PROSPECTUS
800,000 SHARES OF COMMON STOCK AND
800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
----------
Advanced Electronic Support Products, Inc. (the "Company") hereby offers
800,000 shares of Common Stock, par value $.001 per share (the "Common Stock")
and 800,000 Redeemable Common Stock Purchase Warrants (the "Warrants"). The
shares of Common Stock and the Warrants will be purchased separately. Each
Warrant is transferable immediately upon issuance and entitles the holder
thereof to purchase one share of Common Stock at an exercise price of $6.90 per
share during the four year period commencing on the first anniversary of the
effective date of this Offering (the "First Exercise Date"). The Warrants are
redeemable by the Company at $.01 per Warrant upon 30 days' prior written notice
to the holders thereof, if the average closing price of the Common Stock equals
or exceeds $10.50 per share for the 20 consecutive trading days ending not more
than three days prior to the date of the notice of redemption. See "Description
of Securities."
Prior to this offering (the "Offering"), there has not been a public market
for the Common Stock or the Warrants and there can be no assurance that any such
market will develop. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Company has
been approved for listing of its Common Stock and Warrants on the Nasdaq
SmallCap Market under the symbols "AESP" and "AESPW" and on the Chicago Stock
Exchange (the "CSE") under the symbols "ADS" and "ADSWS."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY, INCLUDING WITHOUT LIMITATION A RISK THAT THIS
PROSPECTUS MAY NOT BE CURRENT DURING THE EXERCISE PERIOD OF THE WARRANTS.
The Company's principal shareholders, Slav Stein and Roman Briskin, own
812,500 shares of the Company's outstanding Common Stock, constituting 50.4% of
the shares to be outstanding upon completion of the Offering (assuming no
exercise of the underwriters' over-allotment option or the Warrants).
Immediately prior to the Offering, the Company will issue to Messrs. Stein and
Briskin subordinated promissory notes (the "Principal Shareholders' Notes") to
reimburse them for lost tax benefits which would otherwise be available to them
based upon the conversion of the Company from an S-corporation for federal
income tax purposes to a C-corporation. The Principal Shareholders' Notes would
have aggregated $1,612,043 at September 30, 1996 and will be convertible into
Common Stock at a conversion price of $4.00 per share. After accounting for a
$200,000 payment on these notes (which will be made to Messrs. Stein and Briskin
from the proceeds of the Offering), the Principal Shareholders' Notes would be
convertible into 353,010 shares of Common Stock. In addition, Messrs. Stein and
Briskin hold options to purchase an aggregate of 560,500 shares of Common Stock,
of which 200,000 are currently exercisable. If Messrs. Stein and Briskin were to
immediately convert their notes and currently exercisable options (of which
there can be no assurance), they would own 1,365,510 shares of Common Stock,
constituting 63.1% (59.7% if the underwriters' over-allotment option referenced
below is fully exercised) of shares to be outstanding upon completion of the
Offering (assuming no exercise of the Warrants). For a complete description of
the terms of the Principal Shareholders' Notes, see "Risk Factors--Control By
Insiders," "Certain Transactions" and "Principal Shareholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
===============================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
- -------------------------------------------------------------------------------
Per Share of Common Stock $6.00 $.60 $5.40
- -------------------------------------------------------------------------------
Per Warrant $.125 $.013 $.112
- -------------------------------------------------------------------------------
Total(3) $4,900,000 $490,000 $4,410,000
===============================================================================
(FOOTNOTES ON NEXT PAGE)
The shares of Common Stock are offered by the Underwriters on a
firm-commitment basis, subject to prior sale, when, as and if accepted by them
and subject to certain conditions. Delivery of the shares of Common Stock and
the Warrants to the Underwriters is expected to be made at Miami, Florida, on or
about February 19, 1997.
CORPORATE SECURITIES GROUP, INC. ARGENT SECURITIES, INC.
The date of this Prospectus is February 13, 1997
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
[Photos]
The Company's headquarters and warehouse facility located in North Miami,
Florida
[Photos]
The Company sells computer connectivity and networking products, examples of
which are illustrated to the right.
- ----------
(FOOTNOTES FROM PREVIOUS PAGE)
(1) Does not include compensation to Corporate Securities Group, Inc. and
Argent Securities, Inc., as the co-managing underwriters (the
"Representatives") among the companies underwriting this Offering (the
"Underwriters") in the form of (i) a 3% non-accountable expense allowance,
(ii) warrants to purchase up to 80,000 shares of Common Stock and 80,000
Warrants exercisable at $7.80 per share of Common Stock and $.1625 per
Warrant (the "Underwriters' Warrants") and (iii) a financial advisory
agreement for the Representatives to act as an investment banker for the
Company for a period of two years for an aggregate fee of $47,000, payable
at the closing of the Offering. In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $508,964, including the non-accountable expense allowance
payable to the Underwriters.
(3) The Company has granted the Underwriters a 45-day over-allotment option
to purchase up to 120,000 additional shares of Common Stock and 120,000
additional Warrants on the same terms and conditions as set forth above.
If all such additional shares are purchased by the Underwriters, the
total Price to Public will be $5,635,000, the total Underwriting Discounts
and Commissions will be $563,500 and the total Proceeds to the Company
will be $5,071,500. See "Underwriting."
* * * * *
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES TO THE
COMPANY REFER TO THE COLLECTIVE OPERATIONS OF ADVANCED ELECTRONICS SUPPORT
PRODUCTS, INC., A FLORIDA CORPORATION ("AESP"), AESP COMPUTERZUBEHOR GMBH
("AESP GERMANY") AND ADVANCED ELECTRONIC SUPPORT PRODUCTS COMPUTERTILLBEHOR I
SWEDEN AKTIEBOLAG ("AESP SWEDEN").
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL INFORMATION CONTAINED IN THIS
PROSPECTUS (I) HAS BEEN ADJUSTED TO REFLECT A FORWARD STOCK SPLIT, TO BE
EFFECTED IMMEDIATELY PRIOR TO THE EFFECTIVENESS OF THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS FORMS A PART (THE "EFFECTIVE DATE"), IN WHICH THE 66 2/3
SHARES OF COMMON STOCK OUTSTANDING WILL BE CONVERTED INTO 812,500 SHARES OF
COMMON STOCK, AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION OR THE WARRANTS. ADDITIONALLY, IMMEDIATELY PRIOR TO THE EFFECTIVE DATE,
(I) THE COMPANY WILL OPT OUT OF ITS STATUS AS AN S-CORPORATION FOR FEDERAL
INCOME TAX PURPOSES, AND (II) THE PRINCIPAL SHAREHOLDERS OF THE COMPANY (SLAV
STEIN AND ROMAN BRISKIN) WILL CONTRIBUTE THEIR STOCK INTERESTS IN AESP GERMANY
AND AESP SWEDEN TO AESP FOR NO ADDITIONAL CONSIDERATION. SEE "BUSINESS" AND
"CERTAIN TRANSACTIONS."
THE COMPANY
The Company designs, manufactures, markets and distributes computer
connectivity and networking products nationally and internationally. The
Company currently offers a broad range of products to its customers,
including computer cables, connectors, installation products, data sharing
devices, and fiber optic cables, as well as a complete selection of
networking products, such as networking interface cards, hubs, transceivers,
and repeaters for different networking topologies. The Company works with
various manufacturers that manufacture and assemble the Company's products
using designs and manufacturing specifications (including quality control)
provided by the Company. For these designs and manufacturing specifications,
the Company uses its own designs as well as standard industry designs. The
Company also assembles a very small percentage of its products at the
Company's North Miami Beach facility. The Company's manufacturers are located
primarily in the Far East, allowing the Company to maintain competitive
pricing for its products due to comparatively lower labor-related costs of
production in the Far East. The Company offers its products to a broad range
of customers, including both original equipment manufacturers ("OEM") and
retail customers (such as computer superstores and dealers, and mail order
customers) in North America, Latin America, Eastern and Western Europe, and
Japan.
The Company was founded in 1983 and until 1990 primarily offered
connectivity products for use with Apple computers. In 1991, the Company
expanded its product base to include PC (i.e., non-Apple) connectivity
products which connect computers with peripheral products, such as printers,
and networking products which allow customers to network computers, for
example, with other computers. Since 1993, the Company has achieved
significant sales growth in the United States, and, through AESP Germany and
AESP Sweden, significant sales growth in Europe. In 1995, the Company began
warehousing products in Germany to accommodate its growing product line and
to better service its expanding base of European customers, including those
in Eastern Europe.
The Company's growth strategy is to increase revenues and operating income
by increasing its shares of its existing markets and expanding into new
markets. The Company intends to achieve this by continuing to increase the
breadth of its product lines and by continuing to expand its marketing
efforts to current and potential customers. The Company also intends to grow
through acquisitions of other companies, assets and product lines that would
complement or expand the Company's business. No material commitments or
binding agreements have been entered into to date and there can be no
assurance that any acquisitions will be consummated.
The Company's headquarters and its primary warehouse facility are located
at 1810 N.E. 144th Street, North Miami, Florida 33181. The Company's
telephone number is (305) 944-7710.
3
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by the Company ........800,000 shares of Common Stock and 800,000 Warrants.
See "Description of Securities."(1)
Warrants...................................Each Warrant entitles the holder thereof to purchase
one share of Common Stock at an exercise price of $6.90 per share
during the four year anniversary commencing on the
first anniversary of the effective date of this Offering
(the "First Exercise Date"). The Warrants are each
redeemable by the Company at a redemption price of $.01
per Warrant, at any time after the First Exercise Date,
upon 30 days' prior written notice to the holders thereof,
if the average closing price of the Common Stock equals or
exceeds $10.50 per share for the 20 consecutive trading days ending
three days prior to the date of the notice of redemption.
See "Description of Securities."
Securities Outstanding after the Offering..1,612,500 shares of Common Stock and 800,000 Warrants(1)(2)
Nasdaq SmallCap Market symbols............."AESP" and "AESPW"
CSE Symbols................................"ADS" and "ADSWS"
</TABLE>
- ----------
(1) Excludes up to 120,000 shares of Common Stock and 120,000 Warrants
issuable upon the exercise of the Underwriters' over-allotment option.
See "Underwriting."
(2) Excludes (i) currently outstanding options to purchase 623,500 shares of
Common Stock, (ii) 265,000 shares of Common Stock reserved for issuance
under the Company's Stock Option Plan, of which options to purchase 3,000
shares are presently outstanding, and (iii) shares of Common Stock (353,010
at September 30, 1996, after the completion of the Offering and the use of
the proceeds therefrom in the manner set forth herein) issuable upon the
conversion of the Principal Shareholders' Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Financial Condition, Liquidity and Capital Resources,"
"Management," "Principal Shareholders" and "Certain Transactions."
USE OF PROCEEDS
The Company intends to use the net proceeds from this Offering (i) to repay
all or a substantial portion of its $2.5 million revolving line of credit,
($1,325,000 outstanding at September 30, 1996), (ii) to make a $200,000 (or 5.1%
of the net proceeds from this Offering) pre-payment to Messrs. Stein and Briskin
on the Principal Shareholders' Notes (see "Principal Shareholders" and "Certain
Transactions" for a description of the terms of the notes), (iii) to open new
sales offices, (iv) to increase the design and development of its products, (v)
to increase inventory to support customer requirements, (vi) to increase the
sales force, (vii) to implement international manufacturing standard "ISO 9000"
(see "Business-Quality Control"), (viii) for advertising and marketing, and (ix)
for working capital and general corporate purposes. See "Use of Proceeds."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Investors should consider the information under the caption "Risk
Factors" in this Prospectus.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents selected historical consolidated data of the
Company for each of the years in the two year period ended December 31, 1995
and for each of the nine month periods ended September 30, 1995 and 1996. The
summary financial data set forth below is derived from and should be read in
conjunction with the Company's financial statements and notes thereto and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------------
1994 1995 1995 1996
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net Sales ...................................... $8,797,001 $13,721,014 $8,859,018 $9,713,478
Gross profit ................................... 3,891,858 5,213,494 3,450,521 3,889,395
Income from operations ......................... 898,158 1,261,563 920,635 833,620
Other income (expenses), net ................... 88,201 73,911 (102,217) (95,492)
------------- -------------- ------------- -------------
Income before pro forma income taxes ........... 986,359 1,335,474 818,418 738,128(2)
Pro forma income taxes(1) ...................... 347,534 483,680 311,184 267,057
------------- -------------- ------------- -------------
Pro forma net income(1) ........................ $ 638,825 $ 851,794 $ 507,234 $ 471,071
============= ============== ============= =============
PER SHARE DATA(1):
Pro forma net income per share ................. $ .52 $ .70 $ .41 $ .39
============= ============== ============= =============
Weighted average shares outstanding(3) ........ 1,223,178 1,223,178 1,223,178 1,223,178
============= ============== ============= =============
Supplemental pro forma net income per share(4) $ .64 $ .36
============== =============
</TABLE>
SEPTEMBER 30, 1996
---------------------------------------------
ACTUAL PRO-FORMA AS ADJUSTED(5)
------------- ------------- ---------------
BALANCE SHEET DATA:
Accounts receivable ....... $2,585,929 $2,585,929 $2,585,929
Inventories ............... 3,218,287 3,218,287 3,218,287
Working capital ........... 3,360,185 3,360,185 7,061,221
Total assets .............. 6,565,486 6,565,486 8,941,522
Total current liabilities 2,778,434 2,778,434 1,453,434
Long-term debt ............ -- 1,612,043 1,412,043
Shareholders' equity ..... 3,787,052 2,175,009 6,076,045
- ----------
(1) Includes pro forma adjustments as if the Company had been taxed as a
C-corporation since January 1, 1994 (assuming an estimated effective tax
rate of 39%). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Excludes the effect of an estimated
distribution of approximately $267,000 to the principal shareholders of
the Company representing the income taxes due from them (based upon the
current status of the Company as an S-corporation for federal income tax
purposes) on the Company's income for the nine months ended September 30,
1996 and additional amounts required to pay taxes attributable to the
Company's income between October 1, 1996 and the Effective Date.
(2) Net of approximately $125,000 in expenses relating to a proposed merger
which did not occur. Had such expenses not been incurred, income before
pro forma income taxes would have been approximately $863,000 for the
nine months ended September 30, 1996.
(3) Assumes conversion of the Principal Shareholders' Notes and the exercise
of options granted to Timothy E. Mahoney to purchase 23,000 shares of
Common Stock exercisable at $4.00 per share. See "Management--Consulting
Agreement with Timothy Mahoney." Other outstanding options priced at the
public offering price or above are excluded from this computation because
their impact would be antidilutive.
(4) Supplemental pro forma net income per share for the year ended December
31, 1995 and for the nine months ended September 30, 1996 is based on the
weighted average number of outstanding shares of Common Stock used in the
computation of pro forma net income per share plus a portion of the
shares being sold by the Company in the Offering to repay borrowings
(including the $200,000 payment to be made to the principal shareholders
with respect to the Principal Shareholders' Notes, of $1,175,000 at
December 31, 1995 (195,833 shares) and $1,525,000 at September 30, 1996
(254,167 shares), respectively. The computation gives effect to
elimination of interest costs associated with the borrowings, net of pro
forma income taxes.
(5) Adjusted for (i) the issuance to Messrs. Briskin and Stein, immediately
prior to the Effective Date, of convertible subordinated promissory notes
(the "Principal Shareholders' Notes") in the aggregate principal amount
5
<PAGE>
of $1,612,043 (plus additional amounts equal to 39% of the Company's
undistributed net pre-tax income for periods after September 30, 1996),
which are being issued for the purpose of reimbursing Messrs. Stein and
Briskin for the lost tax benefits which otherwise would be available to them
due to the conversion at the Effective Date of the Company from an
S-corporation for federal income tax purposes to a C-corporation, and (ii)
the sale of 800,000 shares of Common Stock and 800,000 Warrants at the
Public Offering Price (at an offering price of $6.00 per share of Common
Stock and $.125 per Warrant) and the application of the net proceeds
therefrom. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Certain Transactions" and "Principal
Shareholders" for information regarding the terms of the Principal
Shareholders' Notes, including, without limitation, the convertibility of
the notes into an aggregate of 353,010 shares of Common Stock (assuming the
aggregate principal amount of the notes as of September 30, 1996 and the
proposed application of $200,000 of the proceeds of the Offering towards the
payment of these notes).
