| ALL AMERICAN SEMICONDUCTOR INC ITEM 1A Risk Factors - -------- ------------ This report contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended |
| These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 |
| We identify the forward-looking statements when we use the words "e believes, "e "e estimates, "e "e plans, "e "e expects, "e "e intends, "e "e anticipates, "e "e contemplates, "e "e may, "e "e will, "e "e shall, "e "e assuming, "e "e prospect, "e "e should, "e "e could, "e "e looking forward "e and similar expressions in this report |
| We base forward-looking statements on current expectations and beliefs concerning future events that are subject to risks and uncertainties |
| Actual results may differ significantly from the results suggested in this report |
| In many cases, we cannot predict the risks or uncertainties that could cause actual results to differ significantly from those indicated in the forward-looking statements |
| Some of the business risks and factors that may cause or contribute to the difference between actual results and the results suggested in this report are described below |
| We also describe some of these factors in other sections of this report and in our other public filings and in our press releases |
| Neither do we agree to update publicly or revise any forward-looking statements, business risks and/or uncertainties |
| Our industry is cyclical, which causes our operating results to fluctuate significantly |
| We cannot predict the timing or the severity of the cycles within our industry |
| In particular, it is difficult to predict how long and to what levels any industry upturn or downturn and/or general economic weakness will last or be exacerbated by terrorism or war or other factors on our industry |
| The electronic components distribution industry has historically been affected by general economic downturns |
| These economic downturns have often had an adverse economic effect upon manufacturers, end-users of electronic components and electronic components distributors |
| Our industry also directly depends on the continued growth of the electronic components industry and indirectly on end-user demand for our customers &apos products |
| The timing of new product developments, the life-cycle of existing electronic products, and the level of acceptance and growth of new products can also affect demand for electronic components |
| Due to changing conditions, our customers have experienced and may in the future experience periods of inventory corrections which could have a significant negative impact on our results |
| We have supported in the past and expect in the future to support new technologies and emerging markets |
| If these new 12 technologies and emerging markets fail to be accepted or grow, our operating results could suffer significantly |
| Our operating results have significantly fluctuated in the past, and will likely fluctuate in the future, because of these market changes and factors |
| We are dependent on a limited number of suppliers |
| Our operating results could suffer if one or more of our largest suppliers chooses not to sell products to us |
| We rely on a limited number of suppliers for products which generate a significant portion of our sales |
| Substantially all of our inventory has and will be purchased from suppliers with which we have entered into non-exclusive distributor agreements |
| These agreements are typically cancelable on short notice (generally 30 to 90 days) |
| Products purchased from our three largest suppliers accounted for approximately 31prca of our consolidated purchases during the calendar year ended December 31, 2005, of which 20prca were purchased from one supplier |
| No other supplier accounted for more than five percent of our consolidated purchases during this period |
| While most of the products that we sell are available from other sources, our future success will depend in large part on maintaining relationships with existing suppliers and developing relationships with new ones |
| We believe that the loss of a key supplier (particularly our largest supplier) could have a significant adverse impact on our business in the short-term as we attempt to replace the products offered by that supplier |
| Because we cannot guarantee that we would be able to replace the products which were available from a particular supplier, the loss of any of our largest suppliers could cause our operating results to decline significantly |
| Disruptions in relationships with any of our largest suppliers (particularly our largest supplier) or the loss of a significant number of other suppliers in a short period of time could also cause our operating results to decline significantly |
| Because we donapstat have long-term contracts with our customers, they may cancel, reduce or delay their orders without penalty |
| We typically donapstat obtain long-term purchase orders or commitments from our customers |
| Instead, we make product purchase commitments based on nonbinding forecasts of future orders we develop with our customers |
| Based on such nonbinding forecasts, we make commitments regarding the level of business we will seek and accept, and the levels and utilization of personnel and other resources |
| Our customers may cancel, reduce, delay or not place orders or attempt to return inventory due to a variety of industry or customer-specific conditions |
| Generally, our customers may cancel, reduce or delay purchase orders and commitments without penalty or other charges |
| Significant or numerous cancellations, reductions or delays in orders by customers could have a material adverse effect on our operating results |
| We may not be able to sustain or manage growth or achieve satisfactory levels of profitability |
| If market conditions improve, we will need to manage our expanding operations (including our developing European and Asian operations) effectively |
| We will also need to successfully integrate that expansion and any new businesses we may acquire or open into our operations |
