, toilets,
faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or
plumbing system; (ii) all fixtures, interior walls, floors, carpets and
ceilings; (iii) all windows, doors, entrances, plate glass, showcases and
skylights (including cleaning both interior and exterior surfaces); (iv) all
electrical facilities and all equipment (including all lighting fixtures, lamps,
bulbs, tubes, fans, vents, exhaust equipment and systems); and (v) any automatic
fire extinguisher equipment in the Premises.
B. With respect to utility facilities serving the Premises
(including electrical wiring and conduits, gas lines, water pipes, and plumbing
and sewage fixtures and pipes), Tenant shall be responsible for the maintenance
and repair of any such facilities which serve only the Premises, including all
such facilities that are within the walls or floor, or on the roof of the
Premises, and any part of such facility that is not within the Premises, but
only up to the point where such facilities join a main or other junction (e.g.,
sewer main or electrical transformer) from which such utility services are
distributed to other parts of the Project as well as to the Premises. Tenant
shall replace any damaged or broken glass in the Premises (including all
interior and exterior doors and windows) with glass of the same kind, size and
quality. Tenant shall repair any damage to the Premises (including exterior
doors and windows) caused by vandalism or any unauthorized entry.
C. Tenant shall (i) maintain, repair and replace when
necessary all HVAC equipment which services only the Premises, and shall keep
the same in good condition through regular inspection and servicing, and (ii)
maintain continuously throughout the Lease Term a service contract for the
maintenance of all such HVAC equipment with a licensed HVAC repair and
maintenance contractor approved by Landlord, which contract provides for the
periodic inspection and servicing of the HVAC equipment at least once every 60
days during the Lease Term. Notwithstanding the foregoing, Landlord may elect at
any time to assume responsibility for the maintenance, repair and replacement of
such HVAC equipment which serves only the Premises. Tenant shall maintain
continuously throughout the Lease Term a service contract for the washing of all
windows (both interior and exterior surfaces) in the Premises with a contractor
approved by Landlord, which contract provides for the periodic washing of all
such windows at least once every 60 days during the Lease Term. Tenant shall
furnish Landlord with copies of all such service contracts, which shall provide
that they may not be changed without at least 30 days' prior written notice to
Landlord.
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If the cost to replace in the future the HVAC system for
the Leased Premises, other than in connection with or as part of the Tenant
Improvements to be constructed pursuant to the Constructions Plans in accordance
with Exhibit B attached hereto, will be more than $5,000.00, then Landlord shall
arrange to perform and pay for such work, and the cost thereof shall be
amortized over the useful life, together with interest as provided in sections
5.4A. During the Lease Term, Tenant shall pay for such amortized cost, with
interest, as provided in section 5.4A. If the cost of such work is $5,000.00 or
less, Tenant shall perform the work at its expense, or if Landlord elects in its
sole discretion to perform such work, then Tenant shall reimburse Landlord for
the total amount of such expense.
D. All repairs and replacements required of Tenant shall be
promptly made with new materials of like kind and quality. If the work affects
the structural parts of the Building or if the estimated cost of any item of
repair or replacement is in excess of the Permitted Tenant's Alterations Limit,
then Tenant shall first obtain Landlord's written approval of the scope of the
work, plans therefor, materials to be used, and the contractor.
E. Tenant currently occupies the Devcon Drive Space and is
familiar with its condition. In connection with the Tenant Improvements to be
constructed in the Premises, Landlord agrees to partially assign to Tenant upon
request any warranties for such work that Landlord receives from its contractor
and any supplier in order for Tenant to pursue at its expense any claim for work
done in the Premises that may be covered under any such warranty. At no
additional expense to Landlord, Landlord agrees to cooperate with Tenant in
enforcing such warranty. The failure of Tenant to collect or enforce any such
warranty shall not change Tenant's repair and maintenance obligations under this
Lease.
6.2 LANDLORD'S OBLIGATION TO MAINTAIN: Landlord shall repair,
maintain and operate the Common Area and repair and maintain the roof, exterior
and structural parts of the building(s), including interior load bearing walls,
located on the Project so that the same are kept in good order and repair. If
there is central HVAC or other building service equipment and/or utility
facilities serving portions of the Common Area and/or both the Premises and
other parts of the Building, Landlord shall maintain and operate (and replace
when necessary) such equipment. Landlord shall not be responsible for repairs
required by an accident, fire or other peril or for damage caused to any part of
the Project by any act or omission of Tenant or Tenant's Agents except as
otherwise required by Article 11. Landlord may engage contractors of its choice
to perform the obligations required of it by this Article, and the necessity of
any expenditure to perform such obligations shall be at the sole discretion of
Landlord.
6.3 CONTROL OF COMMON AREA: Landlord shall at all times have
exclusive control of the Common Area. Landlord shall have the right, without the
same constituting an actual or constructive eviction and without entitling
Tenant to any abatement of rent, to: (i) close any part of the Common Area to
whatever extent required in the opinion of Landlord's counsel to prevent a
dedication thereof or the accrual of any prescriptive rights therein; (ii)
temporarily close the Common Area to perform maintenance or for any other reason
deemed sufficient by Landlord; (iii) change the shape, size, location and extent
of the Common Area; (iv) eliminate from or add to the Project any land or
improvement, including multi-deck parking structures; (v) make changes to the
Common Area including, without limitation, changes in the location of driveways,
entrances, passageways, doors and doorways, elevators, stairs, restrooms, exits,
parking spaces, parking areas, sidewalks or the direction of the flow of traffic
and the site of the Common Area; (vi) remove unauthorized persons from the
Project; and/or (vii) change the name or address of the Building or Project.
Tenant shall keep the Common Area clear of all obstructions created or permitted
by Tenant. If in the opinion of Landlord unauthorized persons are using any of
the Common Area by reason of the presence of Tenant in the Building, Tenant,
upon demand of Landlord, shall restrain such unauthorized use by appropriate
proceedings. In exercising any such rights regarding the Common Area, (i)
Landlord shall make a reasonable effort to minimize any disruption to Tenant's
business, and (ii) Landlord shall not exercise its rights to control the Common
Area in a manner that would materially interfere with Tenant's use of the
Premises without first obtaining Tenant's consent, which shall not be
unreasonably withheld. Landlord shall have no obligation to provide guard
services or other security measures for the benefit of the Project. Tenant
assumes all responsibility for the protection of Tenant and Tenant's Agents from
acts of third parties; provided, however, that nothing contained herein shall
prevent Landlord, at its sole option, from providing security measures for the
Project.
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ARTICLE 7
WASTE DISPOSAL AND UTILITIES
7.1 WASTE DISPOSAL: Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are fully fenced and screened
in compliance with all Private Restrictions, and designed for such purpose. All
entrances to such outside trash enclosures shall be kept closed, and waste shall
be stored in such manner as not to be visible from the exterior of such outside
enclosures. Tenant shall cause all of its waste to be regularly removed from the
Premises at Tenant's sole cost. Tenant shall keep all fire corridors and
mechanical equipment rooms in the Premises free and clear of all obstructions at
all times.
7.2 HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Project:
A. Any handling, transportation, storage, treatment,
disposal or use of Hazardous Materials by Tenant and Tenant's Agents after the
Effective Date in or about the Project shall strictly comply with all applicable
Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with
counsel reasonably acceptable to Landlord, and hold harmless Landlord from and
against any liabilities, losses, claims, damages, lost profits, consequential
damages, interest, penalties, fines, monetary sanctions, attorneys' fees,
experts' fees, court costs, remediation costs, investigation costs, and other
expenses which result from or arise in any manner whatsoever out of the use,
storage, treatment, transportation, release, or disposal of Hazardous Materials
on or about the Project by Tenant or Tenant's Agents after the Effective Date.
B. If the presence of Hazardous Materials on the Project
caused or permitted by Tenant or Tenant's Agents after the Effective Date
results in contamination or deterioration of water or soil resulting in a level
of contamination greater than the levels established as acceptable by any
governmental agency having jurisdiction over such contamination, then Tenant
shall promptly take any and all action necessary to investigate and remediate
such contamination if required by Law or as a condition to the issuance or
continuing effectiveness of any governmental approval which relates to the use
of the Project or any part thereof. Tenant shall further be solely responsible
for, and shall defend, indemnify and hold Landlord and its agents harmless from
and against, all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with any investigation and remediation
required hereunder to return the Project to its condition existing prior to the
appearance of such Hazardous Materials.
C. Landlord and Tenant shall each give written notice to
the other as soon as reasonably practicable of (i) any communication received
from any governmental authority concerning Hazardous Materials which relates to
the Project, and (ii) any contamination of the Project by Hazardous Materials
which constitutes a violation of any Hazardous Materials Law. Tenant may use
small quantities of household chemicals such as adhesives, lubricants, and
cleaning fluids in order to conduct its business at the Premises and such other
Hazardous Materials as are necessary for the operation of Tenant's business of
which Landlord receives notice prior to such Hazardous Materials being brought
onto the Premises and which Landlord consents in writing in its sole and
absolute discretion may be brought onto the Premises. At any time during the
Lease Term, Tenant shall, within five days after written request therefor
received from Landlord, disclose in writing all Hazardous Materials that are
being used by Tenant on the Project, the nature of such use, and the manner of
storage and disposal.
D. Landlord may cause testing wells to be installed on the
Project, and may cause the ground water to be tested to detect the presence of
Hazardous Material by the use of such tests as are then customarily used for
such purposes. If Tenant so requests, Landlord shall supply Tenant with copies
of such test results. The cost of such tests and of the installation,
maintenance, repair and replacement of such wells shall be paid by Tenant if
such tests disclose the existence of facts which give rise to liability of
Tenant pursuant to its indemnity given in P. 7.2A and/or P. 7.2B.
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E. As used herein, the term "Hazardous Material," means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous Material," includes, without limitation,
petroleum products, asbestos, PCB's, and any material or substance which is (i)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42
U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response; Compensation and Liability Act,
42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term "Hazardous
Material Law" shall mean any statute, law, ordinance, or regulation of any
governmental body or agency (including the U.S. Environmental Protection Agency,
the California Regional Water Quality Control Board, and the California
Department of Health Services) which now of in the future regulates the use,
storage, release or disposal of any Hazardous Material.
F. The obligations of Landlord and Tenant under this P. 7.2
shall survive the expiration or earlier termination of the Lease Term. The
rights and obligations of Landlord and Tenant with respect to issues relating to
Hazardous Materials are exclusively established by this P. 7.2. In the event of
any inconsistency between any other part of this Lease and this P. 7.2, the
terms of this P. 7.2 shall control.
7.3 UTILITIES: Tenant shall promptly pay, as the same become due,
all charges for water, gas, electricity, telephone, sewer service, waste pick-up
and any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee
(excluding any connection fees or hook-up fees which relate to making the
existing electrical, gas, and water service available to the Premises as of the
Commencement Date), and (ii) penalties for discontinued or interrupted service.