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL CONSIDERATION, AMONG OTHER
ITEMS, TO THE FOLLOWING FACTORS BEFORE MAKING AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY. THIS INVESTMENT IS NOT RECOMMENDED FOR THOSE WHO CANNOT
BEAR THE RISKS DESCRIBED BELOW.
REDEMPTION OF REDEEMABLE WARRANTS. The Warrants are subject to redemption by
the Company, at any time after the First Exercise Date at a price of $.01 per
Warrant at any time after the First Exercise Date, upon thirty days' prior
written notice to the holders thereof, if the average closing bid price for the
Common Stock equals or exceeds $10.50 per share for the twenty consecutive
trading days ending on the third day prior to the date of notice of redemption.
In the event that the Warrants are called for redemption by the Company, Warrant
holders will have thirty days during which they may exercise their rights to
purchase shares of Common Stock. In the event a current prospectus is not
available, the Warrants may not be exercised and the Company will be precluded
from redeeming the Warrants. If holders of the Warrants elect not to exercise
them upon notice of redemption thereof, and the Warrants are subsequently
redeemed prior to exercise, the holders thereof would lose the benefit of the
difference between the market price of the underlying Common Stock as of such
date and the exercise price of such Warrants, as well as any possible future
price appreciation in the Common Stock. As a result of an exercise of the
Warrants, existing shareholders would be diluted and the market price of the
Common Stock may be adversely affected. If a Warrant holder fails to exercise
his rights under the Warrants prior to the date set for redemption, then the
Warrant holder will be entitled to receive only the redemption price, $.01 per
Warrant. See "Description of Securities--Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH THE
EXERCISE OF THE WARRANTS. The Company will be able to issue shares of its
Common Stock upon the exercise of the Warrants only if (i) there is a current
prospectus relating to the Common Stock issuable upon exercise of the
Warrants under an effective registration statement filed with the Commission,
and (ii) such Common Stock is then qualified for sale or exempt therefrom
under applicable state securities laws of the jurisdiction in which the
various holders of Warrants reside. Although the Company has undertaken to
use its best efforts to maintain the effectiveness of a current prospectus
covering the Common Stock subject to the Warrants offered hereby, there can
be no assurance that the Company will be successful in doing so. After a
registration statement becomes effective, it may require continuous updating
by the filing of post-effective amendments. A post-effective amendment is
required (i) when, for a prospectus that is used more than 9 months after the
effective date of the registration statement, the information contained
therein (including the certified financial statements) is as of a date more
than 16 months prior to the use of the prospectus, (ii) when facts or events
have occurred which represent a fundamental change in the information
contained in the registration statement, or (iii) when any material change
occurs in the information relating to the plan of distribution of the
securities registered by such registration statement. The Company anticipates
that this Registration Statement will remain effective for at least nine
months following the date of this Prospectus, assuming a post-effective
amendment is not filed by the Company. The Company intends to qualify the
sale of the securities in a limited number of states, although certain
exemptions under certain state securities laws may permit the Warrants to be
transferred to purchasers in states other than those in which the Warrants
were initially qualified. The Company will be prevented, however, from
issuing Common Stock upon exercise of the Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Warrants. The Company may decide not to
seek, or may not be able to obtain qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants of those purchasers will expire
and have no value if such Warrants cannot be exercised or sold. Accordingly,
the market for the Warrants may be limited because of the foregoing
requirements. See "Description of Securities."
RAPID TECHNOLOGICAL CHANGE. In general, the computer industry is
characterized by rapidly changing technology. The Company must continuously
update its existing products to keep them
6
<PAGE>
current with changing technology and must develop new products to take advantage
of new technologies that could render existing products obsolete. These products
must be compatible with the computers and other products with which they are
used. The Company's future prospects are dependent in part on its ability to
develop new products that address new technologies and achieve market
acceptance. There can be no assurance that the Company will be successful in
these efforts. If the Company were unable, due to resource constraints or
technological or other reasons, to develop and introduce such products in a
timely manner, this inability could have a material adverse effect on the
Company's results of operations. In addition, due to the uncertainties
associated with the evolving markets being addressed by the Company, there can
be no assurance that the Company will be able to respond effectively to product
demands, fluctuations, or to changing technologies or customer requirements and
specifications.
Although the computer connectivity and networking industry is not
generally affected as much by rapidly changing technology as the computer
industry as a whole, the Company is aware of and monitoring the development
of universal interfaces and any potential effect such developments would have
on the Company. In general, these interfaces would be used to facilitate the
interaction between many different types of computers and computer devices.
Specifically, the universal interfaces would allow many different devices
(such as, monitors, keyboards, modems and printers) and computer types which
are currently connected by different connectors, to be connected using one
universal interface for each connection. It is possible that the different
connectors currently in use will be replaced by such universal interfaces.
Although the Company anticipates that the sales volume of these universal
interfaces should be at a similar level to the aggregate sales volume for the
connectors that they replace, it is possible that the profit margin
associated with the new universal interfaces may be lower than the Company's
current connectors. Although, in the short term, demand for these universal
interfaces may create a new product for the Company, the Company cannot
determine with any certainty how its other similar products will be affected
or what the long-term effect will be on the Company's sales and operating
results. No assurance can be given that the industry will agree on one or
more of these universal interfaces or that such interfaces will be accepted
by the market. See "Business--Products and Services."
COMPUTER INDUSTRY CYCLICALITY. The computer industry has been affected
historically by general economic downturns, which have had an adverse
economic effect upon manufacturers, distributors and retailers of computers
and computer-related products. See "Business--The Computer Connectivity
Industry and Competition." General economic downturns have traditionally had
adverse effects upon the computer-related industry due to the restrictions on
expenses for products of this industry during recessionary periods. There can
be no assurance that the Company will be able to predict or respond to such
cycles within the industry.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND ASSEMBLY; ABSENCE OF SUPPLY
AGREEMENTS. The Company is dependent on a number of manufacturers, both domestic
and foreign, for the manufacture and assembly of its products pursuant to the
Company's design specifications. Although the Company purchases its retail
products from several different manufacturers, the Company often relies on an
individual manufacturer to produce a particular line of OEM products. Although
the Company has several different product lines, and despite the Company's
efforts to minimize such reliance by having other manufacturers available should
the need arise, these manufacturers are currently not bound by contract other
than by individual purchase orders to supply the Company with these products and
the loss of one or more manufacturers of OEM products may have a material
adverse impact on the Company. While most of the retail products sold by the
Company are available from multiple sources, there can be no assurance that the
Company will be able to replace lost manufacturers of retail products with
others offering products of the same quality, with timely delivery and/or
similar terms. One manufacturer located in Hong Kong (which manufacturer is also
not bound by a supply contract other than a purchase order), supplies products
which constitute approximately 10 percent of the Company's net sales. No other
manufacturer accounts for more than 10 percent of the Company's net sales. See
"Business--Manufacturing and Suppliers."
7
<PAGE>
FOREIGN SUPPLIERS AND MANUFACTURERS. Most of the components utilized by
the Company in the manufacture and assembly of its products are obtained from
foreign countries and a majority of the Company's products are manufactured
or assembled in foreign countries, such as South Korea, China and Taiwan. The
risks of doing business with companies in these areas include potential
adverse changes in the diplomatic relations of foreign countries with the
United States, changes in the relative purchasing power of the United States
dollar, hostility from local populations, changes in exchange controls and
the instability of foreign governments, increases in tariffs or duties,
changes in China's or other countries' most favored nation trading status,
changes in trade treaties, strikes in air or sea transportation, and possible
future United States legislation with respect to import quotas on products
from foreign countries and anti-dumping legislation, any of which could
result in delays in manufacturing, assembly and shipment and the inability of
the Company to obtain supplies and finished products. Alternative sources of
supply, manufacture or assembly may be more expensive. Although the Company
has not encountered significant difficulties in its transactions with foreign
suppliers and manufacturers in the past, there can be no assurance that the
Company will not encounter such difficulties in the future. See
"Business--Manufacturing and Suppliers."
FLUCTUATION IN EXCHANGE RATES. The majority of the Company's suppliers of
components, manufacturers, and assemblers are foreign, and although all price
quotations and payments with those entities are made in U.S. dollars,
fluctuations in exchange rates could alter the price charged by these foreign
suppliers, manufacturers and assemblers, and depending on the level of such
exchange rate fluctuations, such price fluctuations could adversely affect
the Company's performance. Although the majority of the Company's sales are
made to customers in the United States and although all price quotations and
payments from customers are made in U.S. dollars, the same risks of adverse
exchange rate fluctuations which are present with suppliers, manufacturers
and assemblers (as set forth above) are also present in transactions with
customers. The Company does not have a formal exchange risk management
program nor does the Company engage in hedging activities with respect to
exchange rate fluctuations because all price quotations and payments are made
in U.S. dollars, which the Company believes helps reduce but does not
eliminate the risk attendant to fluctuations in exchange rates.
DEPENDENCE ON THIRD PARTIES FOR DISTRIBUTION. Substantially all of the
Company's revenues are derived from the sale of its products through third
parties. Domestically, the Company's products are sold to end users primarily
through OEM customers, wholesale distributors, value added resellers
("VARs"), mail order companies, computer superstores and dealers.
Internationally, the Company's products are sold through wholesale
distributors and mail order companies, dealers, VARs, as well as OEM
customers. Accordingly, the Company is dependent on the continued viability
and financial stability of its resellers. The Company's resellers often offer
products of several different companies, including, in many cases, products
that are competitive with the Company's products. There can be no assurance
that the Company's resellers will continue to purchase its products or
provide them with adequate levels of support. The loss of, or a significant
reduction in sales volume to, a significant number of the Company's resellers
could have a material adverse effect on its results of operations. See
"Business--Marketing and Sales."
DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Company's two largest customers,
Boca Research and Cyquest (which are OEM customers), accounted for approximately
16.5 percent and 12 percent, respectively, of the Company's net sales for the
year ended 1995 and one of those customers, Boca Research, accounted for
approximately 14 percent of the Company's net sales for the nine months ended
September 30, 1996. No other customer of the Company accounted for more than 10
percent of the Company's net sales for those same periods. The Company's top 10
customers accounted for approximately 59 percent of the Company's net sales for
the year ended 1995 and approximately 44 percent of the Company's net sales for
the nine months ended September 30, 1996. The loss of one or more significant
customers could have a material adverse effect on the Company's business and
results of operations. For example, as of the second quarter of 1996, one of the
Company's largest customers (due to its own business situation) nearly ceased
all purchases of products from the Company. The loss of this customer materially
adversely affected the Company's sales and gross profit as reflected herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
8
<PAGE>
Nonetheless, by the end of the third quarter of 1996 sales from this customer
began to increase and the Company continues to diversify its customer base by
obtaining new customers. See "Business--Customer Base."
SIGNIFICANT INVENTORY; RISK OF PRODUCT RETURNS. Although the Company
monitors its inventory on a regular basis, the Company needs to maintain a
significant inventory in order to ensure prompt response to orders and to
avoid backlogs. The Company may need to hold such inventory during periods of
low sales activity. The capital necessary to hold such inventory restricts
the funds available for other corporate purposes. The Company does not
provide allowances for anticipated product returns. Although the Company
endeavors to reduce product returns through its quality control program, and
although historically product returns have been relatively insubstantial,
there can be no assurance that product returns will not increase in the
future. See "Business--Manufacturing and Suppliers."
FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and annual
operating results are impacted by many factors, including the timing of
orders and the availability of inventory to meet customer requirements. A
large portion of the Company's operating expenses are relatively fixed. Since
the Company typically does not obtain long-term purchase orders or
commitments from its customers, it must anticipate the future volume of
orders based upon the historic purchasing patterns of its customers and upon
its discussions with its customers as to their future requirements.
Cancellations, reductions or delays in orders by a large customer or a group
of customers could have a material adverse impact on the Company's business,
financial condition and results of operations. See "Business--Customer Base"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operation."
COMPETITION. The Company competes with many companies that manufacture,
distribute and sell computer connectivity products. While these companies are
largely fragmented, throughout different sectors of the computer connectivity
industry, several of these companies have greater assets and possess greater
financial and personnel resources than those of the Company. Some of these
competitors also carry product lines which the Company does not carry and
provide services which the Company does not provide. There can be no
assurance that competitive pressure from these companies will not materially
adversely affect the Company's business and financial condition. In the event
that more competitors begin to carry products which the Company carries and
price competition with respect to the Company's products significantly
increases, competitive pressures could cause the Company to reduce the prices
of its products, which would result in reduced profit margins. Prolonged
price competition would have a material adverse effect on the Company's
operating results and financial condition. A variety of other potential
actions by the Company's competitors, including increased promotion and
accelerated introduction of new or enhanced products, could have a material
adverse effect on the Company's results of operations. There can be no
assurance that the Company will be able to compete successfully in the
future. See "Business--The Computer Connectivity Industry and Competition."
GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS. One element of
the Company's growth strategy involves growth through the acquisition of
other companies, assets or product lines that would complement or expand the
Company's business. The Company's ability to grow by acquisition is dependent
upon, and may be limited by, the availability of suitable acquisition
candidates and capital, and by restrictions contained in the Company's credit
agreements, which restrictions include
maintaining certain minimum ratios of assets versus liabilities and not
permitting any indebtedness, guarantees or liens which would materially
affect the Company's ability to repay its loan to the bank. In addition,
acquisitions involve risks that could adversely affect the Company's
operating results, including the assimilation of the operations and personnel
of acquired companies, the possible amortization of acquired intangible
assets and the potential loss of key employees of acquired companies. There
can be no assurance that the Company will be able to consummate any
acquisitions on suitable terms. No material commitments or binding agreements
have been entered into to date and there can be no assurance that any
acquisitions will be completed. See "Business--Company Strategy." Although
the Company does not presently plan to use any of the proceeds from this
Offering for
9
<PAGE>
acquisitions, the Company does reserve the right to reallocate such proceeds
for use in an acquisition if such acquisition is advantageous to the Company.
Other than as required by the Company's Articles of Incorporation, By-Laws, and
applicable law, shareholders of the Company generally will not be entitled to
vote upon such acquisitions. See "Use of Proceeds."
CREDIT FACILITY RESTRICTIONS; FUTURE AVAILABILITY. The Company has a
$2,500,000 credit facility with a financial institution. The agreement
governing the line of credit contains covenants that impose limitations on
the Company, and requires the Company to be in compliance with certain
financial ratios. If the Company fails to make required payments, or if the
Company fails to comply with the various covenants contained in its
agreement, the lender may be able to accelerate the maturity of such
indebtedness. As of December 31, 1996, the Company was in compliance with the
required financial ratios and the Company believes that it is presently in
compliance with all other covenants under this agreement. The receivables,
inventory and all other assets of the Company are pledged to the lender to
secure its revolving line of credit. The Company intends to apply a portion
of the proceeds from this Offering to pre-pay all or substantially all of the
outstanding debt under the credit facility ($1,325,000 at September 30,
1996), and then borrow against the credit facility as the needs of the
Company so require. See "Use of Proceeds." The Company intends to renew the
revolving line of credit agreement which expires on July 26, 1997, although
no assurance can be given that such renewal can be obtained, or if obtained,
upon terms favorable to the Company. The credit facility along with proceeds
from this Offering may be used by the Company for, among other purposes,
acquisitions of other companies and/or inventories assisting in the potential
growth of the Company. See "--Growth Strategy and Risks Relating to Future
Acquisitions" and "Business--Strategy." The revolving line of credit
agreement expires on July 26, 1997. To the extent that there is an increase
in interest rates, or present borrowing arrangements are no longer available,
the Company's future growth could be adversely impacted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON EXECUTIVE OFFICERS AND KEY EMPLOYEES. The continued success of
the Company is dependent to a significant degree upon the services of Slav
Stein and Roman Briskin and upon the Company's ability to attract and retain
qualified personnel experienced in the various phases of the Company's
business. The ability of the Company to operate successfully could be
jeopardized if one or more of its executive officers were unavailable and
capable successors were not found. Upon the completion of this Offering, the
Company will enter into employment agreements with Messrs. Stein and Briskin.