| Our failure to do so, particularly in instances in which we have made or make significant investments, could have a material adverse effect on our operating results |
| We may fail to grow or achieve satisfactory levels of profitability if we are unable to: - obtain adequate supplies of competitive products on a timely basis and on commercially reasonable prices and other terms, especially in times of product shortages; - expand sales to existing customers and increase our customer base; - turn our inventories and collect our accounts receivable fully and in a timely manner, especially with respect to customers in new technologies or in emerging markets or in a weakened or bankrupt financial condition; - avoid inventory becoming outdated or losing value as a result of adverse market conditions; - maintain our existing key supplier relationships as well as develop new relationships with leading suppliers of electronic components; - hire and retain additional qualified management, marketing and other personnel to successfully manage our growth and operate our business; - effectively use personnel and facility and infrastructure overcapacity; and 13 - invest to maintain and enhance our infrastructure, including telecommunications and information systems, enterprise resource planning (ERP) system, logistics services and our service capabilities, including "e distribution technology "e |
| A change in market conditions or aggressive pricing programs could trigger a decline in gross profit margins which could adversely affect our operating results |
| We have experienced an increase in gross profit margins as a result of favorable market conditions, including limited supply of certain products, in the electronic components distribution industry during certain periods in the past |
| However, there is no assurance that negative changes in the general economic environment and/or in the electronic components industry will not occur |
| Furthermore, we continue to develop long-term strategic relationship with accounts which have required aggressive pricing programs and there is continued price competition for products sold by us |
| These and other factors, such as increases in low-margin, large volume transactions and a change in our product mix, could result in a decline in our gross profit margins, materially adversely affecting our operating results |
| We may not be able to satisfy our funding requirements |
| We currently anticipate needing to spend significant amounts of cash to: meet our working capital requirements (including to support increases in levels of inventory, as well as customer backlog, and accounts receivable as our level of sales increases); invest in and finance capital equipment and infrastructure; upgrade our information and communication systems, including our new enterprise resource planning (ERP) system; acquire businesses or open divisions; or respond to increases in expenses and costs, unanticipated developments, increasing customer demands or competitive pressures |
| If we do not have enough cash on hand, cash generated from our operations and/or cash available under our credit facility to meet these cash requirements, we will need to seek alternative sources of financing to carry out our growth and operating strategies, particularly if our credit facility is not available to do so |
| We may not be able to raise needed cash on terms acceptable to us, or at all |
| Financing may be on terms that are dilutive or potentially dilutive |
| If alternative sources of financing are required but are insufficient or unavailable, we will be required to modify our operating plans to the extent of available funding, if and assuming such modifications and/or other actions can be made or taken at all |
| Our global expansion initiatives may not be successful |
| We have commenced global expansion initiatives in an attempt to increase our sales to customer locations in foreign countries |
| Given our limited experience in the international market and that we only fairly recently, and on a limited basis so far, commenced operations outside of North America, no assurance can be given that our global expansion initiatives will be successful |
| Interest rate changes may adversely affect our operating results |
| We are affected by interest rate changes with respect to our credit facility, which currently is based upon, at our option, the prime rate or LIBOR Interest rates have risen over the last year and may continue to rise |
| Continuing increases in interest rates could materially adversely affect our operating results |
| Substantial leverage and debt service obligations may adversely affect our cash flow |
| Our revolving lines of credit impose debt service obligations and expose us to certain risks associated with being a substantially leveraged company |
| Separately, there is the possibility that we may be unable to generate cash sufficient to pay the principal amount of, interest on and/or other amounts due in respect of our indebtedness when due |
| 14 Our substantial leverage could also have other significant negative consequences, including: - increasing our vulnerability to general adverse economic and industry conditions; - increasing our exposure to increasing interest rates; - restricting our credit with our manufacturers which would limit our ability to purchase inventory; - limiting our ability to obtain additional financing; - requiring the dedication of a portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of any cash flow available for other purposes, including capital expenditures; - limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and; - placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources |
| We are dependent on foreign manufacturers and subject to trade regulations which expose us to political and economic risk |
| A significant number of components sold by us are manufactured by foreign companies |