If any utility service is not separately metered to the Premises, then Tenant
shall pay its pro rata share of the cost of such utility service with all others
served by the service not separately metered. However, if Landlord determines
that Tenant is using a disproportionate amount of any utility service not
separately metered, then Landlord at its election may (i) periodically charge
Tenant, as Additional Rent, a sum equal to Landlord's reasonable estimate of the
cost of Tenant's excess use of such utility service, or (ii) install a separate
meter (at Tenant's expense) to measure the utility service supplied to the
Premises.
7.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Landlord and Tenant
shall comply with all rules, regulations and requirements promulgated by
national, state or local governmental agencies or utility suppliers concerning
the use of utility services, including any rationing, limitation or other
control. Tenant shall not be entitled to terminate this Lease nor to any
abatement in rent by reason of such compliance.
ARTICLE 8
COMMON OPERATING EXPENSES
8.1 TENANT'S OBLIGATION TO REIMBURSE: As Additional Rent, Tenant
shall pay Tenant's Share (specified in SECTION G of the Summary) of all Common
Operating Expenses; provided, however, if the Project contains more than one
building, then Tenant shall pay Tenant's Share of all Common Operating Expenses
fairly allocable to the Building, including (i) all Common Operating Expenses
paid with respect to the Building, and (ii) a proportionate share (based on the
Building Gross Leasable Area as a percentage of the Project Gross Leasable Area)
of all Common Operating Expenses which relate to the Project in general are not
fairly allocable to any one building that is part of the Project. Tenant shall
pay such share of the actual Common Operating Expenses incurred or paid by
Landlord but not theretofore billed to Tenant within 10 days after receipt of a
written bill therefor from Landlord, on such periodic basis as Landlord shall
designate, but in no event more frequently than once a month. Alternatively,
Landlord may from time to time require that Tenant pay Tenant's Share of Common
Operating Expenses in advance in estimated monthly installments, in accordance
with the following: (i) Landlord shall deliver to Tenant Landlord's reasonable
estimate of the Common Operating expenses it anticipates will be paid or
incurred for the Landlord's fiscal year in question;
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(ii) during such Landlord's fiscal year Tenant shall pay such share of the
estimated Common Operating Expenses in advance in monthly installments as
required by Landlord due with the installments of Base Monthly Rent; and (iii)
within 180 days after the end of each Landlord's fiscal year, Landlord shall
furnish to Tenant a statement in reasonable detail of the actual Common
Operating Expenses paid or incurred by Landlord during the just ended Landlord's
fiscal year and thereupon there shall be an adjustment between Landlord and
Tenant, with payment to Landlord or credit by Landlord against the next
installment of Base Monthly Rent, as the case may require, within 10 days after
delivery by Landlord to Tenant of said statement, so that Landlord shall receive
the entire amount of Tenant's Share of all Common Operating Expenses for such
Landlord's fiscal year and no more. Tenant shall have the right at its expense,
exercisable upon reasonable prior written notice to Landlord, to inspect at
Landlord's office during normal business hours Landlord's books and records as
they relate to Common Operating Expenses. Such inspection must be within 90 days
of Tenant's receipt of Landlord's annual statement for the same, and shall be
limited to verification of the charges contained in such statement. Tenant may
not withhold payment of such bill pending completion of such inspection.
8.2 COMMON OPERATING EXPENSES DEFINED: The term "Common Operating
Expenses" shall mean the following:
A. All costs and expenses paid or incurred by Landlord in
doing the following (including payments to independent contractors providing
services related to the performance of the following): (i) maintaining,
cleaning, repairing and resurfacing the roof (including repair of leaks) and the
exterior surfaces (including painting) of all buildings located on the Project;
(ii) maintenance of the liability, fire, property damage, earthquake and other
insurance covering the Project carried by Landlord pursuant to P. 9.2 (including
the prepayment of premiums for coverage of up to one year); (iii) maintaining,
repairing, operating and replacing when necessary HVAC equipment, utility
facilities and other building service equipment, subject to section 5.4
regarding the amortization of certain capital improvements; (iv) providing
utilities to the Common Area (including lighting, trash removal and water for
landscaping irrigation); (v) complying with all applicable Laws and Private
Restrictions; (vi) operating, maintaining, repairing, cleaning, painting,
restriping and resurfacing the Common Area; (vii) replacement or installation of
lighting fixtures, directional or other signs and signals, irrigation systems,
trees, shrubs, ground cover and other plant materials, and all landscaping in
the Common Area; and (viii) providing security (provided, however, that Landlord
shall not be obligated to provide security and if it does, Landlord may
discontinue such service at any time and in any event Landlord shall not be
responsible for any act or omission of any security personnel); and (ix) capital
improvements as provided in P. 5.4 hereof;
B. The following costs: (i) Real Property Taxes as defined
in P. 8.3; (ii) the amount of any "deductible" paid by Landlord with respect to
damage caused by any Insured Peril up to $10,000.00 for each claim; and (iii)
that portion of all compensation (including benefits and premiums for workers'
compensation and other insurance) paid to or on behalf of employees of Landlord
but only to the extent they are involved in the performance of the work
described by P. 8.2A that is fairly allocable to the Project;
C. Fees for management services rendered by either Landlord
or a third party manager engaged by Landlord (which may be a party affiliated
with Landlord), except that the total amount charged for management services and
included in Tenant's Share of Common Operating Expenses shall not exceed the
monthly rate of four percent (4%) of the Base Monthly Rent.
D. All additional costs and expenses incurred by Landlord
with respect to the operation, protection, maintenance, repair and replacement
of the Project which would be considered a current expense (and not a capital
expenditure) pursuant to generally accepted accounting principles; provided,
however, that Common Operating Expenses shall not include any of the following:
(i) payments on any loans or ground leases affecting the Project; (ii)
depreciation of any buildings or any major systems of building service equipment
within the Project; (iii) leasing commissions; (iv) the cost of tenant
improvements installed or performed for the exclusive use of other tenants of
the Project and the cost of any special services for a particular tenant that is
not available or offered to Tenant; and (v) any cost incurred in complying with
Hazardous Materials Laws, which subject is governed exclusively by P. 7.2.
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Since the Project consists of multiple buildings, certain Common Area
Expenses may pertain to a particular building(s) and other Common Area Expenses
to the Project as a whole (such as Common Area Expenses for the Common Areas of
the Project). Common Area Expenses applicable to any particular building within
the Project shall be charged to the building in question whose tenants shall be
responsible for payment of their respective proportionate shares in the
pertinent building and other Common Area Expenses applicable to the Project
(such as the Common Areas of the Project) shall be charged to each building in
the Project (including the Building) with the tenants in each such building
being responsible for paying their respective proportionate shares in such
building of such costs. Landlord shall in good faith attempt to allocate such
Common Area Expenses to the buildings (including the Building) and such
allocation shall be binding on Tenant.
Any contrary provision contained in this Section 8.2 or Section 5.4 or
elsewhere in this Lease notwithstanding, for purposes of calculating Common
Operating Expenses, in no event shall such Common Operating Expenses include (i)
costs of correcting structural defects in the structural portions of the
Building, which for purposes hereof shall mean the roof, foundation and load
bearing walls, (ii) legal fees, space planners' fees, and advertising and
promotional expenses incurred in connection with and incidental to the
development or leasing of the Building or other space in the Project, or (iii)
any legal fees and costs of Landlord (including, but not limited to, those
incurred in connection with any litigation or other proceedings between Landlord
and any other tenant) except those legal fees and costs incurred in the normal
course of Landlord's business.
8.3 REAL PROPERTY TAXES DEFINED: The term "Real Property Taxes"
shall mean all taxes, assessments, levies, and other charges of any kind or
nature whatsoever, general and special, foreseen and unforeseen (including all
installments of principal and interest required to pay any existing or future
general or special assessments for public improvements, services or benefits,
and any increases resulting from reassessments resulting from a change in
ownership, new construction, or any other cause), now or hereafter imposed by
any governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of all or any
portion of the Project (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein, the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located on the Project, the gross receipts, income, or
rentals from the Project, or the use of parking areas, public utilities, or
energy within the Project, or Landlord's business of leasing the Project. If at
any time during the Lease Term the method of taxation or assessment of the
Project prevailing as of the Effective Date shall be altered so that in lieu of
or in addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate or
additional tax or charge (i) on the value, use or occupancy of the Project or
Landlord's interest therein, or (ii) on or measured by the gross receipts,
income or rentals from the Project, on Landlord's business of leasing the
Project, or computed in any manner with respect to the operation of the Project,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Project, then
only that part of such Real Property Tax that is fairly allocable to the Project
shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE: Tenant shall maintain insurance complying
with all of the following:
A. Tenant shall procure, pay for and keep in full force and
effect the following:
(1) Commercial general liability insurance, including
property damage, against liability for personal injury, bodily injury, death and
damage to property occurring in or about, or resulting from an occurrence in or
about, the Premises with combined single limit coverage of not less than the
amount of Tenant's Liability Insurance Minimum specified in SECTION P of the
Summary, which insurance shall contain a "contractual liability" endorsement
insuring Tenant's performance of Tenant's obligation to indemnify Landlord
contained in P. 10.3;
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(2) Fire and property damage insurance in so-called "all
risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for the
full actual replacement cost thereof;
(3) Business interruption insurance with limits of
liability representing at least approximately six months of income, business
auto liability covering owned, non-owned and hired vehicles with a limit of not
less than $1,000,000 per accident, insurance protecting against liability under
workers' compensation laws with limits at least as required by statute,
insurance for all plate glass in the Premises, and such other insurance that is
either (i) required by any Lender, or (ii) reasonably required by Landlord and
customarily carried by tenants of similar property in similar businesses.
Notwithstanding the foregoing, the original party signing this Lease as Tenant,
and its transferees under a Permitted Transfer, shall have the right to self
insure for the risks covered under business interruption insurance and plate
glass insurance, provided that no such self-insurance shall diminish the rights
and privileges to which Landlord would otherwise have been entitled under the
terms of the Lease had there been a third party insurer, including, without
limitation, the waiver of subrogation
B. Where applicable and required by Landlord, each policy
of insurance required to be carried by Tenant pursuant to this P. 9.1: (i) shall
name Landlord and such other parties in interest as Landlord reasonably
designates as additional insured; (ii) shall be primary insurance which provides
that the insurer shall be liable for the full amount of the loss up to and
including the total amount of liability set forth in the declarations without
the right of contribution from any other insurance coverage of Landlord; (iii)
shall be in a form satisfactory to Landlord; (iv) shall be carried with
companies reasonably acceptable to Landlord; (v) shall provide that such policy
shall not be subject to cancellation, lapse or change except after at least 30
days prior written notice to Landlord so long as such provision of 30 days
notice is reasonably obtainable, but in any event not less than 10 days prior
written notice; (vi) shall not have a "deductible" in excess of such amount as
is reasonably approved by Landlord; (vii) shall contain a cross liability
endorsement; and (viii) shall contain a "severability" clause. If Tenant has in
full force and effect a blanket policy of liability insurance with the same
coverage for the Premises as described above, as well as other coverage of other
premises and properties of Tenant, or in which Tenant has some interest, such
blanket insurance shall satisfy the requirements of this P. 9.1.