See "Management."
CONTROL BY PRINCIPAL SHAREHOLDERS. After the consummation of this Offering,
and assuming no exercise of the Warrants, Messrs. Stein and Briskin will own
812,500 shares of the Common Stock of the Company, representing approximately
50.4 percent of the outstanding Common Stock (or 46.9 percent, assuming the
exercise of the Underwriters' over allotment option). This percentage does not
include shares of Common Stock issuable upon the conversion of the Principal
Shareholders' Notes held by Messrs. Stein and Briskin, nor an aggregate of
560,500 shares of Common Stock issuable to Messrs. Stein and Briskin upon the
exercise of outstanding stock options (the "Principal Shareholders' Options").
See "Principal Shareholders" and "Certain Transactions." Assuming Messrs. Stein
and Briskin were to convert their Principal Shareholders' Notes (after the
$200,000 pre-payment to be made with the proceeds of this Offering, said
$200,000 representing 5.1% of the net proceeds from this Offering), an aggregate
of 353,010 shares of Common Stock (based upon the principal amount of the notes
at September 30, 1996) would be issuable to them, increasing their ownership of
the outstanding Common Stock to 59.3% (55.9% if the Underwriters' over allotment
option is exercised in full). Since the Company's Articles of Incorporation and
Bylaws do not provide for cumulative voting, as a result of their ownership of
these securities, Messrs. Stein and Briskin will be able to control the Company
after the Offering through the election of its entire Board of Directors.
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchase price of the Common Stock
substantially exceeds the tangible book value of the Common Stock. Purchasers
of the Common Stock will therefore experience an immediate substantial
dilution in the net tangible book value per share of the Common
10
<PAGE>
Stock after this Offering in the amount of $2.23 per share. In addition,
investors in this Offering will contribute approximately 99% of the Company's
paid in capital for only 48% of the outstanding shares. See "Dilution."
EXERCISE OF UNDERWRITERS' WARRANTS. In connection with this Offering, the
Company will sell to the Underwriters, for nominal consideration, warrants (the
"Underwriters' Warrants") to purchase an aggregate of 80,000 shares of Common
Stock and 80,000 Warrants. The Underwriters' Warrants will be exercisable
commencing one year after the Effective Date and ending 5 years after such date
at an exercise price of $7.80 per share of Common Stock and $.1625 per Warrant.
The terms of the Warrants underlying the Underwriters' Warrants shall be the
same as those Warrants offered to the public, except such Warrants are not
subject to redemption. The holders of the Underwriters' Warrants will have the
opportunity to profit from a rise in the market price of the Common Stock, if
any, without assuming the risk of ownership. At any time when the holders of the
Underwriters' Warrants might be expected to exercise them, the Company probably
would be able to obtain additional equity capital on terms more favorable than
those provided by the Underwriters' Warrants. The Company may find it more
difficult to raise additional equity capital if it should be needed for the
business of the Company while the Underwriters' Warrants are outstanding. To the
extent that any of the Underwriters' Warrants are exercised, the ownership
interest of the Company's shareholders may be diluted. The Company also has
granted registration rights with respect to the Common Stock, the Warrants and
the underlying Common Stock subject to the Underwriters' Warrants. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. The 812,500 shares of Common Stock held
by the Company's principal shareholders (assuming no conversion of shares of
Common Stock underlying the Principal Shareholders' Notes and no exercise of
the Principal Shareholders' Options) are "restricted securities" as defined
in Rule 144 under the Securities Act, and in the future may be sold in
compliance with Rule 144. All of the Company's present shareholders have
entered into written agreements not to sell, transfer, encumber, assign or
otherwise dispose of any of their Common Stock for 24 months from the
Effective Date without the prior written consent of the Representatives.
Sales of Common Stock by the Company's present shareholders pursuant to Rule
144 or otherwise may, in the future, have a depressive effect on the price of
the Common Stock should a market for the Common Stock develop and be
sustained. See "Principal Shareholders" and "Description of Capital
Stock--Shares Eligible for Future Sale."
NO DIVIDENDS. The Company does not intend to declare or pay cash dividends
in the foreseeable future. Earnings, if any, are expected to be retained to
finance the development and expansion of the Company's business. See
"Dividend Policy."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to this
Offering there has been no public market for the Common Stock or the Warrants.
The offering price per share of the Common Stock and the Warrants has been
determined in negotiations between the Company and the Underwriters.
Concurrently with this Offering, the Company's Common Stock and Warrants will be
quoted on the Nasdaq SmallCap Market and on the Chicago Stock Exchange (the
"CSE"). However, there can be no assurance that an active trading market for the
Common Stock or the Warrants will develop or be sustained after this Offering or
that the shares of Common Stock or Warrants will be able to be resold at or
above the public offering price. The market price of the Common Stock and the
Warrants could be subject to significant fluctuations in response to the
Company's operating results and other factors. In addition, the stock market
generally, and technology-related securities in particular, may experience
extreme price and volume fluctuations that may be unrelated or disproportionate
to the operating performance of companies. Such fluctuations, and general
economic and market conditions, may adversely affect the market price of the
Common Stock. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ AND RISKS OF COMMON STOCK
TRADING BELOW U.S.$5.00 PER SHARE. Upon consummation of this Offering, the
Common Stock will be listed on the NASDAQ SmallCap Market and the CSE. Under the
current rules of NASDAQ, in order to
11
<PAGE>
qualify for continued listing on the SmallCap Market, the Company, among
other things, must have total assets of at least U.S. $2 million, capital and
surplus of at least U.S. $1 million, a market value of public float of at least
U.S. $200,000, at least two market makers and a minimum bid price of U.S. $1.00
per share. NASDAQ recently approved changes to the standards for companies to
remain listed on the SmallCap Market, including, without limitation, new
corporate governance standards, a new requirement that the Company have net
tangible assets of U.S. $2,000,000, market capitalization of U.S. $35,000,000 or
net income of U.S. $500,000 and other qualitative requirements. If the Company
is unable to satisfy the requirements for continued quotation on NASDAQ as well
as the CSE, trading in the Common Stock offered hereby would be conducted in the
over-the-counter market in what are commonly referred to as the "pink sheets" or
on the NASD Electronic Bulletin Board. As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the price of the
Common Stock offered hereby. In addition, if the Common Stock is suspended or
terminated from NASDAQ and at such time have a market price of less than U.S.
$5.00 per share, then the sale of such securities would become subject to
certain regulations adopted by the Commission which imposes sales practice
requirements on broker-dealers. For example, broker-dealers selling such
securities must, prior to effecting the transaction, provide their customers
with a document which discloses the risks of investing in the Common Stock.
Furthermore, if the person purchasing the securities is someone other than an
accredited investor or an established customer of the broker-dealer, the
broker-dealer must also approve the potential customer's account by obtaining
information concerning the customer's financial situation, investment experience
and investment objectives. The broker-dealer must also make a determination
whether the transaction is suitable for the customer and whether the customer
has sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in the security.
Accordingly, if the Common Stock is suspended or terminated from NASDAQ and are
trading for less than U.S. $5.00 per share, the Commission's rules may limit the
number of potential purchasers of the securities.
ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the
Company. See "Description of Capital Stock--Certain Provisions of the
Articles and Bylaws" for a description of these provisions. In addition, the
Board of Directors of the Company has the authority to issue up to 1,000,000
shares of preferred stock in one or more series and to fix the preferences,
rights and limitations of any such series without stockholder approval. See
"Description of Capital Stock--Preferred Stock." In addition, the executive
officers of the Company (Messrs. Stein and Briskin) have provisions in their
employment agreements requiring the Company to pay each $750,000 in the event
of a change in control of the Company. See "Management--Employment
Agreements." Furthermore, such payments which exceed a certain level of
compensation may not be deductible by the Company for federal corporate
income tax purposes. The ability to issue preferred stock and the change in
control payments could have the effect of discouraging unsolicited
acquisition proposals or making it more difficult for a third party to gain
control of the Company, or otherwise could adversely affect the market price
of the Common Stock.
ADJUSTMENTS TO WARRANT EXERCISE PRICE AND EXERCISE DATE. The Company, in
its sole discretion, and in accordance with the terms of the Warrant
Agreement with the Warrant Agent, may reduce the exercise price of the
Warrants and/or extend the time within which the Warrants may be exercised,
depending on such things as the current market conditions, the price of the
Common Stock and the Company's need for additional capital. Further, in the
event that the Company issues certain securities or makes certain
distributions to the holders of its Common Stock, the exercise price of the
Warrants may be reduced. Any such price reductions (assuming exercise of the
Warrants) will provide less money for the Company and possibly adversely
affect the market price of the Company's securities.
IMPACT OF WARRANT EXERCISE ON MARKET. In the event of the exercise of a
substantial number of Warrants within a reasonably short period of time after
the right to exercise commences, the resulting increase in the amount of Common
Stock of the Company in the trading market could substantially affect the market
price of the Common Stock. See "Description of Securities--Warrants."
12
<PAGE>
CONTINUING RELATIONSHIP WITH UNDERWRITERS; POTENTIAL INFLUENCE. In connection
with this Offering, the Company will have certain continuing relationships with
the Representatives, some of which may adversely affect the Company's results of
operations. The Company has agreed with the Representatives that (i) it will
sell to the Underwriters the Underwriters' Warrant (including the grant of
"piggyback" and demand registration rights), (ii) it will pay, under certain
conditions, to the Underwriters a warrant solicitation fee equal to 5% of the
exercise price of the Warrants exercised, (iii) it will use its best efforts to
cause the election to its Board of Directors one designee of each of the
Representatives and (iv) it will enter into a consulting agreement with the
Representatives for consulting services for a two year period for aggregate fees
payable to the Representatives of $47,000. Any of the foregoing relationships
may adversely impact the Company's business, operating results or financial
condition, or its ability to raise additional capital for its business should
the need arise during the term of the above agreements. See "Risk
Factors--Underwriters' Warrants" and "Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. The Company believes that
this Prospectus, of which this Registration Statement forms a part, contains
forward-looking statements, including statements regarding, among other
items, the Company's future plans and growth strategies and anticipated
trends in the industry in which the Company operates. These forward-looking
statements are based largely on the Company's expectations and are subject to
a number of risks and uncertainties, many of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of the factors described herein, including, among
others, regulatory or economic influences. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Prospectus will in fact transpire or prove to be accurate.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 800,000 shares of Common
Stock and 800,000 Warrants (at an offering price of $6.00 per share of the
Common Stock and $.125 per Warrant) in the Offering are estimated to be
approximately $3.9 million (after deducting underwriting discounts and
commissions and estimated offering expenses), or approximately $4.5 million if
the Underwriters' over-allotment option is exercised in full. The Company
intends to use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS(1) DOLLAR AMOUNT DOLLAR AMOUNT
- -------------------------- ------------- -------------
<S> <C> <C>
Repayment of indebtedness to bank(2) .......................... $1,325,000 34.0%
Repayment of indebtedness to principal shareholders (3)........ 200,000 5.1
Open new sales offices(4) ..................................... 500,000 12.8
Product development and design(5) ............................. 200,000 5.1
Increase inventory to support customer requirements .......... 700,000 17.9
Increase sales force .......................................... 250,000 6.4
Implement international manufacturing standard "ISO 9000"(6) . 50,000 1.3
Advertising and marketing ..................................... 100,000 2.6
Working capital and general corporate purposes(7).............. 576,000 14.8
---------- -----
$3,901,000 100.0%
========== =====
</TABLE>
- ----------
(1) Proceeds received upon the exercise of the Underwriters' over-allotment
option will be used for purposes set forth above.
(2) The Company intends to repay all or a substantial portion of its current
borrowings under a $2.5 million revolving line of credit ($1,325,000
outstanding at September 30, 1996). After repayment of the Company's current
borrowings as set forth above, the Company intends to borrow again from its
available revolving line of credit depending on its on-going financial
needs. See "Risk Factors - Credit Facility Restrictions; Future
Availability" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Financial Condition, Liquidity and
Capital Resources."
(3) The Company intends to make a $200,000 pre-payment to Messrs. Stein and
Briskin on the Principal Shareholders' Notes (see "Principal Shareholders"
and "Certain Transactions" for a description of the terms of the Principal
Shareholders' Notes).
(4) Markets have not yet been selected.
(5) The Company intends to increase the design and development of its
connectivity and networking products. At the date of this Prospectus, no
specific products have been identified for development. See
"Business--Products and Services".
(6) See "Business--Quality Control."
(7) Working capital includes, but is not limited to, carrying additional
receivables associated with increased sales, costs for establishing
additional warehouses, personnel costs for the expansion of the Company's
existing products and expenses for distribution, acquisitions, and other
general and administrative expenses.
As noted above, upon completion of the Offering, the Company intends to
temporarily utilize a portion of the proceeds to repay revolving debt due to
a financial institution. Funds may then be reborrowed as required for the
uses set forth above. At present, the Company has a $2.5 million line of
credit from a financial institution, which is due on July 26, 1997. Amounts
borrowed under the facility ($1,325,000 of which was outstanding at September
30, 1996) accrue interest at the prime rate plus 1/2 % per annum. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." While the Company is currently in good standing under its
revolving debt credit agreement, and therefore could reborrow today the
amounts to be paid with the proceeds of this Offering, there can be no
assurance that the Company will be in good standing under its credit
agreement at the time it seeks to reborrow such proceeds.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds received from this Offering, based upon the current status
of the Company's business operations, its current plans and current economic
conditions. Future events, including the problems, delays, expenses and
complications frequently encountered by companies of this size as well as
changes in regulatory, political and competitive conditions affecting the
Company's business and the success or lack thereof of the Company's expansion
and marketing efforts, may make shifts in the allocation of funds necessary or
14
<PAGE>
desirable. The Company also reserves the right to allocate a portion of the
net proceeds for acquisitions. No material commitments or binding agreements
have been entered into to date.
Funds not utilized to temporarily repay revolving credit debt will be
invested in short-term interest bearing securities, government securities or
money market funds pending their anticipated use as set forth above.
DIVIDEND POLICY
The Company does not intend to pay any cash dividends with respect to its
Common Stock in the foreseeable future. Rather, the Company intends, after
the consummation of the Offering, to retain its earnings, if any, for use in
the operation of its business. Furthermore, the Company's ability to declare
or pay dividends on its Common Stock is limited by the terms of its credit
agreements with financial institutions and by terms of the underwriting
agreement with the Underwriters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources," "Description of Capital Stock--Dividends" and "Underwriting."
15
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
$2,175,009, or $2.68 per share, after giving effect to the $1,612,043 Principal
Shareholders' Notes to be issued in connection with the dividend payable on
account of the Company's conversion from an S corporation to a C corporation.