| As a result, our ability to sell certain products at competitive prices could be adversely affected by any of the following: - increases in tariffs or duties; - changes in trade treaties; - strikes or delays in air or sea transportation; - future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries; and - turbulence in offshore economies or financial markets |
| Our ability to be competitive with respect to sales of imported components could also be affected by other governmental actions and policy changes, including anti-dumping and other international antitrust legislation |
| We are subject to adverse currency fluctuations |
| Adverse currency fluctuations could have the effect of making components manufactured abroad more expensive, cause limitations in customer productions due to unfavorable export conditions or cause our offshore suppliers to limit exports to the United States |
| In addition, foreign currency fluctuations could result in increasing the cost of goods to us or reducing our net sales as purchase and sale prices for our goods fixed in foreign currency may result in the cost of goods in US dollars being greater when paid or net sales in US dollars on payment for goods being less when received than anticipated when the price payable or to be received in foreign currency is originally fixed |
| Because we historically purchase substantially all of our products from United States subsidiaries and affiliates of foreign manufacturers, almost all of our purchases are paid for in US dollars, which usually reduces or eliminates the potential adverse effects of currency fluctuations |
| Accordingly, there can be no assurance that such factors could not have a material adverse effect on our operating results in the future |
| A variety of risks in connection with our global expansion initiatives could adversely affect our operating results |
| Our sales to customer locations in foreign countries increased to dlra75dtta9 million for 2005 up from dlra69dtta7 million in 2004 due to our global expansion initiatives |
| Our global operations are subject to a variety of risks including the following: - limited experience in markets outside of North America; - foreign currency fluctuations; - political and economic instability; - the burden and cost of complying with foreign laws; - changes to foreign laws and regulations; 15 - import and export duties and value added taxes; - difficulty in staffing and managing foreign operations; and - unpredictable sales cycles |
| As we expand our global initiative, we may be required to transact business in the local currency of the customers &apos location |
| Fluctuations in currency exchange rates could lead to a reduction in sales or profitability |
| To the extent revenues and expenses are denominated in foreign currencies, gains and losses on the conversion to US dollars may contribute to fluctuation in our operating results |
| Our new enterprise resource planning (ERP) system could continue to interfere with our operations |
| Although we are seeing some improvement recently, service to our customers and suppliers has been adversely impacted by the implementation of our new ERP system |
| The strain on the Companyapstas employees, as well as on its financial resources, in connection with the implementation of this new ERP system has been significant |
| We can offer no assurance that the implementation was fully successful or will not cause additional interruption in operations and services |
| Failure of the new ERP system to perform as expected would have a material adverse impact on our operating results |
| Our industry is subject to supply shortages |
| Any delay or inability to obtain components may have an adverse effect on our operating results |
| During certain prior periods there have been shortages of components in the electronics industry and the availability of certain components have been limited by some of our suppliers |
| Although such shortages and allocations have not had a material adverse effect on our operating results, there can be no assurance that any future shortages or allocations would not have such an effect on us |
| The prices of our components are subject to volatility |
| A significant portion of the memory products we sell have historically experienced volatile pricing |
| If market pricing for these products decreases significantly, we may experience periods when our investment in inventory exceeds the market price of such products |
| In addition, at times there are price increases from our suppliers that we are unable to pass on to our customers |
| These market conditions could have a negative impact on our sales and gross profit margins unless and until our suppliers reduce the cost of these products to us |
| Further, in the future aggressive pricing programs that may be required, an increased number of low-margin, large volume transactions and/or increased availability of the supply of certain products can further impact gross profit margins |
| Our industry is highly competitive |
| Competition could reduce our market share by harming our ability to sell our products and services |
| The electronic components distribution industry is highly competitive |
| We compete with local, regional and national distributors |
| Some of our competitors have greater name recognition and more resources than we do |
| We also compete with third party logistics and e-commerce companies, which have grown with the expanded use of the Internet |
| In addition to the increased competition from these other groups, some of the total available distribution market share is being reduced as more original equipment manufacturers procure more parts from EMS companies |
| The EMS companies use their volume purchase abilities to buy directly from component manufacturers |
| Since these EMS companies are manufacturing more outside North America, we believe that the total available distribution market share in North America is also being reduced as purchasing channels increase in Asia and Europe |