C. A copy of each paid-up policy evidencing the insurance
required to be carried by Tenant pursuant to this P. 9.1 (appropriately
authenticated by the insurer) or a certificate of the insurer, certifying that
such policy has been issued, providing the coverage required by this P. 9.1, and
containing the provisions specified herein, shall be delivered to Landlord prior
to the time Tenant or any of its Agents enters the Premises and upon renewal of
such policies, but not less than 5 days prior to the expiration of the term of
such coverage. Landlord may, at any time, and from time to time, inspect and/or
copy any and all insurance policies required to be procured by Tenant pursuant
to this P. 9.1. If any Lender or insurance advisor reasonably determines at any
time that the amount of coverage required for any policy of insurance Tenant is
to obtain pursuant to this P. 9.1 is not adequate, then Tenant shall increase
such coverage for such insurance to such amount as such Lender or insurance
advisor reasonably deems adequate, not to exceed the level of coverage for such
insurance commonly carried by comparable businesses similarly situated.
9.2 LANDLORD'S INSURANCE: Landlord shall have the following
obligations and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and
property damage insurance in so-called "all risk" form insuring Landlord (and
such others as Landlord may designate) against loss of rents for a period of not
less than 12 months and from physical damage to the Project with coverage of not
less than the full replacement cost thereof. Landlord may so insure the Project
separately, or may insure the Project with other property owned by Landlord
which Landlord elects to insure together under the same policy or policies.
Landlord shall have the right, but not the obligation, in its sole and absolute
discretion, to obtain insurance for such additional perils that Landlord deems
appropriate, including, without limitation, coverage for damage by earthquake
and/or flood. All such coverage shall contain "deductibles" which Landlord deems
appropriate, which in the case of earthquake and flood insurance, may be up to
10% of the replacement value of the property insured or such higher amount as is
then commercially reasonable. Landlord shall not be required to cause such
insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant.
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B. Landlord may maintain a policy or policies of commercial
general liability insurance insuring Landlord (and such others as are designated
by Landlord) against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Project, with combined single limit coverage in such amount as Landlord from
time to time determines is reasonably necessary for its protection.
C. If Landlord's insurance rates for the Building are
increased at any time during the Lease Term as a result of the nature of
Tenant's use of the Premises, Tenant shall reimburse Landlord for the full
amount of such increase immediately upon receipt of a bill from Landlord
therefor.
9.4 RELEASE AND WAIVER OF SUBROGATION: The parties hereto release
each other, and their respective agents and employees, from any liability for
injury to any person or damage to property that is caused by or results from any
risk insured against under any valid and collectible insurance policy carried by
either of the parties which contains a waiver of subrogation by the insurer and
is in force at the time of such injury or damage; subject to the following
limitations: (i) the foregoing provision shall not apply to the commercial
general liability insurance described by subparagraphs P. 9.1A and P. 9.2B; (ii)
such release shall apply to liability resulting from any risk insured against or
covered by self-insurance maintained or provided by Tenant to satisfy the
requirements of P. 9.1 to the extent permitted by this Lease; and (iii) the
parties shall not be released from any such liability to the extent any damages
resulting from such injury or damage are not covered (other than the deductible
amounts and amounts not covered due to a party not having replacement cost
insurance or due to any co-insurance requirements) by the recovery obtained by
the other party from such insurance (or which would have been obtained had the
party carried insurance required under this Lease or had not self-insured), but
only if the insurance in question permits such partial release in connection
with obtaining a waiver of subrogation from the insurer. This release shall be
in effect only so long as the applicable insurance policy contains a clause to
the effect that this release shall not affect the right of the insured to
recover under such policy. Each party shall cause each insurance policy obtained
by it to provide that the insurer waives all right of recovery by way of
subrogation against the other party and its agents and employees in connection
with any injury or damage covered by such policy. However, if any insurance
policy cannot be obtained with such a waiver of subrogation, or if such waiver
of subrogation is only available at additional cost and the party for whose
benefit the waiver is to be obtained does not pay such additional cost, then the
party obtaining such insurance shall notify the other party of that fact and
thereupon shall be relieved of the obligation to obtain such waiver of
subrogation rights from the insurer with respect to the particular insurance
involved unless the other party pays the additional cost.
ARTICLE 10
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
10.1 LIMITATION ON LANDLORD'S LIABILITY: Landlord shall not be liable
to Tenant, nor shall Tenant be entitled to terminate this Lease or to any
abatement of rent (except as expressly provided otherwise herein), for any
injury to Tenant or Tenant's Agents, damage to the property of Tenant or
Tenant's Agents, or loss to Tenant's business resulting from any cause,
including without limitation any: (i) failure, interruption or installation of
any HVAC or other utility system or service; (ii) failure to furnish or delay in
furnishing any utilities or services when such failure or delay is caused by
fire or other peril, the elements, labor disturbances of any character, or any
other accidents or other conditions beyond the reasonable control of Landlord;
(iii) limitation, curtailment, rationing or restriction on the use of water or
electricity, gas or any other form of energy or any services or utility serving
the Project; (iv) vandalism or forcible entry by unauthorized persons or the
criminal act of any person; or (v) penetration of water into or onto any portion
of the Premises or the Building through roof leaks or otherwise. Notwithstanding
the foregoing but subject to P. 9.4, Landlord shall be liable for any such
injury, damage or loss which is proximately caused by Landlord's or Landlord's
Agents willful misconduct or gross negligence of which Landlord has actual
notice and a reasonable opportunity to cure but which it fails to so cure.
10.2 LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation,
trust, partnership, joint venture, unincorporated association or other form of
business entity: (i) the obligations of Landlord shall not constitute personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders, or other principals or representatives of such
business entity; and (ii) Tenant shall not have recourse to the assets of such
officers, directors, trustees, partners, joint venturers, members, owners,
stockholders, principals or representatives except to the extent of their
interest in the Project. Tenant shall have recourse only to the interest of
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Landlord in the Project for the satisfaction of the obligations of Landlord and
shall not have recourse to any other assets of Landlord for the satisfaction of
such obligations.
10.3 INDEMNIFICATION OF LANDLORD: Subject to section 9.4 and to the
extent not covered by Landlord's insurance but only after resorting to Tenant's
insurance as the primary insurance, Tenant shall hold harmless, indemnify and
defend Landlord, and its employees, agents and contractors, with competent
counsel reasonably satisfactory to Landlord (and Landlord agrees to accept
counsel that any insurer requires be used), from all liability, penalties,
losses, damages, costs, expenses, causes of action, claims and/or judgments
arising by reason of any death, bodily injury, personal injury or property
damage resulting from (i) any cause or causes whatsoever (other than the willful
misconduct or gross negligence of Landlord of which Landlord has had notice and
a reasonable time to cure, but which Landlord has failed to cure) occurring in
or about or resulting from an occurrence in or about the Premises during the
Lease Term, (ii) the negligence or willful misconduct of Tenant or its agents,
employees and contractors, wherever the same may occur, or (iii) an Event of
Tenant's Default. The provisions of this P. 10.3 shall survive the expiration or
sooner termination of this Lease.
ARTICLE 11
DAMAGE TO PREMISES
11.1 LANDLORD'S DUTY TO RESTORE: If the Premises are damaged by any
peril after the Effective Date, Landlord shall restore the Premises unless the
Lease is terminated by Landlord pursuant to P. 11.2 or by Tenant pursuant to P.
11.3. All insurance proceeds available from the fire and property damage
insurance carried by Landlord pursuant to P. 9.2 shall be paid to and become the
property of Landlord. If this Lease is terminated pursuant to either P. 11.2 or
P. 11.3, then all insurance proceeds available from insurance carried by Tenant
which covers loss to property that is Landlord's property or would become
Landlord's property on termination of this Lease shall be paid to and become the
property of Landlord. If this Lease is not so terminated, then upon receipt of
the insurance proceeds (if the loss is covered by insurance) and the issuance of
all necessary governmental permits, Landlord shall commence and diligently
prosecute to completion the restoration of the Premises, to the extent then
allowed by Law, to substantially the same condition in which the Premises were
immediately prior to such damage. Landlord's obligation to restore shall be
limited to the Premises and interior improvements constructed by Landlord as
they existed as of the Commencement Date, excluding any Tenant's Alterations,
Trade Fixtures and/or personal property constructed or installed by Tenant in
the Premises. Tenant shall forthwith replace or fully repair all Tenant's
Alterations and Trade Fixtures installed by Tenant and existing at the time of
such damage or destruction, and all insurance proceeds received by Tenant from
the insurance carried by it pursuant to P. 9.1A(2) shall be used for such
purpose.
11.2 LANDLORD'S RIGHT TO TERMINATE: Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within 30 days after the date of such damage:
A. The Building is damaged by an Insured Peril to such an
extent that the estimated cost to restore exceeds 33% of the then actual
replacement cost thereof;
B. The Building is damaged by an Uninsured Peril to such an
extent that the estimated cost to restore exceeds 2% of the then actual
replacement cost thereof; provided, however, that Landlord may not terminate
this Lease pursuant to this P. 11.2B if one or more tenants of the Project agree
in writing to pay the amount by which the cost to restore the damage exceeds
such amount and subsequently deposit such amount with Landlord within 30 days
after Landlord has notified Tenant of its election to terminate this Lease;
C. The Premises are damaged by any peril within 12 months
of the last day of the Lease Term to such an extent that the estimated cost to
restore equals or exceeds an amount equal to six times the Base Monthly Rent
then due; provided, however, that Landlord may not terminate this Lease pursuant
to this P. 11.2C if Tenant, at the time of such damage, has a then valid express
written option to extend the Lease Term and Tenant exercises such option to
extend the Lease Term within 15 days following the date of such damage; or
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D. Either the Project or the Building is damaged by any
peril and, because of the Laws then in force, (i) cannot be restored at
reasonable cost to substantially the same condition in which it was prior to
such damage, or (ii) cannot be used for the same use being made thereof before
such damage if restored as required by this Article.
E. As used herein, the following terms shall have the
following meanings: (i) the term "Insured Peril" shall mean a peril actually
insured against for which the insurance proceeds actually received by Landlord
are sufficient (except for any "deductible" amount specified by such insurance)
to restore the Project under then existing building codes to the condition
existing immediately prior to the damage; and (ii) the term "Uninsured Peril"
shall mean any peril which is not an Insured Peril. Notwithstanding the
foregoing, if the "deductible" for earthquake or flood insurance exceeds 2% of
the replacement cost of the improvements insured, such peril shall be deemed an
"Uninsured Peril".
11.3 TENANT'S RIGHT TO TERMINATE: If the Premises are damaged by any
peril and Landlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to P. 11.2, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord may be completed. Tenant shall have the right to terminate
this Lease in the event any of the following occurs, which right may be
exercised only by delivery to Landlord of a written notice of election to
terminate within 7 days after Tenant receives from Landlord the estimate of the
time needed to complete such restoration.