Net tangible book value per share is equal to total tangible assets of the
Company less total liabilities, divided by the total shares of Common Stock
outstanding. After giving effect to the sale of 800,000 shares of Common Stock
in this Offering (at an offering price of $6.00 per share) and 800,000
Redeemable Common Stock Purchase Warrants (at an offering price of $.125 per
warrant) and receipt of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$6,076,045 or $3.77 per share, representing an immediate increase in net
tangible book value of $1.09 per share to existing shareholders and an immediate
dilution in net tangible book value of $2.23 per share to purchasers of the
Common Stock offered hereby. The following table illustrates the resulting
dilution with respect to the Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Public offering price per share .............................................. $6.00
Net tangible book value per share before offering .......................... $2.68
Increase per share attributable to new investors ........................... 1.09
--------
Pro forma net tangible book value per share after offering ................... 3.77
--------
Dilution of net tangible book value per share to new investors attributable
to purchase of Common Stock by new investors ................................. $2.23
========
</TABLE>
The following table summarizes, as of the Effective Date, the total number of
shares of Common Stock purchased from the Company, and the total consideration
paid and the average price per share paid (at a public offering price of $6.00
per share and without giving effect to the underwriting discount and the
expenses of this Offering), by existing shareholders and by the new investors
who purchase shares of Common Stock pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
------------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders(1)(2) 812,500 50% $ 46,714 1% $ .06
New Investors ............... 800,000(3) 50% $4,800,000 99% $6.00
--------- --- ---------- ---
Total ....................... 1,612,500 100% $4,846,714 100%
========= === ========== ===
</TABLE>
- ----------
(1) Excludes shares issuable upon (i) the conversion (at $4.00 per share) of
the Principal Shareholders' Notes, (ii) the exercise (at the public
offering price) of stock options to purchase an aggregate 450,000 shares
presently owned by the Company's principal shareholders (the "Principal
Shareholders' Options"), (iii) the exercise (at $4.00 and $6.00) of options
to purchase an aggregate 63,000 shares held by Timothy E. Mahoney and (iv)
the exercise (at the public offering price) of options to purchase 3,000
shares presently owned by a non-employee director of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Financial Condition, Liquidity and Capital Resources,"
"Management," "Certain Transactions" and "Principal Shareholders." Also
excludes shares of Common Stock issuable upon the exercise of stock options
which may be granted in the future under the Company's Stock Option Plan.
See "Management--Stock Option Plan."
(2) Includes actual proceeds invested by the principal shareholders in
connection with the formation of the Company in 1983.
(3) If the Underwriters' over-allotment option is exercised in full, the
number of shares of Common Stock held by new investors will be 920,000.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1996, pro forma, and as adjusted at that date to give effect to (i) the
issuance to Messrs. Briskin and Stein immediately prior to the Effective Date of
the Principal Shareholders' Notes, and (ii) the sale of 800,000 shares (at an
offering price of $6.00 per share of Common Stock) and 800,000 Redeemable Common
Stock Purchase Warrants (at an offering price of $.125 per warrant) in the
Offering and the application of the net proceeds therefrom (assuming no exercise
of the Warrants, the Underwriters' Warrants or the Underwriters' over-allotment
option). See "Certain Transactions" and "Principal Shareholders." This table
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(6)
------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Notes Payable(2) ....................................... $1,457,755 $1,457,755 $ 132,755
Principal Shareholders' Notes(3) ....................... -- 1,612,043 1,412,043
---------- ---------- ----------
Total debt ............................................ 1,457,755 3,069,798 1,544,798
---------- ---------- ----------
Shareholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized; none issued .............................. -- --
Common stock, $.001 par value, 20,000,000 shares
authorized; 812,500 shares outstanding; 1,612,500
shares outstanding, as adjusted(4) ................... 813 813 1,613
Additional paid-in capital ............................. 45,901 2,162,019 6,062,255
Retained earnings ...................................... 3,728,161 -- --
Cumulative foreign currency translation adjustment .... 12,177 12,177 12,177
---------- ---------- ----------
Total shareholders' equity(5) ......................... 3,787,052 2,175,009 6,076,045
---------- ---------- ----------
Total capitalization .................................. $5,244,807 $5,244,807 $7,620,843
========== ========== ==========
</TABLE>
- ----------
(1) Reflects that, immediately prior to the Effective Date, the Company will
issue the Principal Shareholders' Notes as a future dividend distribution
($1,612,043 at September 30, 1996) and cumulative undistributed earnings
applicable to the Company's S corporation status are reclassified to
additional paid-in capital ($2,116,118 at September 30, 1996).
(2) For a description of the Company's revolving credit facility, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operation--Financial Condition, Liquidity and Capital Resources."
(3) For a description of the terms of the Principal Shareholders' Notes, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operation," "Certain Transactions" and "Principal Shareholders."
(4) Excludes (i) an aggregate of 63,000 shares of Common Stock issuable to
Timothy E. Mahoney, a consultant to the Company, upon the exercise of
outstanding options, (ii) an aggregate 560,500 shares of Common Stock
issuable to Messrs. Stein and Briskin upon the exercise of outstanding
stock options, (iii) 262,000 shares reserved for issuance under the
Company's Stock Option Plan, (iv) shares of Common Stock issuable
upon the conversion of the Principal Shareholders' Notes which are
presently owned by a non-employee director and (v) the exercise (at the
public offering price) of options to purchase 3,000 shares of the Company's
Common Stock which were granted under the Company's Stock Option Plan. See
"Management--Stock Option Plan," "Management--Consulting Agreement with
Timothy Mahoney," "Principal Shareholders" and "Certain Transactions." Also
excludes shares of Common Stock issuable upon the exercise of the Warrants
and the Underwriters' Warrants (and shares of Common Stock issuable upon the
exercise of the Warrants contained in the Underwriters' Warrants). See
"Underwriting."
(5) Excludes the effect of (i) an anticipated distribution of $267,000 to the
principal shareholders of the Company representing the income taxes due
from them (based upon the current status of the Company as an S
corporation for federal income tax purposes) on the Company's income for
the nine months ended September 30, 1996, and (ii) additional amounts
required to pay taxes attributable to the Company's income between
October 1, 1996 and the Effective Date.
(6) Includes 800,000 shares of Common Stock issued in this Offering (at a
public offering price of $6.00 per share) and 800,000 Redeemable
Common Stock Purchase Warrants (at an offering price of $.125 per
warrant), net of proceeds of $2,676,000 (after $1,525,000 repayment of
debt).
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information presented below for, and as of the end
of, each of the years ended December 31, 1994 and 1995, and each of the
nine-month periods ended September 30, 1995 and 1996, is derived from the
financial statements of the Company. The consolidated financial statements
for each of the years ended December 31, 1994 and 1995 are financial
statements which combine AESP, AESP Germany and AESP Sweden and have been
audited by BDO Seidman LLP, independent certified public accountants, except
for AESP Sweden which has been audited by another independent public
accounting firm. The consolidated financial statements as of and for the
nine-month periods ended September 30, 1995 and 1996 have not been audited,
but, in the opinion of management, such financial statements include all
material adjustments (which were normal recurring adjustments) necessary for
fair presentation. The following selected financial information should be
read in conjunction with the Company's financial statements and related notes
and with "Management's Discussion" which follows this Selected Financial
Information Section.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------------
1994 1995 1995 1996
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales .................................... $8,797,001 $13,721,014 $8,859,018 $9,713,478
Cost of sales ................................ 4,905,143 8,507,520 5,408,497 5,824,083
Gross profit ................................. 3,891,858 5,213,494 3,450,521 3,889,395
Selling, general and administrative expenses 2,993,700 3,951,931 2,529,886 3,055,775
Income from operations ....................... 898,158 1,261,563 920,635 833,620
Other income (expenses), net ................. 88,201 73,911 (102,217) (95,492)
Income before income taxes ................... 986,359 1,335,474 818,418 738,128
Provision for income taxes ................... 11,534 44,680 18,184 10,057
---------- ----------- ---------- ----------
Net income ................................... $ 974,825 $ 1,290,794 $ 800,234 $ 728,071
========== =========== ========== ==========
PRO FORMA NET INCOME:
Income before income taxes ................... $ 986,359 $ 1,335,474 $ 818,418 $ 738,128
Provision for income taxes(1) ................ 347,534 483,680 311,184 267,057
---------- ----------- ---------- ----------
Pro forma net income ......................... $ 638,825 $ 851,794 $ 507,234 $ 471,071
========== =========== ========== ==========
Pro forma net income per share ............... $ .52 $ .70 $ .41 $ .39
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital .............................. $2,336,135 $ 3,024,704 $2,741,025 $3,360,185
Accounts receivable, net of allowance for
doubtful accounts .......................... 1,579,693 3,015,018 2,374,686 2,585,929
Inventory .................................... 1,871,697 3,197,950 2,600,350 3,218,287
Property and equipment (net) ................. 78,056 380,667 218,231 426,867
Total assets ................................. 3,915,114 6,903,030 5,371,988 6,565,486
Notes payable ................................ 403,083 1,117,302 879,074 1,457,755
Total current liabilities .................... 1,500,923 3,497,659 2,412,732 2,778,434
Total shareholders' equity ................... 2,408,788 3,405,371 2,959,256 3,787,052
</TABLE>
- ----------
(1) Reflects pro forma adjustments as if the Company had been taxed as a C
corporation since the beginning of the applicable periods.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
GENERAL
Net Sales consist primarily of gross sales, net of allowances for returns
and other adjustments. Costs of sales consist primarily of product costs
(cost of manufacture or acquisition) and freight charges, among other costs.
Net Sales and gross profits depend in part on the volume and mix of OEM
and retail sales, as well as the cost and mix of components and finished
products contained in the Company's inventory from time to time to supply
those sales. The Company believes that it must continue to manage the mix
between OEM sales and retail sales. OEM sales have a comparably low gross
profit margin with a relatively high volume of sales per customer, while
retail sales have a comparably high gross profit margin with a relatively low
volume of sales per customer. Retail sales consequently require more time and
effort as well as high operating expenses (including overhead) to achieve a
comparably higher gross profit margin. The overall mix of OEM and retail will
help determine the gross profit margin of the Company's sales. A large
portion of the Company's operating expenses are relatively fixed. Since the
Company typically does not obtain long-term purchase orders or commitments
from its customers, it must anticipate the future volume of orders based upon
the historic purchasing practices of its customers and upon discussions with
its customers as to their future requirements. Cancellations, reductions or
delays in orders by a customer or group of customers could have a material
adverse effect on the Company's business, financial condition and results of
operation.
Commencing the first quarter of 1996, sales to one of the Company's
largest customers (due to the customers' own business situation) began to
decrease significantly from sales during previous quarters, in particular the
fourth quarter of 1995. By the end of the second quarter of 1996 sales to
this customer had all but ceased. During the third and fourth quarter of
1996, no single new customer is expected to replace the sales to that
customer which was the Company's largest source of sales for the
corresponding periods in 1995. As of the date of this Prospectus, the Company
has begun to ship products to this customer again and, has also obtained new
customers to diversify its customer base. While sales have continued to grow
to other customers, the impact of the loss in sales to this customer will
likely cause net sales and net income for the 1996 fiscal year to be lower
than they were for the 1995 fiscal year.
During the first nine months of 1996, the Company incurred approximately
$125,000 of costs associated with a potential merger of the Company with
another entity. The proposed merger was later abandoned and the Company
expensed the costs associated with such merger during the 1996 nine month
period. No comparable expense was incurred during the nine months ended
September 30, 1995.
The results described herein reflect the consolidated operations of AESP,
AESP Sweden and AESP Germany.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales for the nine months ended September 30, 1996 increased by 9.6%
to $9,713,478, up $854,460 from net sales of $8,859,018 for the nine months
ended September 30, 1995. This increase in sales primarily reflects the
Company's increased sales in retail markets. During both the 1995 and 1996
nine month periods, domestic sales were approximately 79% of net sales and
international sales were approximately 21% of net sales. The Company believes
that it will continue to achieve growth in net sales in both its domestic and
international markets during future periods.
Gross profits as a percentage of gross sales (i.e., total sales) increased
one percent from period to period to 40 % in 1996. The Company believes that
this level of gross margin is high for the computer
19
<PAGE>
networking and connectivity industry, and that as the Company grows and
increases its sales volume, margins will drop somewhat due to the lower
profit margins often associated with larger sales accounts.
Selling, general and administrative ("SG&A") expenses increased from
period to period, both in absolute dollars and as a percentage of net sales.
SG&A for the nine months ended September 30, 1996 includes approximately
$125,000 in expenses relating to the Company's proposed merger with The
Americas Growth Fund, Inc. ("AGF"). There was no comparable expense during
1995. Additionally, SG&A for the 1996 nine month period reflects increased
costs associated with the expansion of the Company's operations in
anticipation of future sales growth. In that regard, during 1996, the Company
added additional sales personnel and expanded its advertising and marketing
efforts. As a result of these factors, SG&A expenses for the 1996 period were
$3,055,775 (31.5% of net sales), compared with $2,529,886 (28.6% of net
sales) for the same period in 1995. Had the AGF merger expenses not been
incurred, the Company's SG&A, as a percentage of net sales, would have been
30.2% for 1996, compared to 28.6% in 1995.
As a result of the factors set forth above, income from operations for the
1996 nine month period was $833,620, compared to income from operations of
$920,635 for the same period in 1995, a decreased of 9.5%. Had the AGF merger
expenses not been incurred, income from operations for the nine months ended
September 30, 1996 would have been $958,620, an increase of 4.1% over net
income for operations for the first nine months of 1995.
Other income (expenses), net decreased during the 1996 nine month period,
from ($102,217) to ($95,492). This 6.6% decrease primarily results from
increased interest costs relating to increased borrowings during 1996 to
continue the Company's growth, offset by a decrease in foreign exchange
losses. The Company expects that once the Offering is completed, and the
proceeds are utilized, in part, to repay the Company's outstanding
borrowings, that interest costs will drop substantially until such time as
the Company is required to again borrow funds from its lender to continue its
growth. See "Use of Proceeds."
Net income for the nine months ended September 30, 1996 was $728,071,
compared to $800,234 for the nine months ended September 30, 1995. Had the
AGF merger expenses not been incurred, net income for the nine months ended
September 30, 1996 would have been $853,071.
Pro forma net income, which reflects the Company's net income had the
Company been taxed as a C corporation during the 1995 and 1996 periods, was
$471,071 for the nine months ended September 30, 1996, compared to $507,234
for the same period in 1995. Had the AGF merger expenses not been incurred,
pro forma net income for the nine months ended September 30, 1996 would have
been $553,571.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for 1995 increased by 56.0% to $13,721,014, up $4,924,013 from
net sales of $8,797,001 in 1994. The increase in net sales during 1995
reflects increased sales in the OEM and retail markets. The Company believes
that the growth of the computer industry will continue to present
opportunities for the Company to grow, particularly by focusing on large
catalog houses and OEM manufacturers. See "Business--Strategy." During 1995
and 1994, domestic sales and foreign sales, as a percentage of net sales,
were nearly unchanged, at 83% and 81%, respectively, and 17% and 19%,
respectively.
Gross profits as a percentage of net sales were 38.0% in 1995 compared
with 44.2% in 1994. The decrease from 1994 to 1995 is the result of an
increase of OEM sales in 1995 compared with 1994. OEM sales represent high
volume sales with comparably lower overhead, but also have a lower gross
profit margin when compared with retail sales.
SG&A expenses as percentage of net sales were 28.8% in 1995 compared with
34.0% in 1994. The improvement in 1995 reflects the economies of scale
associated with increased sales generally and with
20
<PAGE>
increased OEM sales as a percentage of net sales. This improvement in SG&A
expenses as a percentage of net sales was achieved even though salaries and
commissions associated with increased sales increased in 1995 as compared
with 1994. Overall, SG&A expenses in 1995 increased 32.0% to $3,951,931
compared with 1994. The increase in SG&A expenses was due in part to costs
associated with the growth of the Company's business, upgrading computer
systems, and an increase in sales and marketing personnel.
Income from operations increased 40.5% to $1,261,563 in 1995 from income
from operations of $898,158 in 1994. This increase resulted from increased
sales and the benefits of economies of scale resulting in a decrease in SG&A
expenses as a percentage of net sales.
Net income for 1995 increased by 32.4% to $1,290,794, up $315,969 from net
income of $974,825 in 1994. In general, net income increased in 1995 as a
result of larger OEM sales. During 1995, the Company's OEM sales were
approximately $6.1 million or approximately 44% of total sales, while during
1994, the Company's OEM sales were approximately $2.9 million, which
represents approximately 32% of total sales.
Pro forma net income, which reflects the Company's net income had it been
taxed as a C corporation, was $851,794 in 1995 compared with $638,825 for
1994. The increase of the pro forma net income of 33.3% in 1995 occurred
despite the increase in income taxes and was, again, a result of the growth
in the Company's sales.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily with cash
flow from operations and with the proceeds from its available credit lines.