| We may be unable to defend our market share against these sources of competition or to compete successfully with existing or new competitors |
| Our failure to compete could have a material adverse effect on our operating results |
| 16 Emergence of new competitive business models or sources of competition could have adverse effects on our business |
| Additional competition has emerged in the electronic components distribution industry |
| This increased competition resulted in part from the advent of third party logistics and fulfillment companies, businesses commonly referred to as e-exchanges and e-brokers and several other forms of e-commerce companies which have grown with the expanded use of the Internet |
| In addition to the increased competition from these other groups, some of the total available distribution market share is being reduced as more and more original equipment manufacturers transition their procurement into EMS companies and original design manufacturers |
| The EMS companies and original design manufacturers utilize their abilities to aggregate demand to develop direct purchasing channels with component manufacturers |
| Furthermore, as more and more manufacturing moves outside the boundaries of North America, we believe that the total available distribution market share in North America is also being reduced as procurement channels increase in Asia and Europe |
| While we have implemented our e-commerce strategies, including our website and multiple portals, and commenced operations in Europe and Asia to confront certain of these new business models and sources of competition, there can be no assurance that we will be able to defend our market share against the emergence of these or other new business models and sources of competition |
| A reversal of the trend for distribution to play an increasing role in the electronic components industry could affect our business |
| In recent years, there has been a growing trend for original equipment manufacturers and contract electronics manufacturers to outsource their procurement, inventory and materials management processes to third parties, particularly electronic component distributors |
| Although we do not currently foresee this trend reversing, if it did, our business would be materially adversely affected |
| Our operations would be adversely affected if third party carriers were unable to transport our products on a timely basis |
| All of our products are shipped through third party carriers, principally one carrier |
| If a strike or other event prevented or disrupted that carrier from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers |
| If adequate third party sources to ship our products were unavailable at any time, our operating results would be materially and adversely affected |
| Some of our operations are located in Florida and California and, as a result, are subject to natural disasters, which could result in a business stoppage that would adversely affect our operating results |
| Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel |
| Our corporate headquarters and a significant portion of our business operations, computer systems and personnel are located in Miami, Florida, where there is the potential for hurricanes and, in fact, over the last few years there have been numerous hurricanes |
| In addition, our west coast corporate offices and our west coast distribution and programming center are located in northern California, where there is the potential for earthquakes |
| Should a hurricane or earthquake or other catastrophe, such as a fire, flood, power loss, communication failure or similar event disable our facilities, we have limited available alternative facilities from which we could conduct our business |
| We depend on the services of our executive officers, and their loss could affect our ability to grow |
| We are highly dependent upon the services of our President and Chief Executive Officer |
| The permanent loss of our President and Chief Executive Officer, or any one or more of our other key executives, could have a material adverse effect upon our operating results |
| While we believe that we would be able to locate suitable replacements for our executives if their services were lost, there can be no assurance that we would, in fact, be able to do so |
| 17 We must attract and retain personnel to help support our growth, and competition for personnel in our industry has previously been intense |
| We require the services of a substantial number of qualified personnel |
| Our success depends to a significant degree upon the contributions of our management, engineering, sales, marketing, information technology, distribution and finance personnel |
| During certain prior periods, the market for such skilled and experienced personnel was characterized by intense competition and aggressive recruiting, as well as a high degree of employee mobility |
| Such a market, if it was to return, would make it particularly difficult to attract and retain the qualified personnel we require |
| The loss of or our inability to continue to attract and retain these key personnel could harm our business |
| We may be exposed to product liability claims |
| We are likely to be named as a defendant in any products liability action brought by an end-user as a result of our value-added services or as a participant in the distribution chain between the manufacturer and end-user |
| Although as of this date there are no material claims asserted against us for products liability, there can be no assurance that such claims will not arise in the future |
| In the event that any products liability claim is not covered by insurance or we are not indemnified by or cannot recover damages from our supplier of the product or another third party in the chain of distribution, we may be required to fund some or all of a product liability claim, which could have a material adverse effect on us |
| We may be exposed to warranty claims by our customers both with respect to products manufactured by others which we distribute and with respect to products on which we have performed value added work |