A. The Premises are damaged by any peril and, in the
reasonable opinion of Landlord's architect or construction consultant, the
restoration of the Premises cannot be substantially completed within 180 days
after the date of such damage; or
B. The Premises are damaged by any peril within 12 months
of the last day of the Lease Term and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within 90 days after the date of such damage and such
damage renders unusable more than 30% of the Premises; or
C. If Landlord's insurance proceeds for the restoration of
the Premises are insufficient and the Premises are not restored to substantially
the same condition prior to such damage (except for Tenant's Alterations and
Tenant's Fixtures) and the Premises as restored materially impair Tenants
ability to use the Premises for the permitted use, as reasonably determined
prior to commencement of such restoration work by Landlord.
11.4 ABATEMENT OF RENT: In the event of damage to the Premises which
does not result in the termination of this Lease, the Base Monthly Rent and the
Additional Rent shall be temporarily abated during the period of restoration in
proportion to the degree to which Tenant's use of the Premises is impaired by
such damage. Tenant shall not be entitled to any compensation or damages from
Landlord for loss of Tenant's business or property or for any inconvenience or
annoyance caused by such damage or restoration. Tenant hereby waives the
provisions of California Civil Code Sections 1932(2) and 1933(4) and the
provisions of any similar law hereinafter enacted.
ARTICLE 12
CONDEMNATION
12.1 LANDLORD'S TERMINATION RIGHT: Landlord shall have the right to
terminate this Lease if, as a result of a taking by means of the exercise of the
power of eminent domain (including a voluntary sale or transfer by Landlord to a
condemnor under threat of condemnation), (i) all or any part of the Premises is
so taken, (ii) more than 10% of the Building Leasable Area is so taken, or (iii)
more than 50% of the Common Area is so taken. Any such right to terminate by
Landlord must be exercised within a reasonable period of time, to be effective
as of the date possession is taken by the condemnor.
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12.2 TENANT'S TERMINATION RIGHT: Tenant shall have the right to
terminate this Lease if, as a result of any taking by means of the exercise of
the power of eminent domain (including any voluntary sale or transfer by
Landlord to any condemnor under threat of condemnation), (i) 10% or more of the
Premises is so taken and that part of the Premises that remains cannot be
restored within a reasonable period of time not to exceed ninety (90) days and
thereby made reasonably suitable for the continued operation of the Tenant's
business, or (ii) there is a taking affecting the Common Area and, as a result
of such taking, Landlord cannot provide parking spaces within reasonable walking
distance of the Premises equal in number to at least 80% of the number of spaces
allocated to Tenant by P. 2.1, whether by rearrangement of the remaining parking
areas in the Common Area (including construction of multi-deck parking
structures or restriping for compact cars where permitted by Law) or by
alternative parking facilities on other land. Tenant must exercise such right
within a reasonable period of time, to be effective on the date that possession
of that portion of the Premises or Common Area that is condemned is taken by the
condemnor.
12.3 RESTORATION AND ABATEMENT OF RENT: If any part of the Premises
or the Common Area is taken by condemnation and this Lease is not terminated,
then Landlord shall restore the remaining portion of the Premises and Common
Area and interior improvements constructed by Landlord as they existed as of the
Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or
personal property constructed or installed by Tenant. Thereafter, except in the
case of a temporary taking, as of the date possession is taken the Base Monthly
Rent shall be reduced in the same proportion that the floor area of that part of
the Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the Premises.
12.4 TEMPORARY TAKING: If any portion of the Premises is temporarily
taken for one year or less, this Lease shall remain in effect. If any portion of
the Premises is temporarily taken by condemnation for a period which exceeds one
year or which extends beyond the natural expiration of the Lease Term, and such
taking materially and adversely affects Tenant's ability to use the Premises for
the Permitted Use, then Tenant shall have the right to terminate this Lease,
effective on the date possession is taken by the condemnor.
12.5 DIVISION OF CONDEMNATION AWARD: Any award made as a result of
any condemnation of the Premises or the Common Area shall belong to and be paid
to Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
receive any condemnation award that is made directly to Tenant for the following
so long as the award made to Landlord is not thereby reduced: (i) for the taking
of personal property or Trade Fixtures belonging to Tenant, (ii) for the
interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill; or (iv) for any temporary taking where this Lease is not
terminated as a result of such taking. The rights of Landlord and Tenant
regarding any condemnation shall be determined as provided in this Article, and
each party hereby waives the provisions of California Code of Civil Procedure
Section 1265.130 and the provisions of any similar law hereinafter enacted
allowing either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Premises.
ARTICLE 13
DEFAULT AND REMEDIES
13.1 EVENTS OF TENANT'S DEFAULT: Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or
Additional Rent when due; provided, however, that not more frequently than twice
each calendar year, Tenant shall not be in default for failure to pay rent or
any other sum unless Tenant fails to make such payment within five (5) days
after receipt of written notice of such failure from Landlord; or
B. Tenant shall have failed to perform any term, covenant,
or condition of this Lease except those requiring the payment of Base Monthly
Rent or Additional Rent, and Tenant shall have failed to cure such breach within
30 days after written notice from Landlord specifying the nature of such breach
where such breach could reasonably be cured within said 30 day period, or if
such breach could not be reasonably cured within said 30 day period, Tenant
shall have failed to commence such cure within said 30 day period and thereafter
continue with due diligence to prosecute such cure to completion within such
time period as is reasonably needed; or
C. Tenant shall have sublet the Premises or assigned its
interest in the Lease in violation of the provisions contained in Article 14; or
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D. The occurrence of the following: (i) the making by
Tenant of any general arrangements or assignments for the benefit of creditors;
(ii) Tenant becomes a "debtor" as defined in 11 USC ss.101 or any successor
statute thereto (unless, in the case of a petition filed against Tenant, the
same is dismissed within 60 days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within 60 days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within 60 days; provided, however, in the event that any provision of this
Section 13.1E is contrary to any applicable Law, such provision shall be of no
force or effect; or
E. Tenant shall have failed to deliver documents required
of it pursuant to P. 15.4 or P. 15.6 within the time periods specified therein;
or
13.2 LANDLORD'S REMEDIES: If an Event of Tenant's Default occurs,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by any Law or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:
A. Landlord may keep this Lease in effect and enforce by an
action at law or in equity all of its rights and remedies under this Lease,
including (i) the right to recover the rent and other sums as they become due by
appropriate legal action, (ii) the right to make payments required of Tenant or
perform Tenant's obligations and be reimbursed by Tenant for the cost thereof
with interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of
injunctive relief. Notwithstanding anything contained in this Lease, in the
event of a breach of an obligation by Tenant which results in a condition which
poses an imminent danger to safety of persons or damage to property, an
unsightly condition visible from the exterior of the Building, or a threat to
insurance coverage, then if Tenant does not cure such breach within 3 days after
delivery to it of written notice from Landlord identifying the breach, Landlord
may cure the breach of Tenant and be reimbursed by Tenant for the actual and
reasonable cost thereof with interest at the Agreed Interest Rate from the date
the sum is paid by Landlord until Landlord is reimbursed by Tenant.
B. Landlord may enter the Premises and release them to
third parties for Tenant's account for any period, whether shorter or longer
than the remaining Lease Term. Tenant shall be liable immediately to Landlord
for all commercially reasonable and actual costs Landlord incurs in releasing
the Premises, including brokers' commissions, expenses of altering and preparing
the Premises required by the releasing. Tenant shall pay to Landlord the rent
and other sums due under this Lease on the date the rent is due, less the rent
and other sums Landlord received from any releasing. No act by Landlord allowed
by this subparagraph shall terminate this Lease unless Landlord notifies Tenant
in writing that Landlord elects to terminate this Lease. Notwithstanding any
releasing without termination, Landlord may later elect to terminate this Lease
because of the default by Tenant.
C. Landlord may terminate this Lease by giving Tenant
written notice of termination, in which event this Lease shall terminate on the
date set forth for termination in such notice. Any termination under this P.
13.2C shall not relieve Tenant from its obligation to pay sums then due Landlord
or from any claim against Tenant for damages or rent previously accrued or then
accruing. In no event shall any one or more of the following actions by
Landlord, in the absence of a written election by Landlord to terminate this
Lease, constitute a termination of this Lease: (i) appointment of a receiver or
keeper in order to protect Landlord's interest hereunder; (ii) consent to any
subletting of the Premises or assignment of this Lease by Tenant, whether
pursuant to the provisions hereof or otherwise; or (iii) any other action by
Landlord or Landlord's Agents intended to mitigate the adverse effects of any
breach of this Lease by Tenant, including without limitation any action taken to
maintain and preserve the Premises or any action taken to relet the Premises or
any portions thereof to the extent such actions do not affect a termination of
Tenant's right to possession of the Premises.
D. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including those
described by P. 13.C, shall constitute a termination of Tenant's right to
possession unless Landlord gives Tenant written notice of termination. Should
Landlord not terminate this Lease by giving Tenant written notice, Landlord may
enforce all its rights and remedies under this Lease, including the right to
recover the rent as it becomes due under the Lease as provided in California
Civil Code Section 1951.4.
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E. In the event Landlord terminates this Lease, Landlord
shall be entitled, at Landlord's election, to damages in an amount as set forth
in California Civil Code Section 1951.2 as in effect on the Effective Date. For
purposes of computing damages pursuant to California Civil Code Section 1951.2,
(i) an interest rate equal to the Agreed Interest Rate shall be used where
permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional
Rent. Such damages shall include:
(1) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided, computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%); and
(2) Any other amount necessary to compensate Landlord
for all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom, including the following: (i) expenses for cleaning,
repairing or restoring the Premises; (ii) expenses for altering, remodeling or
otherwise improving the Premises for the purpose of reletting, including
installation of leasehold improvements (whether such installation be funded by a
reduction of rent, direct payment or allowance to a new tenant, or otherwise);
(iii) broker's fees, advertising costs and other expenses of reletting the
Premises; (iv) costs of carrying the Premises, such as taxes, insurance
premiums, utilities and security precautions; (v) expenses in retaking
possession of the Premises; and (vi) reasonable attorneys' fees and court costs
incurred by Landlord in retaking possession of the Premises and in releasing the
Premises or otherwise incurred as a result of Tenant's default.
F. Nothing in this P. 13.2 shall limit Landlord's right to
indemnification from Tenant as provided in P. 7.2 and P. 10.3. Any notice given
by Landlord in order to satisfy the requirements of P. 13.1A or P. 13.1B above
shall also satisfy the notice requirements of California Code of Civil Procedure
Section 1161 regarding unlawful detainer proceedings.
13.3 WAIVER: One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.4 LIMITATION ON EXERCISE OF RIGHTS: At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval requested
of it by Tenant which Landlord would otherwise be obligated to give, and (ii)
Tenant may not exercise any option to extend, right to terminate this Lease, or
other right granted to it by this Lease which would otherwise be available to
it.