Cash flows from operating activities for the year ended December 31, 1994
aggregated $304,875, while cash required by operating activities for the year
ended December 31, 1995 aggregated $87,283. For the nine months ended
September 30, 1995 cash required by operating activities was $182,636; for
the nine months ended September 30, 1996 cash flows from operating activities
were $100,983. The negative cash flows for the year ended December 31, 1995
and for the nine months ended September 30, 1995 were primarily due to
significant increased sales in 1995 and increased inventory levels to meet
anticipated customer demand.
Cash required by investing activities, which was solely related to
additions to property and equipment, for the years ended December 31, 1994
and 1995 aggregated $39,303 and $362,102, respectively. For the nine months
ended September 30, 1995 and 1996, cash required by investing activities was
$158,111 and $84,360, respectively. The significantly higher additions to
property and equipment during the nine months ended September 30, 1995 and
the year ended December 31, 1995 coincided with the Company's move into its
current premises.
Cash required by financing activities for the year ended December 31, 1994
was $274,041; for the year ended December 31, 1995, cash flows from financing
activities were $384,627. For the nine months ended September 30, 1995, cash
flows from financing activities were $221,151, while cash required by
financing activities for the nine months ended September 30, 1996 was $5,006.
Net borrowings by the Company under its line of credit provided $647,049,
$483,573 and $340,453 for the year ended December 31, 1995 and for the nine
months ended September 30, 1995 and 1996, respectively; for the year ended
December 31, 1994, net cash repayments under the Company's line of credit
aggregated $154,286. During 1994 and 1995, the Company borrowed, in the
aggregate, $120,000 from an entity controlled by the shareholders of the
Company. Dividends, representing distributions of S-Corporation earnings,
aggregated $193,495, $308,682 and $345,459 in 1994, 1995 and 1996,
respectively.
Working capital was $3,360,185 at September 30, 1996, compared to
$3,024,704 at December 31, 1995 and $2,336,135 at December 31, 1994. Accounts
receivable were $2,585,929 at September 30, 1996, down from receivables of
$3,015,018 at December 31, 1995 and $1,579,693 at December 31, 1994. The
decrease in accounts receivable at September 30, 1996, compared to December
31, 1995 reflects
21
<PAGE>
decreased sales to a large customer which had operational and financial
problems during early 1996. The customer has since recovered and has begun to
again purchase products from the Company, but at a much lower volume than its
previous purchases. The increase in accounts receivable from 1994 to 1995
reflects increased sales activity during 1995. Inventory was $3,218,287 at
September 30, 1996, and $3,197,950 at December 31, 1995, up from inventory of
$1,871,697 at December 31, 1994. This increase was attributable to purchases
made during 1995 and 1996 to expand the Company's inventories to meet
anticipated customer demand.
The Company has a $2.5 million dollar revolving line of credit with an
institutional lender, the material terms of which are set forth below.
Borrowings under this line of credit bear interest at the rate of prime plus .5%
per annum. Available borrowings under the line are based upon specific
percentages of eligible accounts receivable and inventories. The line of credit
is secured by a lien on the Company's accounts receivable, inventory and all
other assets of the Company. As of December 31, 1996, approximately $1,450,000
million was outstanding under this credit facility. The line of credit is
guaranteed by the Company's principal shareholders. Proceeds from this Offering
will be used to pre-pay all or a significant portion of the outstanding debt
under this credit facility. See "Use of Proceeds."
In connection with its credit facility agreement, the Company is required
to comply with certain affirmative and negative covenants, including
limitations on further borrowings and dividend payments. Further, the Company
is obligated to remain in compliance with certain financial ratios during the
term of the agreement. As of December 31, 1996, the Company was in compliance
with all financial ratios under this Agreement and the Company believes that
it is currently in compliance with all other covenants of this agreement.
The Company intends to reborrow funds from its credit facility to fund its
future growth after utilizing the net funds of this Offering. See "Use of
Proceeds" and "Business--Strategy." There can be no assurance that the
Company will be in a position to borrow funds under its credit line at such
time as they are required. Additionally, the credit facility will mature on
July 26, 1997. While the Company expects that it will be able to renew the
facility, there can be no assurance that the credit facility will be renewed
or even if renewed that it can be renewed on its current terms.
Since its inception, the Company has generally foregone the distribution
of profits in an effort to grow the Company. As a result, Messrs. Stein and
Briskin, the co-founders and principal shareholders of the Company have in
the past personally paid taxes on profits that remained with the Company and
were not distributed to them. In addition, Messrs. Stein and Briskin will
personally pay taxes on undistributed profits of the Company for the period
from January 1, 1996 to the Effective Date (for which the Company will
reimburse such persons).
In order to reimburse Messrs. Stein and Briskin for the loss of tax
benefits associated with the previously taxed profits of the Company, the
Company at the Effective Date will execute two Seven Year Convertible
Subordinated Promissory Notes (the "Principal Shareholders' Notes") each in
the amount of $806,021.50 (plus additional amounts equal to 39% of the
Company's undistributed net pretax income for periods after September 30,
1996) in favor of Messrs. Stein and Briskin. The Principal Shareholders'
Notes will bear interest at a rate of one percent over the floating prime
rate charged by Citibank, N.A. The holders of the notes have the right to
convert the principal amount of the notes at any time prior to maturity into
shares of the Company's Common Stock based upon a conversion rate of $4.00
per share. In the event that the holders of the Principal Shareholders' Notes
exercise the conversion rights, the shares of Common Stock issued upon
conversion will be afforded one-time demand registration rights and certain
piggyback registration rights.
On July 15, 1996, the Company executed an Agreement and Plan of Merger
among The Americas Growth Fund, Inc., a Maryland corporation ("AGF"), and its
subsidiary AGF Merger Corporation, a Florida corporation, to effectuate a
merger between the Company and AGF. On November 8, 1996 the parties to the
Agreement and Plan of Merger entered into an agreement terminating the
proposed merger. The Company incurred certain administrative, accounting and
legal expenses, aggregating
22
<PAGE>
approximately $125,000, in connection with the proposed merger which was
expensed by the Company during the nine months ended September 30, 1996.
The Company has entered into a loan agreement with US Advantage (the sole
shareholders of which are Messrs. Stein and Briskin) in the principal amount
of $120,000. The loan is evidenced by a demand promissory note with an
interest rate of 8.5% per annum. As of December 31, 1996, $120,000 remained
outstanding under the loan with $15,007 in accrued interest. The Company
anticipates paying off this outstanding amount from available cash flow. See
"Certain Transactions."
The Company expects that its cash flow from operations, along with its
currently available bank line of credit, will be sufficient to meet its
financing requirements over the next twelve months. This is a projection,
however, and no assurance can be given that the Company's cash flow from
operations and from its available line of credit will be available to meet the
Company's cash requirements over the next twelve months. See "Risk Factors" and
"Use of Proceeds" for a discussion of certain important factors that could
materially impact this projection.
The Company's management does not believe that inflation has had a
significant effect on the Company's operations during the last several years.
The Company's management believes the Company has historically been able to
pass on increased costs of production to the price charged for its products,
however given the labor-intensive nature of its products and the fact that
the majority of its production occurs in the Far East, no assurance can be
given that the Company will continue to be able to pass on such increased
costs in the future.
23
<PAGE>
BUSINESS
GENERAL
The Company designs, manufactures, markets and distributes computer
connectivity and networking products nationally and internationally. The
Company currently offers a broad range of products to its customers,
including computer cables, connectors, installation products, data sharing
devices, and fiber optic cables, as well as a complete selection of
networking products, such as networking interface cards, hubs, transceivers,
and repeaters for different networking topologies. The Company contracts with
various manufacturers to manufacture and assemble the Company's products
using designs and manufacturing specifications (including quality control)
provided by the Company. The Company's products are manufactured from its own
designs as well as from standard industry designs. The Company also assembles
a very small percentage of its products at the Company's North Miami Beach
facility. The Company's manufacturers are located primarily in the Far East,
allowing the Company to obtain competitive pricing for its products due to
comparatively lower labor costs in the production of its products. The
Company offers its products to a broad range of both original equipment
manufacturers ("OEM") customers and retailers (such as computer superstores
and dealers, and mail order customers) in North America, Latin America,
Eastern and Western Europe, and Japan. The Company generally does not offer
its products to end users.
HISTORY OF THE COMPANY
Advanced Electronic Support Products, Inc. ("AESP") is a Florida
corporation incorporated in 1983. The Company is headquartered in North
Miami, Florida and has warehouse facilities in North Miami and South San
Francisco, California. Through AESP Computerzubehor GmbH, a German company
established in 1987 ("AESP Germany"), and Advanced Electronic Supports
Products Computertillbehor i Sweden Aktiebolag, a Swedish company established
in 1988 ("AESP Sweden"), both wholly owned by the two principals of AESP,
AESP established sales offices and warehouses in Germany and Sweden.
Until 1990, the Company primarily offered connectivity products for use
with Apple computers. In 1991, the Company expanded its product base to
include PC connectivity and general networking products. Since 1993, the
Company has experienced significant sales growth in the United States, and,
through AESP Germany and AESP Sweden, significant sales growth in Europe. In
1995, the Company began warehousing products in Germany to accommodate its
growing product line and to better service its expanding base of European
customers, including those in Eastern Europe. Immediately prior to the
Effective Date, Slav Stein and Roman Briskin (the two principals of AESP
Germany and AESP Sweden) shall contribute for no additional consideration
their interest in AESP Germany and AESP Sweden to the Company resulting in
AESP Germany and AESP Sweden becoming wholly-owned subsidiaries of the
Company. See "Certain Transactions."
THE COMPUTER CONNECTIVITY INDUSTRY AND COMPETITION
The growth of computer sales over the past five years has increased the
need for components and devices which connect computers with computer
peripherals and other computer-related equipment. Companies which currently
service this growing computer connectivity market fall into three categories:
manufacturers and distributors, retailers and catalog houses. Catalog houses
sell directly to end-users by mass mailing catalogs. Retailers sell to
end-users from retail stores. Often retailers of competitive products have
multiple locations. Manufacturers and distributors, such as the Company,
service both the retailers and catalog houses.
Due to the high volume and labor intensive nature of manufacturing
computer connectivity products, most of these products are manufactured
outside the United States in such countries as Taiwan, the Peoples' Republic
of China, Hong Kong, Malaysia and Korea.
Currently, distributors of computer connectivity products range in size,
with the largest companies reporting in the range of $50 million in annual
net sales and the smaller distributors reporting little
24
<PAGE>
more than $1-3 million in annual net sales. These small distributors
predominate the computer connectivity industry, and are largely fragmented
throughout the different sectors of the computer connectivity industry. Some
of these distributors have greater assets and possess greater financial and
personnel resources than those of the Company. With $13.7 million in gross
revenues in 1995, the Company is among the group of distributors whose annual
gross sales are between $50 million and $1-3 million. In general, the Company
has competed with its competitors by providing quality products, competitive
prices and a broad range of services. The Company seeks to adhere to this
approach in competing with its competitors in the future. In particular, the
Company plans to improve its competitive position within the industry by
expanding its product lines and developing new products, entering new markets
with competitive prices by enlarging its distribution networks, and
broadening the services it provides to its customers. See "--Strategy."
PRODUCTS AND SERVICES
The Company's products fall into four product categories: connectivity,
networking, audio/video, and accessories. Connectivity products generally
include cable assembles, adaptors, connectors, installation products, and
data-sharing devices. Connectivity products can be characterized as products
which connect a computer, for example, to other external hardware, such as a
printer. Networking products include, for example, interface cards, hubs,
transceivers, and repeaters for different networking topologies. Networking
products can be described as products which connect a computer, for example,
to another computer or to a network server. Audio/video products include
connectivity-type products for multimedia applications. Audio/video products
connect audio and video output to homes and businesses. Accessories include
tools, testers, and surge protectors. Accessories are used across all three
other product lines.
Part of the Company's success to date has resulted from expanding the
variety of the products it offers through its diversification into, and
management of, these four product categories. By diversifying among these
four product categories, the Company has expanded its product lines as well
as the total number of its products offered within those lines allowing it to
enter new markets and increase gross sales. Another important element to the
Company's success is product management which includes overseeing the
production and assembly of the Company's products as well as keeping in touch
with the types of products being produced by the industry as a whole.
The Company is constantly upgrading its product lines in an effort to meet
changing customer demand. In the first quarter of 1996, the Company produced
a new comprehensive, reference-style catalog, which includes over 1000 of the
Company's products. During the same quarter, the Company also improved the
packaging of its products. The Company is currently working with an outside
advertising agency to improve the Company's brand name recognition.
In addition to offering a large variety of products, the Company also
offers numerous services to its customers. These services include, but are
not limited to: stock rotation (where the customer can return unsold products
for credit towards purchases of new products); price protection (where the
customer is entitled to receive a lower price if another customer receives a
lower price on the same product); enhanced packaging; custom packaging;
technical and design support (where the customer receives advise from the
Company on which product or design specification is appropriate for a
particular situation); assembly support (where customers rely on the Company
to assemble the component parts the customer traditionally had done itself);
training (where the customer receives training from the Company on the
different capabilities and applications of the Company's products); extended
warranties; merchandising/display programs and quality control. These
value-added services assist the Company's customers, providing what the
Company believes is a competitive advantage.
MANUFACTURING AND SUPPLIERS
All of the Company's products are manufactured according to the Company's
design specifications. Specifically, those specifications are derived from
the Company's designs or from standard industry
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designs, which the Company also employs. Products which the Company designs
are custom designs where often the customer provides the specifications
(usually with the Company's assistance). OEM products are generally custom
designed. The Company also provides products, such as bulk cable products,
from standard industry designs where the Company is, for the most part, not
involved in the design process. Retail products are generally derived from
standard industry designs. The Company contracts with suppliers to
manufacture its products using one of two methods. With the first method, the
Company works with a primary manufacturer (a/k/a an assembler) in directing
this manufacturer to various other manufacturers (with whom the Company also
works) in order to obtain the numerous component parts which the primary
manufacturer uses in assembling a particular product or product line. With
the second method, the Company works solely with a primary manufacturer of a
product or product line and does not assist that manufacturer in identifying
the various other manufacturers (a/k/a suppliers) for its component parts.
Under either method, the primary manufacturer is responsible for assembling
the product, which assembly procedure following the Company's specifications
is generally uniform throughout the various primary manufacturers for each
product. For example, the assembly of molded cables consists of several
uniform procedures which can be summarized as follows: (a) the cable is
prepared by cutting, removing the PVC jacket and stripping the connectors,
(b) the connectors on either end of the cable are then soldered to their
respective connector type, (c) the soldered connectors are then molded using
injection molding, (d) a shield is then placed on top of the first mold, (e)
a final mold is then applied along with a shield foil protecting the
connectors, and (f) the cable is packaged and shipped. For a description of
the Company's quality control procedures, see "--Quality Control" below. The
above process can be modified depending upon the Company's final product
specifications and requirements.
The manufacturers used by the Company are located mainly in Taiwan, Korea
and the Peoples Republic of China, although the Company also uses
manufacturers in Europe and the United States.
For the production of each specific type of retail product, the Company
usually maintains an on-going relationship with several suppliers to guard
against the possibility of problems with one supplier adversely impacting the
Company's business. For the production of OEM products, the Company usually
uses a single supplier for each product, with other factories providing
competitive price quotes and being available to supply the same OEM product
if a primary supplier fails to produce for reasons outside the Company's
control. In an effort to produce defect-free products and maintain good
working relationships with its suppliers, the Company keeps in contact with
its suppliers, often inspecting the manufacturing facilities of the suppliers
and implementing quality assurance programs in the supplier's factories. See
"--Quality Control."
Over the last five years, the Company has significantly expanded its supplier
base. Presently, the Company works with approximately 35 suppliers both in and
outside the United States. The Company has one supplier (Kaicap Investments,
Ltd. located in Hong Kong) supplied approximately 10 percent of the Company's
net sales during 1995. No other source of supply accounted for more than 10
percent of the Company's net sales, and other than purchase orders, the Company
does not enter into supply or requirements contracts with its suppliers. The
Company believes that purchase orders, as opposed to supply or requirement
agreements, provide the Company with more flexibility in responding to customer
demand.