| With respect to claims relating to products manufactured by others, we would expect that the manufacturers of such products would indemnify us as well as defend such claims on our behalf to the extent provided for under our agreement with the manufacturer, although no assurance can be given that any manufacturer would so do |
| In addition, there may be instances where a customer might be able to enforce an express or implied warranty claim against us with respect to products manufactured by our suppliers |
| With respect to products manufactured or assembled by third party companies for Aved Memory Products, we offer a warranty for a period of one year against defects in workmanship and materials under normal use and service |
| Accordingly, a significant number of such warranty claims could have a material adverse effect on us |
| We are exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002 |
| As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (SEC) adopted rules requiring public companies to include a report of management on the companyapstas internal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the companyapstas internal control over financial reporting |
| In addition, the independent registered public accounting firm auditing the companyapstas financial statements must attest to and report on managementapstas assessment of the effectiveness of the companyapstas internal control over financial reporting |
| We will be required to comply with these rules with respect to our fiscal year ending December 31, 2007, which compliance may require us to incur significant costs or at least costs beyond what we normally incur for financial reporting |
| If our independent auditors interpret the Section 404 requirements and the related rules and regulations differently from us or if our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to managementapstas assessment or issue a qualified report |
| Additionally, if we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq Stock Market |
| Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline |
| 18 Any acquisitions could be difficult to integrate, disrupt our business and adversely affect our operations |
| Our growth in the future may depend, in part, on our ability to acquire compatible electronic components distributors or other businesses and to integrate the acquired operations |
| There can be no assurance that we will be able to locate additional appropriate acquisition candidates, or that we will be successful in acquiring any identified candidates |
| In addition and as we have experienced in the past, we cannot be certain that the operations of any acquired companies will be effectively integrated or prove profitable |
| The completion of future acquisitions may require the expenditure of sizable amounts of capital and management effort |
| Moreover, unexpected problems encountered in connection with our acquisitions could have a material adverse effect on our operating results |
| Our officers and directors have and will continue to have significant control over us |
| If our Chairman and President and Chief Executive Officer exercised all of their outstanding stock options, they and their respective spouses and children and related trusts would own as of December 31, 2005 an aggregate of approximately 520cmam224 shares, representing approximately 13prca of the outstanding shares of common stock |
| As a result of such stock ownership and their positions as executive officers, as the members of the executive committee of our Board of Directors and as two of our seven directors, they are and will continue to be in a position to control our day-to-day affairs |
| Our shareholder rights plan, preferred stock and governing documents may discourage potential acquisitions of our business |
| We have a shareholders rights plan and have authorized preferred stock which is available to be issued with such rights, preferences, privileges and limitations as are determined by the Board of Directors |
| In addition, our Certificate of Incorporation includes provisions designed to discourage attempts by others to acquire control of us without negotiation with our Board of Directors, and to attempt to ensure that such transactions are on terms favorable to all of our shareholders |
| These provisions provide, among other things: - that meetings of our shareholders may only be called by the Board of Directors; - that an affirmative vote of two-thirds of our outstanding shares of common stock is required to approve certain business combinations unless 65prca of our Board approves such transaction; - for three classes of directors with each class elected for a three year staggered term; - that our Board in evaluating a tender offer or certain business combinations is authorized to give due consideration to all relevant factors; and - that actions of shareholders may not be taken by written consent of shareholders in lieu of a meeting |
| For various reasons, however, these provisions may not always be in the best interest of our shareholders |
| These reasons include the fact that the provisions of our Certificate of Incorporation (i) make it difficult to remove directors even if removal would be in the best interest of our shareholders; (ii) make it difficult for our shareholders to approve certain transactions that are not approved by at least 65prca of our Board, even if the transactions would be beneficial to our shareholders; and (iii) eliminate the ability of our shareholders to act without a meeting |
| Our shareholder rights plan, our blank-check preferred stock and our governing documents may have the effect of delaying, deterring or preventing a change in control of the Company, could discourage potential investors from bidding for our common stock at a premium over the market price of the common stock and could adversely affect the market price and the voting rights of the holders of the common stock |