13.5 WAIVER BY TENANT OF CERTAIN REMEDIES: Tenant waives the
provisions of Sections 1932(1), 1941 and 1942 of the California Civil Code and
any similar or successor law regarding Tenant's right to terminate this Lease or
to make repairs and deduct the expenses of such repairs from the rent due under
this Lease. Tenant hereby waives any right of redemption or relief from
forfeiture under the laws of the State of California, or under any other present
or future law, including the provisions of Sections 1174 and 1179 of the
California Code of Civil Procedure.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 TRANSFER BY TENANT: The following provisions shall apply to any
assignment, subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this P. 14.1 as "Tenant"):
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A. Tenant shall not do any of the following (collectively
referred to herein as a "Transfer"), whether voluntarily, involuntarily or by
operation of law, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld: (i) sublet all or any part of the Premises
or allow it to be sublet, occupied or used by any person or entity other than
Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the
Lease (or otherwise use the Lease as a security device) in any manner; or (iv)
materially amend or modify an assignment, sublease or other transfer that has
been previously approved by Landlord. Tenant shall reimburse Landlord for all
reasonable costs and attorneys' fees incurred by Landlord in connection with the
evaluation, processing, and/or documentation of any requested Transfer, whether
or not Landlord's consent is granted. Landlord's reasonable costs shall include
the cost of any review or investigation performed by Landlord or consultant
acting on Landlord's behalf of (i) Hazardous Materials (as defined in Section
7.2E of this Lease) used, stored, released, or disposed of by the potential
Subtenant or Assignee, and/or (ii) violations of Hazardous Materials Law (as
defined in Section 7.2E of this lease) by the Tenant or the proposed Subtenant
or Assignee. Any Transfer so approved by Landlord shall not be effective until
Tenant has delivered to Landlord an executed counterpart of the document
evidencing the Transfer which (i) is in a form reasonably approved by Landlord,
(ii) contains the same terms and conditions as stated in Tenant's notice given
to Landlord pursuant to P. 14.1B, and (iii) in the case of an assignment of the
Lease, contains the agreement of the proposed transferee to assume all
obligations of Tenant under this Lease arising after the effective date of such
Transfer and to remain jointly and severally liable therefor with Tenant. Any
attempted Transfer without Landlord's consent shall constitute an Event of
Tenant's Default and shall be voidable at Landlord's option. Landlord's consent
to any one Transfer shall not constitute a waiver of the provisions of this P.
14.1 as to any subsequent Transfer or a consent to any subsequent Transfer. No
Transfer, even with the consent of Landlord, shall relieve Tenant of its
personal and primary obligation to pay the rent and to perform all of the other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any person shall not be deemed to be a waiver by Landlord of any
provision of this Lease nor to be a consent to any Transfer.
B. At least 30 days before a proposed Transfer is to become
effective, Tenant shall give Landlord written notice of the proposed terms of
such Transfer and request Landlord's approval, which notice shall include the
following: (i) the name and legal composition of the proposed transferee; (ii)
the latest annual and quarterly report of the transferee if the transferee is a
public company, otherwise a current financial statement of the transferee and
financial statements of such transferee covering the preceding three years if
the same exist, and (if available) an audited financial statement of the
transferee for a period ending not more than one year prior to the proposed
effective date of the Transfer, all of which statements are prepared in
accordance with generally accepted accounting principles; (iii) the nature of
the proposed transferee's business to be carried on in the Premises; (iv) all
consideration to be given on account of the Transfer; (v) a current financial
statement of Tenant; and (vi) an accurately filled out response to Landlord's
standard hazardous materials questionnaire. Tenant shall provide to Landlord
such other information as may be reasonably requested by Landlord within seven
days after Landlord's receipt of such notice from Tenant. Landlord shall respond
in writing to Tenant's request for Landlord's consent to a Transfer within the
later of (i) 30 days of receipt of such request together with the required
accompanying documentation, or (ii) 15 days after Landlord's receipt of all
information which Landlord reasonably requests within seven days after it
receives Tenant's first notice regarding the Transfer in question. If Landlord
fails to respond in writing within said period, then Tenant shall provide a
second written notice to Tenant requesting such consent and if Landlord fails to
respond within 7 days after receipt of such second notice, then Landlord will be
deemed to have consented to such Transfer. Tenant shall immediately notify
Landlord of any modification to the proposed terms of such Transfer, which shall
also be subject Landlord's consent in accordance with the same process for
obtaining Landlord's initial consent to such Transfer.
C. Except for a Permitted Transfer under section 14.1F or a
Transfer described in section 14.1G, in the event that Tenant seeks to make any
Transfer, Landlord shall have the right to terminate this Lease or, in the case
of a sublease of less than all of the Premises, terminate this Lease as to that
part of the Premises proposed to be so sublet, either (i) on the condition that
the proposed transferee immediately enter into a direct lease of the Premises
with Landlord (or, in the case of a partial sublease, a lease for the portion
proposed to be so sublet) on the same terms and conditions contained in Tenant's
notice, or (ii) so that Landlord is thereafter free to lease the Premises (or,
in the case of a partial sublease, the portion proposed to be so sublet) to
whomever it pleases on whatever terms are acceptable to Landlord. In the event
Landlord elects to so terminate this Lease, then
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(i) if such termination is conditioned upon the execution of a lease between
Landlord and the proposed transferee, Tenant's obligations under this Lease
shall not be terminated until such transferee executes a new lease with
Landlord, enters into possession and commences the payment of rent, and (ii) if
Landlord elects simply to terminate this Lease (or, in the case of a partial
sublease, terminate this Lease as to the portion to be so sublet), the Lease
shall so terminate in its entirety (or as to the space to be so sublet) fifteen
(15) days after Landlord has notified Tenant in writing of such election. Upon
such termination, Tenant shall be released from any further obligation under
this Lease if it is terminated in its entirety, or shall be released from any
further obligation under the Lease with respect to the space proposed to be
sublet in the case of a proposed partial sublease. In the case of a partial
termination of the Lease, the Base Monthly Rent and Tenant's Share shall be
reduced to an amount which bears the same relationship to the original amount
thereof as the area of that part of the Premises which remains subject to the
Lease bears to the original area of the Premises. Landlord and Tenant shall
execute a cancellation and release with respect to the Lease to effect such
termination.
D. If Landlord consents to a Transfer proposed by Tenant,
Tenant may enter into such Transfer, and if Tenant does so, the following shall
apply:
(1) Tenant shall not be released of its liability for
the performance of all of its obligations under the Lease. However, Tenant shall
not be liable for any obligation that accrues during any extension of this Lease
beyond the initial Lease Term, unless Tenant was a party to any such extension
or the Transfer was a Permitted Transfer.
(2) If Tenant assigns its interest in this Lease, then
Tenant shall pay to Landlord 50% of all Subrent (as defined in P. 14.1D(5))
received by Tenant over and above (i) the assignee's agreement to assume the
obligations of Tenant under this Lease, and (ii) all Permitted Transfer Costs
related to such assignment. In the case of assignment, the amount of Subrent
owed to Landlord shall be paid to Landlord on the same basis, whether periodic
or in lump sum, that such Subrent is paid to Tenant by the assignee. All
Permitted Transfer Costs shall be amortized on a straight line basis over the
term of such sublease (excluding any extension options) for purposes of
calculating the amount due Landlord hereunder.
(3) If Tenant sublets any part of the Premises, then
with respect to the space so subleased, Tenant shall pay to Landlord 50% of the
positive difference, if any, between (i) all Subrent paid by the subtenant to
Tenant, less (ii) the sum of all Base Monthly Rent and Additional Rent allocable
to the space sublet and all Permitted Transfer Costs related to such sublease.
Such amount shall be paid to Landlord on the same basis, whether periodic or in
lump sum, that such Subrent is paid to Tenant by its subtenant. All Permitted
Transfer Costs shall be amortized on a straight line basis over the term of such
sublease (excluding any extension options) for purposes of calculating the
amount due Landlord hereunder.
(4) Tenant's obligations under this P. 14.1D shall
survive any Transfer, and Tenant's failure to perform its obligations hereunder
shall be an Event of Tenant's Default. At the time Tenant makes any payment to
Landlord required by this P. 14.1D, Tenant shall deliver an itemized statement
of the method by which the amount to which Landlord is entitled was calculated,
certified by Tenant as true and correct. Landlord shall have the right at
reasonable intervals to inspect Tenant's books and records relating to the
payments due hereunder. Upon request therefor, Tenant shall deliver to Landlord
copies of all bills, invoices or other documents upon which its calculations are
based. Landlord may condition its approval of any Transfer upon obtaining a
certification from both Tenant and the proposed transferee of all Subrent and
other amounts that are to be paid to Tenant in connection with such Transfer.
(5) As used in this P. 14.1D, the term "Subrent" shall
mean any consideration of any kind received, or to be received, by Tenant as a
result of the Transfer, if such sums are related to Tenant's interest in this
Lease or in the Premises, including payments from or on behalf of the transferee
(in excess of the book value thereof) for Tenant's assets, fixtures, leasehold
improvements, inventory, accounts, goodwill, equipment, furniture, and general
intangibles. As used in this P. 14.1D, the term "Permitted Transfer Costs" shall
mean (i) all reasonable leasing commissions paid to third parties not affiliated
with Tenant in order to obtain the Transfer in question, and (ii) all reasonable
attorneys' fees incurred by Tenant with respect to the Transfer in question, and
(iii) the unamortized cost of the Tenant Improvements (as defined in Exhibit B
attached hereto) to the extent the cost for such Tenant Improvements were in
excess of Landlord's Allowances (as defined in Exhibit B attached hereto).
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E. If Tenant is a corporation, the following shall be
deemed a voluntary assignment of Tenant's interest in this Lease: (i) any
dissolution, merger, consolidation, or other reorganization of or affecting
Tenant, whether or not Tenant is the surviving corporation; and (ii) if the
capital stock of Tenant is not publicly traded, the sale or transfer to one
person or entity (or to any group of related persons or entities) stock
possessing more than 50% of the total combined voting power of all classes of
Tenant's capital stock issued, outstanding and entitled to vote for the election
of directors. If Tenant is a partnership, limited liability company or other
entity any withdrawal or substitution (whether voluntary, involuntary or by
operation of law, and whether occurring at one time or over a period of time) of
any partner, member or other party owning 25% or more (cumulatively) of any
interest in the capital or profits of the partnership, limited liability company
or other entity or the dissolution of the partnership, limited liability company
or other entity, shall be deemed a voluntary assignment of Tenant's interest in
this Lease.
F. Notwithstanding anything contained in P. 14.1, so
long as Tenant otherwise complies with the provisions of P. 14.1 Tenant may
enter into any of the following transfers (a "Permitted Transfer") without
Landlord's prior written consent, and Landlord shall not be entitled to
terminate the Lease pursuant to P. 14.1C or to receive any part of any
Subrent resulting therefrom that would otherwise be due it pursuant to P.