QUALITY CONTROL
The goal of the Company's quality control program is to provide the
Company's customers with defect-free products. Working with its primary
manufacturers and often with the manufacturers of the component parts, the
Company has instituted quality control measures at five stages throughout the
manufacturing process. At the first stage, the Company works with its primary
manufacturers to institute a general quality control check upon the entry of
the various component parts into the primary manufacturers' factory. At the
second stage, the primary manufacturer checks to ensure that the contacts
which are being fitted with connectors function properly. The third and
fourth stages of quality control occur after each molding process, with the
final product being subject to quality control upon
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shipment to the Company. The fifth and final stage of quality control occurs
at one of the Company's distribution warehouses (North Miami, San Francisco,
Germany and Sweden). At this final stage of quality control, the Company tests a
certain percentage of each shipment of the products it receives to ensure the
products meet the Company's quality standards. The Company is currently working
with its suppliers and aims to have approximately 80% of its suppliers with the
"ISO 9000" approval by the end of calendar year 1997. The ISO 9000 is an
international manufacturing standard which is becoming more prevalent across
numerous industries. Almost all of the Company's current suppliers are in the
process of implementing ISO 9000 procedures.
DISTRIBUTION
OEM sales are generally handled by salespersons located in the Company's
headquarters in North Miami, Florida, with an additional warehouse in the San
Francisco area to improve delivery times from the Pacific rim. OEM customers
located in the Western half of the United States receive their product
directly from the Company's South San Francisco warehouse, while customers
located in the Eastern half of the United States receive their shipments from
the North Miami warehouse. Retail sales are generally handled from the
Company's headquarters in North Miami, Florida and from the German and
Swedish offices and warehouses. Quality assurance points are located at all
warehouse locations. The Company also maintains a limited production facility
in North Miami for small OEM and custom cable orders.
CUSTOMER BASE
The Company's customer base is divided into two categories: OEM and
retail. OEM customers are manufacturers of computer-related equipment which
use the Company's products as part of their finished products. Retail
customers are local and regional resellers, value-added resellers and
distributors, educational institutions and catalog houses. Catalog houses
constitute a large share of the Company's domestic retail sales and also
represent the most potential in the Company's efforts to expand its retail
customer base. The retail mass merchandising market also represent a
significant growth area for the Company. The Company does not sell directly
to end-users. Two of the Company's largest customers, Boca Research and
Cyquest (who are both OEM customers), accounted for approximately 16.5
percent and 12 percent, respectively, of the Company's net sales for the year
ended 1995 and one of those customers, Boca Research, accounted for
approximately 14 percent of the Company's net sales for the nine months ended
September 30, 1996. No other customer of the Company accounted for more than
10 percent of the Company's net sales for those same periods. The Company's
top 10 customers accounted for approximately 59 percent of the Company's net
sales for the year ended 1995 and approximately 44 percent of the Company's
net sales for the nine months ended September 30, 1996. The reduction in net
sales attributable to the Company's top ten customers reflects the Company's
attempts to diversify its customer base and reduce dependence on any one set
of customers. This effort to diversify goes hand in hand with the Company's
efforts to increase sales.
MARKETING AND SALES
The Company's marketing and sales efforts are directed by the Sales and
Marketing Department. See "--Corporate Organization and Distribution." The
marketing group is responsible for, among other things, publishing the
Company's catalogs for each product line as well as the general Company
catalog, assisting the sales group (described below) in preparing for sales
shows, advertising the Company's products in industry publications, working
with mail-order catalogs to prepare advertising space in such catalogs, and
providing designs for packaging the Company's products. The sales group is
responsible for, among other things, contacting potential customers with
information and prices for the Company's products, following leads from trade
shows, providing customer support and visiting customers on a regular basis.
As discussed in the "Products" section above, the Sales and Marketing
Department is currently working with an outside advertising agency to improve
the Company's name brand recognition. For a discussion of potential new
markets for the Company and how the Company anticipates entering such
markets, see "--Strategy" below.
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<PAGE>
STRATEGY
The Company's goals are to continue the growth which it has experienced since
January 1990, and to become a leader and achieve brand recognition in the
computer connectivity and networking industry. In order to achieve these two
goals, the Company's strategy is to increase its retail and OEM customer base
through internal growth and through growth by acquisition.
The Company plans to increase its operating revenues and income by
increasing its retail and OEM customer base in existing markets and expanding
into new markets. In order to increase its national and international retail
customer base, the Company intends to continue to increase its marketing with
large catalog companies and to increase its product line and the size of its
inventory as well as continue to expand its sales and marketing efforts by
opening additional sales offices in Eastern and Western Europe and in Latin
America. In an effort to expand its OEM customer base, the Company intends to
seek to offer its products not only to OEM computer product manufacturers,
but also to the manufacturers' in the medical, appliance, telecommunications,
and cable TV industries.
Another element of the Company's strategy to achieve its goals, is to grow
by the acquisition of other companies, assets, and/or product lines that
would compliment or expand the Company's existing business. The Company
believes that there are many small distributors which would be interested in
consolidating with the Company, allowing the Company to grow significantly.
In general, the Company would look for companies and/or product lines with
new designs, new technology, and advanced products, preferably in the high
technology industries. In particular, the Company would be interested in
companies and/or product lines in the telecommunications, cable audio/video,
and computer markets. The Company believes that acquisitions will enable it
to leverage its current level of operations and accelerate growth. The
Company has no present understanding, agreement or arrangement with respect
to any such material acquisition.
As part of the Company's strategy to increase its retail and OEM customer
base, the Company shall seek to continue to maintain the quality of its
products as the volume of products manufactured by the Company increases. To
this end the Company will continue to implement the international
manufacturing standard ISO 9000 throughout the manufacturing and assembly
process of its products. See "--Quality Control." The acquisitions of
companies and/or inventories as set forth above are expected to be funded in
part by borrowings under the Company's revolving credit facility and from the
proceeds of this Offering. See "Use of Proceeds."
CORPORATE ORGANIZATION
The Company is divided into five departments: (1) The Sales and Marketing
Department, (2) the International Sales Department (including affiliated
offices in Sweden and Germany), (3) the Purchasing Department, (4) the
Operations Department (including the MIS, shipping, warehouse and quality
control and production groups), and (5) the Accounting Department. The Sales
and Marketing Department covers sales in Latin America, the United States and
Canada. Account Managers and Customer Service Representatives service this
department from the North Miami headquarters. The International Sales
Department covers sales in Eastern and Western Europe, with offices in Sweden
and Germany servicing the European sector, and exclusive distributors in the
Ukraine and Russia handling East European customers.
The Sales and Marketing Department also includes product management,
graphic arts and technical support services. The International Sales
Department also receives support from the Sales and Marketing Department.
EMPLOYEES
As of December 31, 1996, the Company employed 62 people at the following
locations: Miami office--45; AESP Sweden--seven; and AESP Germany--ten.
Company wide--11 employees work in
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administration/accounting, three employees work in purchasing, 27 employees
work in sales and marketing, and 21 work in the Operations Department. None
of the Company employees is covered by collective bargaining agreements. The
Company believes that its relationship with its employees is good.
PROPERTIES
The Company's executive offices are located in North Miami, Florida. All
of the Company's properties are maintained on a regular basis and are
adequate for the Company's present requirements. The Company may, in the
future, consolidate its inventory into a single warehouse facility, if it is
cost effective to do so and if required to support the Company's growth.
The following table identifies the principal properties utilized by the
Company. All properties are leased. RSB Holdings, Inc., a related party, owns
the corporate headquarters, product assembly and central warehouse, and
leases such properties to the Company. See "Certain Transactions."
APPROXIMATE
FACILITY DESCRIPTION LOCATION SQUARE FOOTAGE
- -------------------- -------- --------------
Corporate Headquarters, Product Assembly
and Central Warehouse ................. North Miami, FL 10,000
Warehouse ............................... North Miami, FL 20,000
Warehouse ............................... San Francisco, CA 5,000
Sales Office and Warehouse .............. Tierp, Sweden 5,000
Sales Office and Warehouse .............. Sulzemoos, Germany 5,000
Bonded Warehouse ........................ Sulzemoos, Germany 6,000
LEGAL PROCEEDINGS
As of the Effective Date, there are no material legal proceedings to which
the Company is a party.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages are as
follows:
NAME AGE POSITION
- ---- --- --------
Slav Stein 52 President and a Director
Roman Briskin 47 Vice President, Secretary, Treasurer and a Director
Terrence R. Daidone 37 Director
The principal occupations for the past five years of each of the directors
and executive officers of the Company are as follows:
Mr. Stein has served as President and Director of the Company since
January 1992. Prior to January 1992, Mr. Stein had served as Executive Vice
President, General Manager and Director of the Company. Mr. Stein was a
co-founder of the Company and has been employed by the Company since its
formation. Mr. Stein is also a director and executive officer of RSB
Holdings, Inc., a Florida corporation, since September 1994, Planet
Corporation, a Florida corporation, since September 1991, and US Advantage
Corporation, a Florida corporation, since October 1994. See "Certain
Transactions."
Mr. Briskin has served as Vice President, Secretary, Treasurer and
Director of the Company since January 1992. Prior to January 1992, Mr.
Briskin had served as Secretary and Treasurer of the Company. Mr. Briskin
joined the Company in 1984. Mr. Briskin is also a director and executive
officer of RSB Holdings, Inc., a Florida corporation, since September 1994,
Planet Corporation, a Florida corporation, since September 1991, and US
Advantage Corporation, a Florida corporation, since October 1994. See
"Certain Transactions."
Mr. Daidone has served as Director of the Company since January 1997.
Since 1996, Mr. Daidone has served as Vice President of Sales and Marketing
with Fugate and Associates, Inc./ERS Imaging Supplies, Inc., a Pennsylvania
corporation. From 1993 to 1996, Mr. Daidone served as Director of Mass
Merchant Operations with Nashua Corporation, a Delaware corporation. Prior to
that, Mr. Daidone served as President of Nashua Cartridge Products, Inc., a
Delaware corporation and a subsidiary of Nashua Corporation.
KEY EMPLOYEES
Kevin Brin has served as the Company's Audio/Video Marketing Manager since
June 1996. Prior to joining the Company, Mr. Brin worked as the National
Sales Manager for Viewsonics Corporation in Boca Raton, Florida for a year
and a half, and previously was President of EECO Electronics, Ltd. in New
York for more than eight years.
Daniel Cohen has served as the Company's Purchasing Manager since early
1996. Prior to joining the Company, Mr. Cohen worked as Director of
Operations for Arrow Industries, Inc. in Miami, Florida for several years.
Tom Collentine has served as OEM Sales Manager since November 1996. Mr.
Collentine worked with America II Electronics, Inc. in St. Petersburg,
Florida for four years prior to joining the Company.
Don Lacertosa, who is the Company's Marketing Manager, has been with the
Company since early 1994. Prior to joining the Company, Mr. Lacertosa was
Product Manager for two years for a computer-related firm in New Jersey.
Steven Meistle has served as the Company's Controller since May 1993.
Prior to joining the Company, Mr. Meistle was a consultant on accounting
matters for several years.
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Donald Oldag has served as the Company's Retail and Sales Manager since
early 1995. Prior to joining the Company, Mr. Oldag was National Sales
Manager for Mico Connectors Co. in California. Adrian Peschl has served as
the Company's Director of Operations since mid-1994. Prior to joining the
Company, Mr. Peschl was Engineering Manager for Casi Rusco, Inc. in Boca
Raton, Florida.
ADDITIONAL DIRECTORS
The Company intends to add several additional members to its Board of
Directors at least two of whom (including Mr. Daidone) are expected to be
independent of management. The Company intends to seek as members of the
Board of Directors persons knowledgeable in the computer connectivity and
networking industry or in the distribution business generally, and persons
with experience with companies achieving significant growth.
COMMITTEES OF THE BOARD
The Company has established an Audit Committee and a Nominating and
Compensation Committee. The Audit Committee recommends the independent
accountants appointed by the Board of Directors to audit the financial
statements of the Company, which includes an inspection of the books and
accounts of the Company, and reviews with such accountants the scope of their
audit and their report thereon, including any questions and recommendations
that may arise relating to such audit and report of the Company's internal
accounting and auditing procedures.
The Nominating and Compensation Committee reviews and approves the
compensation of executive officers, evaluates possible director nominees and
makes recommendations concerning such nominees to the Board of Directors and
recommends to the Chairman and the Board the composition of the Board
committees and nominees for officers of the Company.
DIRECTOR COMPENSATION
Two of the three current members of the Board of Directors receive salaries
from the Company in their capacities as executive officers of the Company and
will receive no additional compensation for serving as directors of the Company.
The third director is a non-employee director and will initially receive for his
services as a director options to purchase (at the public offering price) 3,000
shares of Common Stock. These options have been granted under the Company's 1996
Stock Option Plan. The Company anticipates that non-employee directors will
generally be paid fees for attending Board meetings and may receive grants of
stock options.
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SUMMARY COMPENSATION TABLE
The following table shows remuneration paid or accrued by the Company
during the year ended December 31, 1995 and for each of the two preceding
years, to the President and Vice President, the most highly compensated
executive officers of the Company, for services in all capacities while they
were employees of the Company:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS
-------------------------
RESTRICTED
SALARY BONUS STOCK OPTION/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) AWARDS SARS(#) PAYMENTS COMPENSATION(1)
- --------------------------- ---- ------ ------ ---------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Slav Stein ................. 1995 $90,000 -- -- -- -- --
1994 $75,000 -- -- -- -- --
1993 $60,000 -- -- -- -- --
Roman Briskin .............. 1995 $90,000 -- -- -- -- --
1994 $75,000 -- -- -- -- --
1993 $60,000 -- -- -- -- --
</TABLE>
- ----------
(1) Does not include compensation paid to the executive to cover withholding
taxes incurred as a result of the Company's status as an S corporation.
No long-term compensation awards were made to management during the three
years ended December 31, 1995. During 1996, Messrs. Stein and Briskin each
received the Principal Shareholders' Options, allowing them each to purchase
280,250 shares of Common Stock (560,500 shares in the aggregate) at the
initial public offering price of the Common Stock. The Principal Shareholders
options have a ten year term, are intended to qualify as incentive stock
options under the Internal Revenue Code (the "Code") and have certain piggy
back and demand registration rights.
The holders of the Principal Shareholders' Options have agreed to a
lock-up of the sale of any of their shares in the open market without the
consent of the Underwriters for a two year period. See"Underwriting." Subject
to this lockup, the Principal Shareholders' Options are divided into two
categories (i) options to purchase 100,000 shares of Common Stock held by
each of Messrs Stein and Briskin (200,000 options in the aggregate) are
exercisable at any time without any conditions and (ii) options to purchase
180,250 shares of Common Stock (the "Contingent Options") held by each of
Messrs. Stein and Briskin (360,500 options in the aggregate) are exercisable
only upon the satisfaction of certain contingencies.
The Contingent Options enable Messrs. Stein and Briskin to acquire up to an
aggregate of 360,500 shares of Common Stock subject to certain performance
contingencies set forth below. Nonetheless, regardless of the Company's
performance, all of the Contingent Options will vest and become fully
exercisable seven years after their date of grant, with provisions for earlier
vesting. Earlier vesting of the exercise of the Contingent Options is contingent
upon the Company achieving either a specified earnings per share level or a
specified stock price level (the "Performance Threshold"), for the corresponding
fiscal year-end. Commencing with fiscal year-ended December 31, 1997, and at
each of the four fiscal year ends thereafter, 72,100 of such options will become
exercisable (i) if the Company achieves earnings per share of $.50, $.60, $.72,
$.86 and $1.04 for the fiscal years ended December 31, 1997, 1998, 1999, 2000
and 2001, respectively (or cumulative earnings per share of $.50, $1.10, $1.82,
$2.68 and $3.72, respectively) (ii) if the closing bid price of the Company's
Common on any 20 consecutive trading days during such fiscal year is $7.20,
$8.64, $10.37, $12.44 and $14.93, respectively or (iii) the Company has net
income of $1.0 million, $1.2 million, $1.440 million, $1.728 million and $2.074
million, respectively (or cumulative net income of $1.0 million, $2.2 million,
$3.64 million, $5.368 million and $7.442 million, respectively). For any fiscal
year after January 31, 1997 in which the Company attains the foregoing earnings
per share, stock price or cumulative net income targets, any options eligible
for vesting in prior years which were not vested and exercisable because the
targets for such fiscal years were not achieved, shall become exercisable. In
addition, for any fiscal year in which the
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Company attains the earnings per share, stock price or cumulative net income
targets applicable to a subsequent fiscal year, all options eligible for vesting
in such subsequent fiscal year shall vest and become exercisable. If any of the
Warrants are exercised, the options shall vest and become exercisable pro rata
(based on the number of Warrants exercised) to the extent not already vested in
accordance with the foregoing.