14.1D:
(1) Tenant may sublease all or part of the Premises or
assign its interest in this Lease to any corporation which controls, is
controlled by, or is under common control with the original Tenant to this Lease
by means of an ownership interest of more than 50%;
(2) Tenant may assign its interest in the Lease to a
corporation which results from a merger, consolidation or other reorganization
in which Tenant is not the surviving corporation, so long as the surviving
corporation has a net worth at the time of such assignment that is equal to or
greater than the net worth of Tenant immediately prior to such transaction; and
(3) Tenant may assign this Lease to a corporation which
purchases or otherwise acquires all or substantially all of the assets of
Tenant, so long as such acquiring corporation has a net worth at the time of
such assignment that is equal to or greater than the net worth of Tenant
immediately prior to such transaction.
G. Notwithstanding anything to the contrary, the merger of
All American Semiconductor, Inc. (the parent corporation of Tenant) with a
wholly owned subsidiary of Reptron Electronics, Inc. during the first year
following the Commencement Date, shall not constitute a Transfer requiring the
Landlord's consent or be subject to the bonus rent provisions of section
14.1D(2) and (3) or the recapture provisions of section 14.1C, or similar
provisions under the Devcon Lease. In addition, so long as Tenant otherwise
complies with the provisions of P. 14.1, the recapture provisions of section
14.1C shall not apply to a sublease by Tenant to another party for any portion
of the space located in front of the Zanker Road Space consisting of
approximately 6,000 square feet of space, as outlined in Exhibit B-1 attached to
the Work Letter attached hereto as Exhibit B.
14.2 TRANSFER BY LANDLORD: Landlord and its successors in interest
shall have the right to transfer their interest in this Lease and the Project at
any time and to any person or entity. In the event of any such transfer, the
Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, shall be automatically relieved,
without any further act by any person or entity, of all liability for the
performance of the obligations of the Landlord hereunder which may accrue after
the date of such transfer. After the date of any such transfer, the term
"Landlord" as used herein shall mean the transferee of such interest in the
Premises.
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ARTICLE 15
GENERAL PROVISIONS
15.1 LANDLORD'S RIGHT TO ENTER: Landlord and its agents may enter the
Premises at any reasonable time after giving at least 24 hours' prior notice to
Tenant (and immediately in the case of emergency) for the purpose of: (i)
inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying
any service to be provided by Landlord to Tenant; (iv) showing the Premises to
prospective purchasers, mortgagees or tenants; (v) making necessary alterations,
additions or repairs; (vi) performing Tenant's obligations when Tenant has
failed to do so after written notice from Landlord; (vii) placing upon the
Premises ordinary "for lease" signs or "for sale" signs; and (viii) responding
to an emergency. Landlord shall have the right to use any and all means Landlord
may deem necessary and proper to enter the Premises in an emergency. Any entry
into the Premises obtained by Landlord in accordance with this P. 15.1 shall not
be a forcible or unlawful entry into, or a detainer of, the Premises, or an
eviction, actual or constructive, of Tenant from the Premises.
15.2 SURRENDER OF THE PREMISES: Upon the expiration or sooner
termination of this Lease, Tenant shall vacate and surrender the Premises to
Landlord in the same condition as existed at the Commencement Date, except for
(i) reasonable wear and tear, (ii) damage caused by any peril or condemnation,
and (iii) contamination by Hazardous Materials for which Tenant is not
responsible pursuant to P. 7.2A or P. 7.2B. In this regard, normal wear and tear
shall be construed to mean wear and tear caused to the Premises by the natural
aging process which occurs in spite of prudent application of the best standards
for maintenance, repair and janitorial practices, and does not include items of
neglected or deferred maintenance. In any event, Tenant shall cause the
following to be done prior to the expiration or the sooner termination of this
Lease: (i) all interior walls shall be cleaned or if necessary painted to appear
in good condition, reasonable wear and tear excepted; (ii) all tiled floors
shall be cleaned and waxed; (iii) all carpets shall be cleaned and shampooed;
(iv) all broken, marred, stained or nonconforming acoustical ceiling tiles shall
be replaced; (v) all exterior and interior windows shall be washed; (vi) the
HVAC system shall be serviced by a reputable and licensed service firm and left
in good operating condition and repair as so certified by such firm; and (vii)
the plumbing and electrical systems and lighting shall be placed in good order
and repair (including replacement of any burned out, discolored or broken light
bulbs, ballasts, or lenses). If Landlord so requests, Tenant shall, prior to the
expiration or sooner termination of this Lease, (i) remove any Tenant's
Alterations which Tenant is required to remove pursuant to P. 5.2 and repair all
damage caused by such removal, and (ii) return the Premises or any part thereof
to its original configuration existing as of the time the Premises were
delivered to Tenant with the Tenant Improvements completed, except for any
portion of the Tenant Improvements that Landlord notifies Tenant at the time
Landlord approves of the Construction Plans for the Tenant Improvements must be
removed by Tenant at or prior to the expiration or earlier termination of this
Lease. If the Premises are not so surrendered at the termination of this Lease,
Tenant shall be liable to Landlord for all costs incurred by Landlord in
returning the Premises to the required condition, plus interest on all costs
incurred at the Agreed Interest Rate. Tenant shall indemnify Landlord against
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including, without limitation, any claims made by any succeeding
tenant or losses to Landlord due to lost opportunities to lease to succeeding
tenants only if there is a delay of more than thirty (30) days in completing
such work.
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15.3 HOLDING OVER: This Lease shall terminate without further notice
at the expiration of the Lease Term. Any holding over by Tenant after expiration
of the Lease Term shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the Premises except as expressly provided in
this Lease. Any holding over after such expiration with the written consent of
Landlord shall be construed to be a tenancy from month to month on the same
terms and conditions herein specified insofar as applicable except that Base
Monthly Rent shall be increased to an amount equal to 150% of the greater of (a)
the Base Monthly Rent payable during the last full calendar month of the Lease
Term, or (b) the then prevailing fair market rent.
15.4 SUBORDINATION: The following provisions shall govern the
relationship of this Lease to any Security Instrument:
A. The Lease is subject and subordinate to all Security
Instruments existing as of the Effective Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument.
B. At Landlord's election, this Lease shall become subject
and subordinate to any Security Instrument created after the Effective Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant is not in default and performs
all of its obligations under this Lease, unless this Lease is otherwise
terminated pursuant to its terms.
C. Tenant shall upon request execute any document or
instrument required by any Lender to make this Lease either prior or subordinate
to a Security Instrument, which may include such other matters as the Lender
customarily and reasonably requires in connection with such agreements,
including provisions that the Lender not be liable for (i) the return of any
security deposit unless the Lender receives it from Landlord, and (ii) any
defaults on the part of Landlord occurring prior to the time the Lender takes
possession of the Project in connection with the enforcement of its Security
Instrument, except that such Lender shall be responsible for correcting any
continuing default in the nature of the failure of Landlord to repair the
Building or Common Areas for which Tenant has previously provided Landlord and
such Lender with notice of default. Tenant's failure to execute any such
document or instrument within 15 days after written demand therefor shall
constitute an Event of Tenant's Default.
Landlord shall request the beneficiary (or its servicer) of the
deed of trust that encumbers the Project as of the date hereof issue its
subordination, non-disturbance and attornment agreement ("SNDA"), pursuant to
which such beneficiary agrees to recognize this Lease in the event of default
under such deed of trust or sale under such deed of trust, so long as Tenant is
not in default hereunder beyond the expiration of any applicable cure period.
The failure of such beneficiary to issue its SNDA shall not be grounds to
terminate this Lease or afford Tenant any right or remedy against Landlord.
Tenant shall be responsible for paying any legal fees or charges required by
beneficiary to issue such SNDA.
15.5 MORTGAGEE PROTECTION AND ATTORNMENT: In the event of any default
on the part of the Landlord, Tenant will use reasonable efforts to give notice
by certified mail to any Lender whose name has been provided to Tenant and shall
offer such Lender a reasonable opportunity to cure the default, including time
to obtain possession of the Premises by power of sale or judicial foreclosure or
other appropriate legal proceedings, if such should prove necessary to effect a
cure. Tenant shall attorn to any purchaser of the Premises at any foreclosure
sale or private sale conducted pursuant to any Security Instrument encumbering
the Premises, or to any grantee or transferee designated in any deed given in
lieu of foreclosure.
15.6 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS: At all times
during the Lease Term, each party agrees, following any request by the other
party, promptly to execute and deliver to the requesting party within 15 days
following delivery of such request an estoppel certificate: (i) certifying that
this Lease is unmodified and in full force and effect or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect, (ii) stating the date to which the rent and other
charges are paid in advance, if any, (iii) acknowledging that there are not, to
the certifying party's knowledge, any uncured defaults on the part of any party
hereunder or, if there are uncured defaults, specifying the nature of such
defaults, and (iv) certifying such other factual information about the Lease as
may be reasonably required by the requesting party. A failure to deliver an
estoppel certificate within 15 days after delivery of a request therefor shall
be a conclusive admission that, as of the date of the request for such
statement: (i) this Lease is unmodified except as may be represented by the
requesting party in said request and is in full force and effect, (ii) there are
no uncured defaults in the requesting party's performance, and (iii) no rent has
been paid more than 30 days in advance. At any time during the Lease Term Tenant
shall, upon 15 days' prior written notice from Landlord, provide Tenant's most
recent annual and quarterly reports if Tenant is a public company, otherwise a
current financial statement and financial statements covering the 24 month
period prior to the date of such most recent financial statement to any existing
Lender or to any potential Lender or buyer of the Premises.
33
<PAGE>
15.7 INTENTIONALLY DELETED.
15.8 NOTICES: Any notice required or desired to be given regarding
this Lease shall be in writing and may be given by personal delivery, by
facsimile, by courier service, or by mail. A notice shall be deemed to have been
given (i) when delivered if given by personal delivery, including overnight
courier service, and (ii) in all other cases when actually received at the
party's Address for Notices or on date delivery is refused. Either party may
change its address by giving notice of the same in accordance with this P. 15.8,
provided, however, that any address to which notices may be sent must be a
California address.
15.9 ATTORNEYS' FEES: In the event either Landlord or Tenant shall
bring any action or legal proceeding for an alleged breach of any provision of
this Lease, to recover rent, to terminate this Lease or otherwise to enforce,
protect or establish any term or covenant of this Lease, the prevailing party
shall be entitled to recover as a part of such action or proceeding, or in a
separate action brought for that purpose, reasonable attorneys' fees, court
costs, and experts' fees as may be fixed by the court.
15.10 CORPORATE AUTHORITY: If Tenant is a corporation (or
partnership), each individual executing this Lease on behalf of Tenant
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of such corporation in accordance with the by-laws of such
corporation (or partnership in accordance with the partnership agreement of such
partnership) and that this Lease is binding upon such corporation (or
partnership) in accordance with its terms. Each of the persons executing this
Lease on behalf of a corporation does hereby covenant and warrant that the party
for whom it is executing this Lease is a duly authorized and existing
corporation, that it is qualified to do business in California, and that the
corporation has full right and authority to enter into this Lease.