EMPLOYMENT AGREEMENTS
At the Effective Date, Messrs. Stein and Briskin will each enter into an
employment agreement with the Company. The term of such employment agreements
will (subject to earlier termination for cause) be for an initial period of
five years and will thereafter continue for successive one year terms unless
canceled by either party. During the term of such employment agreements,
Messrs. Stein and Briskin will each receive a salary of $150,000 per year,
which salary will increase annually by 10 percent of the prior year's salary
plus the increase in the consumer price index, which annual increase may not,
in any event, exceed 20 percent of the prior year's salary. In addition,
Messrs. Stein and Briskin will each be entitled to receive an annual bonus
equal to five percent of the Company's pre-tax net income in each fiscal
year. The Company will provide each of Messrs. Stein and Briskin with an
automobile allowance of $500 per month and a term life insurance policy in
the amount of $1,000,000.
For purposes of the employment agreements, a change in control is defined
as an event that: (i) would be required to be reported in response to Item
6(e) of Schedule 14(a) of Regulation 14A under the Exchange Act; or (ii)
causes a person other than Messrs. Stein and Briskin to beneficially own more
than 30 percent of the Company's outstanding securities. In the event that
during the term of such employment agreements there is a change of control of
the Company which has not been approved by the Company's Board of Directors,
Messrs. Stein and Briskin will have the option to terminate their employment
with the Company within three months of the change of control and receive a
lump sum payment of $750,000 each. In such event, all previously granted
stock options would become automatically vested. If the Board of Directors
approves a change of control, Messrs. Stein and Briskin may terminate their
employment, but would only be entitled to receive a payment equal to the
prior year's annual salary and to become automatically vested in a portion of
their stock option equal to their percentage completion of the term of their
employment agreement. As part of such employment agreements, each of Messrs.
Stein and Briskin will agree not to compete against the Company for a
12-month period following the termination of his employment with the Company
for any reason other than a change in control without the approval of the
Board of Directors.
STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option Plan (the "1996 Plan").
Pursuant to the 1996 Plan options to acquire a maximum of 265,000 shares of
Common Stock may be granted to directors, executive officers, employees
(including employees who are directors), independent contractors and
consultants of the Company. Options to purchase 3,000 shares have been granted
under the 1996 Plan.
The 1996 Plan is administered by the Nominating and Compensation Committee
of the Board of Directors. The Nominating and Compensation Committee
determines which persons will receive options and the number of options to be
granted to such persons. The Nominating and Compensation Committee also
interprets the provisions of the 1996 Plan and makes all other determinations
that it may deem necessary or advisable for the administration of the 1996
Plan.
Pursuant to the 1996 Plan, the Company may grant ISOs (Incentive Stock
Options) and NQSOs (Non-Qualified Stock Options). The price at which the
Company's Common Stock may be purchased upon the exercise of options granted
under the 1996 Plan are required to be at least equal to the per share fair
market value of the Common Stock on the date particular options are granted.
Options granted under the 1996 Plan may have maximum terms of not more than
10 years and are not transferable, except by will or the laws of descent and
distribution. None of the ISOs under the 1996 Plan may be granted to an
individual owning more than 10 percent of the total combined voting power
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<PAGE>
of all classes of stock issued by the Company unless the purchase price of
the Common Stock under such option is at least 110 percent of the fair market
value of the shares issuable on exercise of the option determined as of the date
the option is granted, and such option is not exercisable more than five years
after the grant date.
Generally, options granted under the 1996 Plan may remain outstanding and
may be exercised at any time up to three months after the person to whom such
options were granted is no longer employed or retained by the Company or
serving on the Company's Board of Directors. Notwithstanding the foregoing,
the Company may not grant options in excess of 15% of the outstanding Common
Stock for a period of 1 year from the Effective Date.
Pursuant to the 1996 Plan, unless otherwise determined by the Nominating
and Compensation Committee, one-third of the options granted to an individual
are exercisable upon grant, one-third are exercisable on the first
anniversary of such grant and the final one-third are exercisable on the
second anniversary of such grant. However, options granted under the 1996
Plan shall become immediately exercisable if the holder of such options is
terminated by the Company or is no longer a director of the Company, as the
case may be, subsequent to certain events which are deemed to be a "change in
control" of the Company. A "change in control" of the Company generally is
deemed to occur when (i) any person becomes the beneficial owner of or
acquires voting control with respect to more than 20 percent of the Common
Stock (or 35 percent if such person is a holder of Common Stock on the
Effective Date) (ii) a change occurs in the composition of a majority of the
Company's Board of Directors during a two-year period, provided that a change
with respect to a member of the Company's Board of Directors shall be deemed
not to have occurred if the appointment of a member of the Company's Board of
Directors is approved by a vote of at least 75 percent of the individuals who
constitute the then existing Board of Directors; or (iii) the Company's
stockholders approve the sale of all of the Company's assets.
ISOs granted under the 1996 Plan are subject to the restriction that the
aggregate fair market value (determined as of the date of grant) of options
which first become exercisable in any calendar year cannot exceed $100,000.
The 1996 Plan provides for appropriate adjustments in the number and type
of shares covered by the 1996 Plan and options granted thereunder in the
event of any reorganization, merger, recapitalization or certain other
transactions involving the Company.
CONSULTING AGREEMENT WITH TIMOTHY MAHONEY
Timothy E. Mahoney has served as a consultant to the Company since January
1996. The Company has entered into a Consulting Agreement with Mr. Mahoney
whereby the Company has agreed to compensate Mr. Mahoney for his services to
the Company. The term of such Consulting Agreement has recently been amended
to provide for a period of one year, effective January 1, 1997. Mr. Mahoney
will be responsible for performing such consulting and advisory services
pertaining to the Company's business as the Company shall from time to time
request including, without limitation, the development of the Company's OEM
and retail business, development of a strategy to increase revenue and brand
awareness among customers, personnel recruitment, identification of potential
acquisition targets, and introductions to potential customers. As
consideration for the performance of such services, Mr. Mahoney will be paid
$16,300 per month during the term of his Consulting Agreement. He has also
been granted seven-year options to purchase 23,000 shares of Common Stock
exercisable at $4.00 per share and 40,000 shares of Common Stock exercisable
at $6.00 per share (collectively, the "Mahoney Options"). The Mahoney Options
are presently exercisable.
INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation and By-laws, officers
and directors of the Company shall be indemnified by the Company to the
fullest extent allowed under Florida law for
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claims brought against them in their capacities as officers and directors.
Indemnification is allowed if the officer or director acts in good faith and, in
the case of conduct in his official capacity, in a manner reasonably believed to
be in the best interests of the Company, or in all other cases, with a
reasonable belief that his conduct was at least not opposed to the Company's
best interests. In the case of criminal proceedings, an officer or director
should have no reasonable cause to believe his conduct was unlawful.
Accordingly, it is possible that indemnification may occur for liabilities
arising under the Securities Act. The Underwriting Agreement also contains
provisions under which the Company and the Underwriters have agreed to indemnify
each other (including officers and directors) against certain liabilities under
the Securities Act. See "Underwriting." Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions or otherwise, the Company has been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
As of July 15, 1996, the Company entered into a five year lease with RSB
Holdings, Inc., a Florida corporation ("RSB Holdings"), pursuant to which the
Company leases its corporate headquarters and warehouse in North Miami,
Florida. The Company makes annual payments under such lease in the amount of
approximately $43,200. Messrs. Stein and Briskin each own 50 percent of the
issued and outstanding common stock of RSB Holdings, and are its sole
officers and directors. See "Business--Properties."
Immediately prior to the Effective Date, Messrs. Stein and Briskin, who
currently own all of the outstanding stock of AESP Germany and AESP Sweden
will contribute their interests in said corporations immediately prior to the
Effective Date, to the Company for no additional consideration. See
"Business--History of the Company."
The Company will issue two Principal Shareholders' Notes, each in the
amount of $806,021.50 (plus additional amounts equal to 39 percent of the
Company's net pretax income for periods after September 30, 1996). The
Principal Shareholders' Notes will bear interest at a rate of one (1) percent
over the prime rate payable monthly. Principal and accrued but unpaid
interest will be due seven (7) years from the Effective Date. The Principal
Shareholders' Notes will be convertible into Common Stock of the Company at a
conversion price of $4.00 per share. The Principal Shareholders' Notes will
be also subordinate to all institutional senior debt of the Company.
The Company sells certain of its computer connectivity products to Planet
Corporation, a Florida corporation ("Planet Corporation"), of which Messrs.
Stein and Briskin each own 25 percent of the issued and outstanding capital
stock. Planet Corporation sells the products it purchases from the Company
outside the United States to unaffiliated third parties in Russia and the
Ukraine, on terms which in general were no more or less favorable than those
terms offered to third parties. The Company sold approximately $170,000 of
products to Planet Corporation in 1995, and for the nine months ended
September 30, 1996, have not sold any of its products to Planet Corporation.
US Advantage Corporation, a Florida corporation ("US Advantage") loaned to
the Company pursuant to a Demand Promissory Note $120,000 in July 1995 at an
interest rate of 8.5 percent. The loan amount may be prepaid at any time
prior to maturity without penalty. As of December 31, 1996, $120,000 remains
outstanding; $15,007 in interest had accrued under the note. Messrs. Stein
and Briskin each own 50 percent of the issued and outstanding capital stock
of US Advantage.
The Company believes that all the foregoing related-party transactions
were on terms no less favorable to the Company than could reasonably be
obtained from unaffiliated third parties. All future transactions with
affiliates will be approved by a majority of disinterested directors of the
Company and on terms no less favorable to Company than those that are
generally available from unaffiliated third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock (including shares subject
to options) as of the date of this Prospectus, and as adjusted to reflect the
sale of the shares of Common Stock offered by this Prospectus, by (a) each of
the Company's directors, (b) all executive officers and directors of the
Company as a group, and (c) all persons known by the Company to beneficially
own 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
------------------------ ---------------------
NAME OF BENEFICIAL OWNER(2) SHARES PERCENT SHARES PERCENT
- --------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Slav Stein .......................... 682,755 49.89% 682,755 31.5%
Roman Briskin........................ 682,755 49.89% 682,755 31.5%
Terry Daidone(3)..................... 3,000 .22% 3,000 .1%
All directors and executive officers
as a group (2 persons) ............ 1,368,510 100% 1,368,510 63.1%
</TABLE>
(1) Includes (i) 353,010 shares of Common Stock issuable upon the conversion
of the Principal Shareholders' Notes (at September 30, 1996 and after the
prepayment thereof to be made from the proceeds of this Offering), and
(ii) 200,000 shares of Common Stock issuable upon the exercise of that
portion of the Principal Shareholders' Options which is already
exercisable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Financial Condition, Liquidity and
Capital Resources" and "Certain Transactions." Excludes 360,500 shares of
Common Stock issuable upon the exercise of the Contingent Options, which
options are not presently vested.
(2) Each person named in the table has the sole voting and investment power
with respect to the shares beneficially owned. The address for each named
person is c/o the Company.
(3) Presently exercisable stock options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital consists of 20,000,000 shares of Common
Stock, par value $.001 per share, and 1,000,000 shares of preferred stock,
par value $.001 per share (the "Preferred Stock"). None of the Preferred
Stock is outstanding.
COMMON STOCK
The Company has 20,000,000 shares of authorized Common Stock, par value
$.001 per share, of which 812,500 shares are issued and outstanding
(1,612,500 shares after completion of this Offering). Each outstanding share
of Common Stock is entitled to one vote, either in person or by proxy, on all
matters that may be voted upon by the owners thereof at meetings of the
shareholders.
The holders of Common Stock (i) have equal ratable rights to dividends
from funds legally available therefor, when, as and if declared by the Board
of Directors of the Company, (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company,
(iii) do not have preemptive, subscription or conversion rights, or
redemption or sinking fund provisions applicable thereto, and (iv) are
entitled to one non-cumulative vote per share on all matters on which
shareholders may vote at all meetings of shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any series of preferred stock that may be issued
in the future, including voting, dividend, and liquidation rights.
The holders of shares of Common Stock of the Company do not have
cumulative voting rights, which means that the holders of more than 50% of
such outstanding shares, voting for the election of directors, can elect all
of the directors of the Company if they so choose and, in such event, the
holders of the remaining shares will not be able to elect any of the
Company's directors.
WARRANTS
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $6.90 per share for a period of four years
commencing on the first anniversary of the effective date of this Offering (the
"First Exercise Date"). Each Warrant is redeemable by the Company at a
redemption price of $0.01 per Warrant, at any time after the First Exercise
Date, upon thirty days' prior written notice to the holders thereof, if the
average closing bid price of the Common Stock, as reported on the principal
exchange on which the Common Stock is traded, equals or exceeds $10.50 per share
of Common Stock for twenty consecutive trading days ending three days prior to
the date of the notice of redemption. Pursuant to applicable federal and state
securities laws, in the event a current prospectus is not available, the
Warrants may not be exercised by the holders thereof and the Company will be
precluded from redeeming the Warrants. There can be no assurances that the
Company will not be prevented by financial or other considerations from
maintaining a current prospectus. Any Warrant holder who does not exercise prior
to the redemption date, as set forth in the Company's notice of redemption, will
forfeit the right to purchase the Common Stock underlying the Warrants, and
after the redemption date or upon conclusion of the exercise period any
outstanding Warrants will become void and be of no further force or effect,
unless extended by the Board of Directors of the Company. See "Underwriting."
The number of shares of Common Stock that may be purchased is subject to
adjustment upon the occurrence of certain events including a dividend
distribution to the Company's shareholders, or a subdivision, combination or
reclassification of the outstanding shares of Common Stock.
The Company may at any time, and from time to time, extend the exercise
period of the Warrants, provided that written notice of such extension is
given to the Warrant holders prior to the expiration of the date then in
effect. Also, the Company may reduce the exercise price of the Warrants for
limited periods or through the end of the exercise period in accordance with
the terms of the Company's
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<PAGE>
warrant agreement with the Transfer Agent if deemed appropriate by the Board
of Directors. Any extension of the term and/or reduction of the exercise price
of the Warrants may be subject to compliance with Rule 13e-4 under the Exchange
Act including the filing of a Schedule 13E-4. Notice of any extension of the
exercise period and/or reduction of the exercise price will be given to the
Warrant holders. The Company does not presently contemplate any extension of the
exercise period nor does it contemplate any reduction in the exercise price of
the Warrants. Factors which the Board of Directors may consider in taking such
action include the current market conditions, the price of the Common Stock and
the Company's need for additional capital.
OPTIONS AND CONVERTIBLE SECURITIES PRESENTLY OUTSTANDING
Upon the Effective Date, the following options and convertible securities
will be outstanding: (i) options to purchase an aggregate 63,000 shares of
Common Stock held by a consultant to the Company; (ii) options to purchase an
aggregate of 560,500 shares of Common Stock held by the Company's principal
shareholders; (iii) options to purchase 3,000 shares of Common Stock held by a
non-employee director of the Company, and (iv) an aggregate of 353,010 shares of
Common Stock (based upon the principal amount of the note after payment of a
part thereof from the proceeds of the Offering as of September 30, 1996)
issuable upon the conversion of the Principal Shareholders' Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources," "Management,"
"Certain Transactions" and "Principal Shareholders."