15.11 MISCELLANEOUS: Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. The captions used in this Lease are for convenience only and shall not
be considered in the construction or interpretation of any provision hereof. Any
executed copy of this Lease shall be deemed an original for all purposes. This
Lease shall, subject to the provisions regarding assignment, apply to and bind
the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. If Tenant consists of more than one person or entity, then all members
of Tenant shall be jointly and severally liable hereunder. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning, and not strictly for or against either
Landlord or Tenant. When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership or corporation or joint
venture, and the singular includes the plural. The terms "shall", "will" and
"agree" are mandatory. The term "may" is permissive. When a party is required to
do something by this Lease, it shall do so at its sole cost and expense without
right of reimbursement from the other party unless a provision of this Lease
expressly requires reimbursement. Landlord and Tenant agree that (i) the gross
leasable area of the Premises includes any atriums, depressed loading docks,
covered entrances or egresses, and covered loading areas, (ii) each has had an
opportunity to determine to its satisfaction the actual area of the Project and
the Premises, (iii) all measurements of area contained in this Lease are
conclusively agreed to be correct and binding upon the parties, even if a
subsequent measurement of any one of these areas determines that it is more or
less than the amount of area reflected in this Lease, and (iv) any such
subsequent determination that the area is more or less than shown in this Lease
shall not result in a change in any of the computations of rent, improvement
allowances, or other matters described in this Lease where area is a factor.
Where a party hereto is obligated not to perform any act, such party is also
obligated to restrain any others within its control from performing said act,
including the Agents of such party. Landlord shall not become or be deemed a
partner or a joint venturer with Tenant by reason of the provisions of this
Lease.
15.12 TERMINATION BY EXERCISE OF RIGHT: If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate 30 days after the date the right to terminate is properly exercised
(unless another date is specified in that part of the Lease creating the right,
in which event the date so specified for termination shall prevail), the rent
and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination or those obligations which this Lease specifically provides
are to survive termination. This P. 15.12 does not apply to a termination of
this Lease by Landlord as a result of an Event of Tenant's Default.
34
<PAGE>
15.13 BROKERAGE COMMISSIONS: Each party hereto (i) represents and
warrants to the other that it has not had any dealings with any real estate
brokers, leasing agents or salesmen, or incurred any obligations for the payment
of real estate brokerage commissions or finder's fees which would be earned or
due and payable by reason of the execution of this Lease, other than to the
Retained Real Estate Brokers described in SECTION S of the Summary, and (ii)
agrees to indemnify, defend, and hold harmless the other party from any claim
for any such commission or fees which result from the actions of the
indemnifying party. Landlord shall be responsible for the payment of any
commission owed to the Retained Real Estate Brokers if there is a separate
written commission agreement between Landlord and the Retained Real Estate
Brokers for the payment of a commission as a result of the execution of this
Lease.
15.14 FORCE MAJEURE: Any prevention, delay or stoppage due to strikes,
lock-outs, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of Landlord or Tenant
(except financial inability) shall excuse the performance by Landlord or Tenant,
for a period equal to the period of any said prevention, delay or stoppage, of
any obligation hereunder, except Tenant shall not be excused form the payment of
rent or any other sum under this Lease.
15.15 ENTIRE AGREEMENT: This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that neither
Landlord nor Landlord's Agents has made any legally binding representation or
warranty as to any matter except those expressly set forth herein, including any
warranty as to (i) whether the Premises may be used for Tenant's intended use
under existing Law, (ii) the suitability of the Premises or the Project for the
conduct of Tenant's business, or (iii) the condition of any improvements. There
are no oral agreements between Landlord and Tenant affecting this Lease, and
this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant or displayed by Landlord to Tenant with respect to the subject matter
of this Lease. This instrument shall not be legally binding until it is executed
by both Landlord and Tenant. No subsequent change or addition to this Lease
shall be binding unless in writing and signed by Landlord and Tenant.
15.16 WAIVER OF LANDLORD'S LIEN. Landlord agrees to waives its
"landlord's lien" or any other statutory lien, contractual lien or security
interest given by law or this Lease to Landlord in any equipment, furniture,
trade fixtures, inventory, supplies or personal property of Tenant now or
hereafter placed in or upon the Premises. Upon Tenant's request, Landlord agrees
to cooperate with Tenant's third party lender's request in executing a consent
to such financing and removal of such furniture, trade fixtures and equipment,
provided such form of consent (a) does not require the delivery to such lender
of notice of any default by Tenant, (b) does not permit any auction, bulk sale
or similar sale at the Premises or Project, (c) provides for an indemnity by
such lender to Landlord for any injury to any person or damage to any property,
including, without limitation, the Project caused by such lender or its agents,
consultants or contractors and (d) is acceptable to Landlord in its good faith
discretion.
15.17 LANDLORD'S REPRESENTATIONS. Landlord represents and warrants to
Tenant that as of the date hereof: (a) Landlord is the sole owner of fee simple
title to the Project, subject to all liens, encumbrances, rights of way,
easements, restrictions and other matters of record; and (b) Landlord has full
power and authority, and has taken all necessary action, to execute, deliver and
perform under this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Effective
Date.
LANDLORD: TENANT:
By: SAN JOSE TECHNOLOBY PROPERTIES, LLC By: ALL AMERICAN SEMICONDUCTOR
a Delaware limited liability company OF NORTHERN CALIFORNIA, INC.
a California corporation
By: Divco West Group, LLC,
a Delaware limited By: /s/ BRUCE M. GOLDBERG
liability company -----------------------
Its Manager Name: BRUCE M. GOLDBERG
Title: PRES. & CEO
By: /s/ SCOTT SMITHERS
----------------------------
Name: Scott Smithers
Its: President
35
<PAGE>
ADDENDUM NO. 1
This ADDENDUM NO. 1 (this "Addendum") is made in connection with and is
a part of that certain Lease, dated as of October 1, 1998, by and between ALL
AMERICAN SEMICONDUCTOR OF NORTHERN CALIFORNIA, INC., a California corporation,
as Tenant, and SAN JOSE TECHNOLOGY PROPERTIES, LLC, a Delaware limited liability
company, as Landlord (the "Lease").
1. DEFINITIONS AND CONFLICT. All capitalized terms referred to in
this Addendum shall have the same meaning as provided in the Lease, except as
expressly provided to the contrary in this Addendum. In case of any conflict
between any term or provision of the Lease and any exhibits attached thereto and
this Addendum, this Addendum shall control.
2. OPTION TO EXTEND AND RENT DURING THE EXTENDED PERIOD: Tenant
shall have one (1) option to extend the term of the Lease for a period of five
(5) years (the period shall be referred to as the "Extension Period") by giving
written notice of exercise of such option ("Extension Option Notice") at least
one hundred eighty (180) days, but not more than three hundred sixty-five (365)
days, prior to the expiration of the initial Lease Term. The Extension Period
shall commence, if at all, immediately following the expiration of the initial
Lease Term. If Tenant is in default (after notice and the expiration of the
applicable cure period) under any term or provision of the Lease on the date of
giving an Extension Option Notice, or if Tenant is in default (after notice and
the expiration of the applicable cure period) under any term or provision of the
Lease on the date of the applicable Extension Period is to commence, the
Extension Period at the option of Landlord shall not commence and the Lease
shall expire at the end of initial Lease Term. The Extension Period shall be
upon all of the terms and provisions of the Lease, except that the Base Monthly
Rent during such Extension Period shall be one hundred percent (100%) of then
Fair Market Rent. Tenant may not rescind, cancel, terminate or modify its
Extension Option Notice once given.
2.1 FAIR MARKET RENT. The term "Fair Market Rent" for
purposes of determining Base Monthly Rent during the Extension Period shall mean
the greater of (i) the Base Monthly Rent payable during the last month prior to
the commencement of the Extension Period, or (ii) the base monthly rent
generally applicable to similar leases in like buildings with annual increases
in base monthly rent for space of comparable size, age, quality of the Premises
in the San Jose, California area within the boundaries of Highways 237, 880 and
101, projected as of the first day of the Extension Period by giving due
consideration for the quality of the Building and improvements therein
(including the quality of the then existing improvements in the Premises), for a
term comparable to the Extension Period at the time the commencement of the
Extension Period is scheduled to commence, without any deduction for
amortization or cost of Tenant improvements or commissions whether or not
incurred by Landlord, and otherwise subject to the terms and conditions of this
Lease that will be applicable during the Extension Period.
2.2 PROCEDURE TO DETERMINE FAIR MARKET RENT. Landlord shall
notify Tenant in writing of Landlord's determination of the Fair Market Rent
("Landlord's FMR") after receipt of the Extension Option Notice. Within thirty
(30) days after receipt of such written notice of Landlord's FMR, Tenant shall
have the right either to: (i) accept Landlord's FMR, or (ii) elect to have the
Fair Market Rent determined in accordance with the appraisal procedure set forth
below. The failure of Tenant to provide written notice of its election under the
preceding sentence shall be deemed an acceptance of Landlord's FMR. The election
(or deemed election ) by Tenant under this section shall be non-revocable and
binding on the parties.
36
<PAGE>
2.3 APPRAISERS. If Tenant has elected to have the Fair
Market Rent determined by an appraisal, then within ten (10) days after receipt
of Tenant's written notice of such an election, each party, by giving written
notice to the other party, shall appoint an appraiser to render a written
opinion of the Fair Market Rent for the Extension Period. Each appraiser must be
a member of the Appraisal Institute of America (MAI) for at least five years and
with at least five years experience in the appraisal of rental rates of similar
commercial buildings in the area in which the Building is located and otherwise
unaffiliated with either Landlord or Tenant. The two appraisers shall render
their written opinion of the Fair Market Rent for the Extension Period to
Landlord and Tenant within thirty (30) days after the appointment of the second
appraiser. If the Fair Market Rent of each appraiser is within five percent (5%)
of each other, then the average of the two appraisals of Fair Market Rent shall
be the Base Monthly Rent for the Extension Period. If one party does not appoint
its appraiser as provided above, then the one appointed shall determine the Fair
Market Rent. The Fair Market Rent so determined under this section shall be
binding on Landlord and Tenant.
2.4 THIRD APPRAISER. If the Fair Market Rent determined by
the appraisers is more than five percent (5%) apart, then the two appraisers
shall pick a third appraiser within ten (10) days after the two appraisers have
rendered their opinions of Fair Market Rent as provided above. If the two
appraisers are unable to agree on the third appraiser within said ten (10) day
period, Landlord and Tenant shall mutually agree on the third appraiser within
ten (10) days thereafter. The third appraiser shall be a person who has not
previously acted in any capacity for either party and must meet the
qualifications stated above.
2.5 IMPARTIAL APPRAISAL. Within thirty (30) days after its
appointment, the third appraiser shall render its written opinion of the Fair
Market Rent for the Extension Period ("Third Opinion"). If the Fair Market Rent
set forth in the Third Opinion is equidistant from the Fair Market Rent made by
Landlord's or Tenant's appraiser, then the Fair Market Rent contained in the
Third Opinion shall be the Fair Market Rent during the Extension Period.
Otherwise, the Fair Market Rent of Landlord's or Tenant's appraiser that is
closest to the Fair Market Rent of the Third Opinion shall be averaged with the
Fair Market Rent of Third Option to determine the Fair Market Rent during the
Extension Period.
2.6 APPRAISAL COSTS. Each party shall bear the cost of its
own appraiser and one-half (1/2) the cost of the third appraiser.
2.7 ACKNOWLEDGMENT OF RENT. After the Fair Market Rent for
the Extension Period has been established in accordance with the foregoing
procedure, Landlord and Tenant shall promptly execute an amendment to the Lease
to reflect the Base Monthly Rent for the Extension Period.
2.8 OPTION PERSONAL. The option to extend under this
Addendum is applicable only for the original party signing the Lease as "Tenant"
as of the date of the Lease and such Tenant's transferee under a Permitted
Transfer as defined in sections 14.1F or 14.1G of the Lease, but may not be
relied upon or exercise by any other assignee, sublessee, transferee under a
Transfer or any other successor to Tenant.
37
Exhibit 10.18
AMENDMENT NO. 4 TO
LOAN AND SECURITY AGREEMENT
March 23, 1999
All American Semiconductor, Inc.
16115 Northwest 52nd Avenue
Miami, Florida 33014
Attention: Chief Financial Officer
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated as
of May 3, 1996 among Harris Trust and Savings Bank, as a Lender and as
Administrative Agent for the Lenders, American National Bank and Trust Company
of Chicago, as a Lender and as Collateral Agent for the Lenders and the other
Lenders party thereto and All American Semiconductor, Inc., as amended to date
(the "Loan Agreement"). Unless defined herein, capitalized terms used herein
shall have the meanings provided for such terms in the Loan Agreement.
Borrower has requested that Requisite Lenders agree to amend
the Loan Agreement in order to modify certain financial covenants contained in
the Loan Agreement and certain related definitions. Requisite Lenders have
agreed to the foregoing on the terms and pursuant to the conditions provided
herein.
Therefore, the parties hereto hereby agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is
hereby amended, as follows:
(a) SECTION 1.1. The definition of the term "Debt Service
Coverage Ratio" contained in Section 1.1 of the Loan Agreement is hereby amended
and restated, as follows:
" 'DEBT SERVICE COVERAGE RATIO' shall mean, with respect
to the Designated Companies for any period, the ratio of (a)
the sum of (i) Net Income from continuing and discontinued
operations before interest expense and taxes, PLUS (ii)
depreciation and amortization expenses, MINUS (iii) tax
payments, MINUS (iv) capital expenditures, to the extent not
financed, MINUS (v) dividends paid, and PLUS (vi) with respect
only to calculations made for the testing periods ending on
each of December 31, 1998, March 31, 1999, June 30, 1999 and
September 30, 1999, charges taken in the 1998 fiscal year and
associated with the proposed Reptron Merger, to (b) the sum of
(i) all interest payments in respect of the Revolving Loans
PLUS (ii) all payments of principal and interest in respect of
capitalized leases and other long-term indebtedness of the
Designated Companies, including without limitation the Junior
Debt (but specifically excluding principal payments in respect
of the Revolving Loans), all determined for such period on a
consolidated basis and in accordance with GAAP."
(b) SECTION 8.12. Clause (ii) of Section 8.12 of the Loan
Agreement is hereby amended and restated in its entirety, as follows:
"(ii) Five Million Dollars ($5,000,000) for the 1999
fiscal year or any fiscal year thereafter."
<PAGE>
(c) SECTION 8.17. The table contained in Section 8.17 of the
Loan Agreement is hereby amended and restated in its entirety, as follows:
"PERIOD AMOUNT
------- ------
December 31, 1998 through and including $24,400,000
December 30, 1999
December 31, 1999 through and including $26,000,000
December 30, 2000
December 31, 2000 through and including $27,600,000
December 30, 2001
December 31, 2001 through and including $29,200,000"
May 3, 2002
(d) SCOPE. This Amendment No. 4 to Loan and Security
Agreement shall have the effect of amending the Loan Agreement and the other
Financing Agreements as appropriate to express the agreements contained herein.
In all other respects, the Loan Agreement and the other Financing Agreements
shall remain in full force and effect in accordance with their respective terms.
2. CONDITIONS TO EFFECTIVENESS. This Amendment No. 4 to
Loan and Security Agreement shall be effective immediately upon the execution
hereof by Requisite Lenders, the acceptance hereof by each Borrower and each
Guarantor, and the delivery hereof to the Administrative Agent, at 111 West
Monroe Street, Chicago, Illinois 60603, Attention: Mr. William Kane, Vice
President, on or before March 23, 1999.
Very truly yours,
HARRIS TRUST AND SAVINGS BANK,
as Administrative Agent and a Lender
Pro Rata Share: 25%
By: /s/ WILLIAM J. KANE
-------------------------------------
Its: Vice President
-------------------------------------
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO,
as Collateral Agent and a Lender
Pro Rata Share: 25%
By: /s/ M. MARTHA GASKIN
-------------------------------------
Its: Vice President
-------------------------------------
-2-
<PAGE>
FLEET BUSINESS CREDIT CORPORATION,
formerly known as SANWA BUSINESS
CREDIT CORPORATION, as a Lender
Pro Rata Share: 12.5%
By: /s/ DANIEL J. MANELLA
-------------------------------------
Its: Vice President
-------------------------------------
MERCANTILE BUSINESS CREDIT, INC.,
as a Lender
Pro Rata Share: 12.5%
By:
-------------------------------------
Its:
-------------------------------------
BNY FINANCIAL CORPORATION,
as a Lender
Pro Rata Share: 12.5%
By: /s/ A. VIOLA
-------------------------------------
Its: Vice President
-------------------------------------
NATIONSBANK, N.A., successor by merger to
NATIONSBANK OF TEXAS, N.A.,
as a Lender
Pro Rata Share: 12.5%
By:
-------------------------------------
Its:
-------------------------------------
Acknowledged and agreed to as of
this 23rd day of March, 1999.
ALL AMERICAN
SEMICONDUCTOR, INC.
By: /s/ HOWARD L. FLANDERS
---------------------------------
Its: EVP & CFO
---------------------------------
-3-
<PAGE>
ACKNOWLEDGMENT AND ACCEPTANCE OF GUARANTORS
Each of the undersigned, in its capacity as a Guarantor of the
Liabilities of Borrowers to Agents and Lenders under the Loan Agreement, hereby
acknowledges receipt of the foregoing Amendment No. 4 to Loan and Security
Agreement, accepts and agrees to be bound by the terms thereof, ratifies and
confirms all of its obligations under the Master Corporate Guaranty executed by
it and agrees that such Master Corporate Guaranty shall continue in full force
and effect as to it, notwithstanding such amendment.
Dated: March 23, 1999
Each of the Subsidiaries of
All American Semiconductor, Inc.
By: /s/ HOWARD L. FLANDERS
-----------------------------
Its: EVP & CFO
-----------------------------
-4-
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
YEARS ENDED DECEMBER 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net Income (Loss)............................................ $ 831,000 $ 3,250,000 $ (9,920,000)
=============== =============== ================
Weighted Average Shares Outstanding.......................... 19,685,106 19,672,559 19,742,849
=============== =============== ================
Basic Earnings (Loss) Per Share.............................. $ .04 $ .17 $ (.50)
====== ====== =======
DILUTED EARNINGS (LOSS) PER SHARE:
Net Income (Loss)............................................ $ 831,000 $ 3,250,000 $ (9,920,000)
=============== =============== ================
Weighted Average and Dilutive Shares:
Weighted average shares outstanding........................ 19,685,106 19,672,559 19,742,849
Dilutive shares............................................ 308,903 112,278 362,912
--------------- --------------- ----------------
19,994,009 19,784,837 20,105,761
=============== =============== ================
Diluted Earnings (Loss) Per Share............................ $ .04 $ .16 $ (.49)
====== ====== ======
</TABLE>
ALL AMERICAN SEMICONDUCTOR, INC. EXHIBIT 21.1
LIST OF SUBSIDIARIES
NAME JURISDICTION OF
INCORPORATION
Access Micro Products, Inc. Delaware
All American Added Value, Inc. California
All American A.V.E.D., Inc. Colorado
All American Semiconductor of Atlanta, Inc. Georgia
All American Semiconductor of Canada, Inc. Canada
All American Semiconductor of Chicago, Inc. Illinois
All American Semiconductor of Florida, Inc. Florida
All American Semiconductor of Huntsville, Inc. Alabama
All American Semiconductor of Massachusetts, Inc. Massachusetts
All American Semiconductor of Michigan, Inc. Michigan
All American Semiconductor of Minnesota, Inc. Minnesota
All American Semiconductor of New York, Inc. New York
All American Semiconductor of Ohio, Inc. Ohio
All American Semiconductor of Philadelphia, Inc. New Jersey
All American Semiconductor of Phoenix, Inc. Arizona
All American Semiconductor of Portland, Inc. Oregon
All American Semiconductor of Rockville, Inc. Maryland
All American Semiconductor of Salt Lake, Inc. Utah
All American Semiconductor of Texas, Inc. Texas
All American Semiconductor-Northern California, Inc. California
All American Semiconductor of Washington, Inc. Washington
All American Semiconductor of Wisconsin, Inc. Wisconsin
All American Technologies, Inc. Florida
All American Transistor of California, Inc. California
Aved Industries, Inc. California
Palm Electronics Manufacturing Corp. Florida
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1
All American Semiconductor, Inc.
We hereby consent to the incorporation in the Company's previously filed
Registration Statement on Form S-8 of our report dated March 5, 1999, except as
to Note 14, the date of which is March 17, 1999 and Note 7, the date of which is
March 23, 1999, relating to the consolidated financial statements of All
American Semiconductor, Inc. and Subsidiaries included in this Form 10-K for the
fiscal year ended December 31, 1998 and to the reference to our firm under the
caption "Experts" in such Registration Statement.
/s/ LAZAR LEVINE & FELIX LLP
- ----------------------------
Lazar Levine & Felix LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information from the Registrant's
consolidated financial statements as of and for the year ended December 31,
1998, and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<CIK> 0000818074
<NAME> ALL AMERICAN SEMICONDUCTOR, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 473
<SECURITIES> 0
<RECEIVABLES> 39,233
<ALLOWANCES> 1,412
<INVENTORY> 69,063
<CURRENT-ASSETS> 109,931
<PP&E> 10,120
<DEPRECIATION> 5,614
<TOTAL-ASSETS> 118,957
<CURRENT-LIABILITIES> 41,739
<BONDS> 50,709
0
0
<COMMON> 199
<OTHER-SE> 26,310
<TOTAL-LIABILITY-AND-EQUITY> 118,957
<SALES> 250,044
<TOTAL-REVENUES> 250,044
<CGS> 194,599
<TOTAL-COSTS> 194,599
<OTHER-EXPENSES> 46,089
<LOSS-PROVISION> 791
<INTEREST-EXPENSE> 4,313
<INCOME-PRETAX> 1,392
<INCOME-TAX> 561
<INCOME-CONTINUING> 831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