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 1,000,000
shares of Preferred Stock, $.001 par value, none of which is issued and
outstanding, in one or more series and to fix, by resolution, conditional,
full, limited or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights, if any, and the
qualifications, limitations or restrictions thereof, if any, including the
number of shares in such series (which the Board may increase or decrease as
permitted by Florida law), liquidation preferences, dividend rates,
conversion or exchange rights, redemption provisions of the shares
constituting any series, and such other special rights and protective
provisions with respect to any class or series as the Board may deem
advisable without any further vote or action by the shareholders. Any shares
of Preferred Stock so issued would have priority over the Common Stock with
respect to dividend or liquidation rights or both and could have voting and
other rights of shareholders. The issuance of Preferred Stock with voting or
conversion rights may adversely affect the voting rights of the holders of
Common Stock. The Company has no present plans to issue shares of Preferred
Stock.
CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS
GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of
corporate governance and the rights of shareholders. Certain of these
provisions, as well as the ability of the Board of Directors to issue shares
of Preferred Stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain shareholders may deem to be in their best interests).
To the extent takeover attempts are discouraged, temporary fluctuations in
the market price of the Common Stock, which may result from actual or rumored
takeover attempts, may be inhibited. These provisions, together with the
ability of the Board to issue Preferred Stock without further shareholder
action, also could delay or frustrate the removal of incumbent Directors or
the assumption of control by shareholders, even if such removal or assumption
would be beneficial to shareholders of the Company. These provisions also
could discourage or make more difficult a merger, tender offer or proxy
contest, even if they could be favorable to the interests of shareholders,
and could potentially depress the market price of the Common Stock. The Board
of Directors believes that these provisions are appropriate to protect the
interests of the Company and all of its shareholders.
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<PAGE>
MEETINGS OF SHAREHOLDERS. The Bylaws provide that a special meeting of
shareholders may be called by the Board of Directors or the holders of not less
than 10% of the outstanding Common Stock entitled to vote at such a meeting
unless otherwise required by law. The Company's Bylaws provide that only those
matters set forth in the notice of the special meeting may be considered or
acted upon at that special meeting, unless otherwise provided by law. In
addition, the Bylaws set forth certain advance notice and informational
requirements and time limitations on any director nomination or any new business
which a shareholder wishes to propose for consideration at an annual meeting of
shareholders.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT. The Articles provide that any
action required or permitted to be taken by the shareholders of the Company
at an annual or special meeting of shareholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
shareholders in lieu thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Bylaws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Florida law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Bylaws also provide
that the right of directors and officers to indemnification shall be a contract
right and shall not be exclusive of any other right possessed or hereafter
acquired under any bylaw, agreement, vote of shareholders or otherwise. The
Articles contain a provision permitted by Florida law that generally eliminates
the personal liability of directors for monetary damages unless the director has
breached his or her fiduciary duty and such breach constitutes or includes
certain violations of criminal law, a transaction from which the director
derived an improper personal benefit, certain unlawful distributions or certain
other reckless, wanton or willful acts or misconduct. This provision does not
alter a director's liability under the federal securities laws. In addition,
this provision does not affect the availability of equitable remedies, such as
an injunction or rescission, for breach of fiduciary duty.
AMENDMENT OF THE ARTICLES. The Articles provide that an amendment thereof
must first be approved by a majority of the Board of Directors and (with certain
exceptions) thereafter approved by the holders of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal; provided however, that the affirmative vote of 80% of the total votes
eligible to be cast by holders of voting stock, voting together as a single
class, is required to amend provisions relating to the establishment of the
Board of Directors and amendments to the Articles.
AMENDMENT OF BYLAWS. The Articles provide that the Bylaws may be amended or
repealed by the Board of Directors or by the shareholders. Such action by the
Board of Directors requires the affirmative vote of a majority of the directors
then in office. Such action by the shareholders requires the affirmative vote of
the holders of at least two-thirds of the total votes eligible to be cast by
holders of voting stock with respect to such amendment or repeal at an annual
meeting of shareholders or a special meeting called for such purposes, unless
the Board of Directors recommends that the shareholders approve such amendment
or repeal at such meeting, in which case such amendment or repeal shall only
require the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Shares Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority of a
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). The Company has elected not to be governed by the Florida Control
Shares Act and the Florida Affiliated Transactions Act. Florida law and the
Company's Articles and Bylaws also authorize
39
<PAGE>
the Company to indemnify the Company's directors, officers, employees and
agents. In addition, the Company's Articles and Florida law presently limit the
personal liability of corporate directors for monetary damages, except where the
directors (i) breach their fiduciary duties and (ii) such breach constitutes or
includes certain violations of criminal law, a transaction from which the
directors derived an improper personal benefit, certain unlawful distributions
or certain other reckless, wanton or willful acts or misconduct.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this Offering, the Company will have 1,612,500 shares
of Common Stock outstanding (1,732,500 if the Underwriters' over-allotment
option is exercised in full). All of these shares of Common Stock offered
hereby, will be freely tradeable without restriction or further registration
under the Securities Act, unless purchased by "affiliates" of the Company, as
that term is defined in Rule 144, described below.
In general, under Rule 144 under the Securities Act as currently in
effect, any affiliate of the Company or any person (or persons whose shares
are aggregated in accordance with the Rule) who has beneficially owned
Restricted Securities for at least two years would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
1% of the outstanding shares of Common Stock or the reported average weekly
trading volume in the over-the-counter market for the four weeks preceding
the sale. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current
public information concerning the Company. Persons who have not been
affiliates of the Company for at least three months and who have held their
shares for more than three years are entitled to sell Restricted Securities
without regard to the volume, manner of sale, notice and public information
requirements of Rule 144.
The Company, its executive officers, directors and principal shareholders
have agreed that for a period of two (2) years from the date of this
Prospectus, they will not, without the prior written consent of Argent
Securities, Inc., offer, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock. See "Underwriting." The
above-referenced shares of Common Stock outstanding do not include an
aggregate 626,500 shares of Common Stock issuable upon the exercise of
outstanding options, nor the 353,010 shares of Common Stock (based upon the
principal amount of the notes at September 30, 1996 and prepayment of
$200,000 from the proceeds of this Offering) issuable upon the conversion of
the Principal Shareholders' Notes. There are also 262,000 shares of Common
Stock reserved to be granted pursuant to the Company's Stock Option Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources,"
"Management," "Certain Transactions" and "Principal Shareholders."
Finally, in connection with the Offering, the Company will issue the
Warrants and the Underwriters' Warrants. The Company has agreed to register
these shares of Common Stock in the Registration Statement of which this
Prospectus forms a part. See "Underwriting."
Prior to this Offering, there has been no market for the shares of Common
Stock and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of shares of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the shares of Common
Stock and/or may impair the Company's ability to raise equity capital in the
future.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the Warrant Agent for the
Warrants is Continental Stock Transfer & Trust Co., New York, New York.
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<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") for whom Corporate
Securities Group, Inc. and Argent Securities, Inc. are acting as representatives
(collectively, the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement between the Company and the
Representatives (the "Underwriting Agreement"), to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the aggregate number of
Shares of Common Stock and Warrants set forth opposite their names below:
NUMBER OF NUMBER OF
UNDERWRITERS SHARES WARRANTS
- ------------ --------- ---------
Corporate Securities Group, Inc...... 400,000 400,000
Argent Securities, Inc............... 400,000 400,000
------- -------
Total.............................. 800,000 800,000
======= =======
The Underwriters are committed to purchase and pay for all of the shares of
Common Stock and Warrants offered hereby if any shares of Common Stock and
Warrants are purchased. The shares of Common Stock and Warrants subject to this
Offering are being offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel and to various other conditions.
The Underwriters have advised the Company that the Underwriters propose to
offer the shares of Common Stock and Warrants subject to this Offering to the
public at the public offering price set forth on the cover page of this
Prospectus. The Underwriters may allow to certain dealers who are members of the
NASD a concession not in excess of $.36 per share of Common Stock and $.008 per
Warrant and such dealers may reallow a concession not in excess of $.18 per
share of Common Stock and $.004 per Warrant to certain other dealers who are
members of the NASD.
The Company has granted to the Representatives an option, exercisable for
45 days from the date of this Prospectus, to purchase up to 120,000
additional shares of Common Stock and 120,000 additional Warrants at the
public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Representatives may exercise this
option on one occasion, in whole or in part, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
shares of Common Stock offered hereby.
The Company has agreed with the Underwriters that the Company will pay to the
Underwriters a warrant solicitation fee (the "Warrant Solicitation Fee") equal
to 5% of the exercise price of the Warrants exercised beginning one year after
the Effective Date and to the extent not inconsistent with the guidelines of the
NASD and the rules and regulations to the Commission (including NASD Notice to
Members 81-38). Such Warrant Solicitation Fee will be paid to the Underwriters
if (a) the market price of the Common Stock on the date that any Warrant is
exercised is greater than the exercise price of the Warrant; (b) the exercise of
such Warrant was solicited by the Underwriters; (c) prior specific written
approval for exercise is received from the customer if the Warrant is held in a
discretionary account; (d) disclosure of this compensation agreement is made
prior to or upon the exercise of such Warrant; (e) solicitation of the exercise
is not a violation of Rule 10b-6 of the Exchange Act; (f) the Underwriter
provided bona fide services in exchange for the Warrant Solicitation Fee; and
(g) the Underwriter has been specifically designated in writing by the holders
of the Warrants as the broker. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Underwriters will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Securities for the period from nine business days
prior to any solicitation of the exercise of any Warrant or nine business days
prior to the exercise of any Warrant based on a prior solicitation until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right the Underwriters may have to receive such a
fee for
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<PAGE>
the exercise of the Warrants following such solicitation. As a result, the
Underwriters may be unable to continue to provide a market for the securities
during certain periods while the Warrants are exercisable.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public trading market for any
securities of the Company. As a result, the public offering price of the
Common Stock offered hereby has been determined by negotiations among the
Company and the Representatives. Among the factors considered in determining
the public offering price of the Common Stock offered hereby were the
Company's financial condition and prospects, market prices of similar
securities of comparable publicly traded companies, certain financial and
operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities market. These prices
do not necessarily bear any relationship to the Company's assets, book value,
earnings or other established criterion of value.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance of three percent of the gross proceeds of this Offering, of
which $50,000 has been paid to date. The Company also has agreed to pay all
expenses in connection with registering or qualifying the shares of Common
Stock offered hereby for sale under the laws of the states in which such
shares of Common Stock are sold by the Underwriters (including expenses of
counsel retained for such purpose by the Underwriters, expenses associated
with informational meetings) and the expense of all pre-and post-closing
advertisements relating to this Offering.
The Company has agreed to sell to the Representatives for an aggregate price
of $80 ($.001 per warrant), non-callable warrants entitling the Representatives
to purchase from the Company 80,000 shares of Common Stock and 80,000 Warrants
(10 percent of the securities sold in the Offering) at an exercise price of
$7.80 per share of Common Stock and $.1625 per Warrant. The Underwriters'
Warrants may not be transferred or exercised for one year from the date of this
Prospectus, except to officers and partners of the Underwriters or members of
the underwriting or selling group, if any, and are exercisable during the
four-year period commencing one year from the date of this Prospectus (the
"Warrant Exercise Term").
During the Warrant Exercise Term, the holders of the Underwriters'
Warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the Company's Common Stock. To the extent that the
Underwriters' Warrants are exercised, dilution to the percentage ownership
of the Company's shareholders will occur. Further, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected since the holders of the Underwriters' Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain additional equity capital on terms more favorable to the Company than
those provided in the Underwriters' Warrants. Any profit realized by the
Representatives on sale of the Underwriters' Warrants or the underlying
securities may be deemed additional underwriting compensation. The Company has
further agreed to place an indeterminable number of shares of Common Stock,
underlying the exercise of the Underwriters' Warrants, including additional
shares of Common Stock issuable in the event any of the anti-dilution provisions
set forth in the instruments evidencing such Underwriters' Warrants are
triggered. Subject to certain limitations and exclusions, the Company has
agreed, at the request of the holders of a majority of the Underwriters'
Warrants, to register the Underwriters' Warrants, and the underlying shares of
Common Stock, under the Securities Act on two occasions during the Warrant
Exercise Term; one such occasion shall be at the Company's expense. The Company
has also agreed to include such Underwriters' Warrants and underlying shares of
Common Stock in any appropriate registration statement filed by the Company for
five years from the date of this Prospectus. See "Description of Capital
Stock--Future Sales of Common Stock."
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All officers, directors and affiliates, as of the Effective Date, have agreed
with the Representatives in writing not to sell, assign, or transfer any of
their shares of the Company's securities without the Representatives' prior
written consent for a period of 24 months from the Effective Date.
The Company has agreed to enter into a financial advisory agreement with the
Representatives for them to offer financial consulting services to the Company
for a period of two years commencing on the closing date of the Offering for an
aggregate fee of $47,000, which amount shall be prepaid in full at the closing
of the Offering. Such consulting services are to include evaluating the
Company's capital requirements for future growth and expansion, advising the
Company as to alternative methods and sources of financing and advising
management of the Company regarding potential business opportunities. If the
Representatives originate a financing or a merger, acquisition, joint venture,
or other transaction to which the Company is a party, the Representatives will
be entitled to receive a finder's fee in consideration for origination of such
transaction. Such finder's fee shall be calculated as a percentage of the value
of the applicable transaction in accordance with the following schedule: 6% on
the first $5,000,000; 5% on the amount from $5,000,000 to $6,000,000; 4% on the
amount from $6,000,000 to $7,000,000; 3% on the amount from $7,000,000 to
$8,000,000; 2% on the amount from $8,000,000 to $9,000,000; and 1% on the amount
above $9,000,000.
The Representatives will each have the right, for a period of five years
following the completion of this Offering or until the Underwriters' Warrants
have been exercised in full, whichever comes first, to each designate a nominee
for election to the Board or, in lieu thereof, to have a representative attend
all Board meetings of the Company. Any such nominee may be a director, officer,
partner, employee or affiliate of the Representatives. The Company (and its
current directors, officers, and existing shareholders) have agreed to support
any such nominee designated by the Representatives. The Representatives have
advised the Company that they have not presently identified any designees to
nominate for election to the Board.
The Company has agreed that, for a period of two years from the closing of
the Offering, without the consent of the Representatives, it shall not redeem
any of its securities or pay any dividends, or make any other cash
distributions in respect of its securities, in excess of the amount of the
Company's current or retained earnings recognized from and after the closing
date. See "Dividend Policy."
For a period of four years following the completion of this Offering, the
officers and directors of the Company have agreed to effect any permitted
sales of their shares of Common Stock through any of the Representatives
provided that the price and terms of execution offered by the Representatives
are at least as favorable as those that may be obtained from other brokerage
firms.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The foregoing includes a summary of the principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the form of Underwriting Agreement filed as an exhibit to the
Company's Registration Statement of which this Prospectus forms a part.
43
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Common Stock and Warrants offered
hereby will be passed upon for the Company by Akerman, Senterfitt & Eidson,
P.A., Miami, Florida. Lucio, Mandler, Croland, Bronstein, Garbett, Stiphany &
Martinez, P.A., Miami, Florida, and Johnson & Montgomery, Atlanta, Georgia are
acting as counsel for the Underwriters in this Offering.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, and by KPMG Bohlins AB, independent
accountants, to the extent and for the periods set forth in the respective
reports of such firms contained herein and in the Registration Statement. All
such financial statements have been included in reliance upon such reports
given upon the authority of such firms as experts in auditing and accounting.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form
SB-2 filed by the Company with the Commission under the Securities Act with
respect to the Common Stock and Warrants offered hereby. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and related exhibits and
schedules for further information with respect to the Company and the Common
Stock offered hereby. Any statements contained herein concerning the provisions
of any document are not necessarily complete, and in each such instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules forming a
part thereof can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington, 20549, and should also be available for inspection and copying
at the following regional offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10007; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
NW, Washington, 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxies and information statements and other information
regarding issuers that file electronically with the Commission. The Commission's
Web site is http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements certified by independent auditors and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
44
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets at September 30, 1996 and December 31, 1995.... F-4
Consolidated Statements of Income for the nine months ended
September 30, 1996 and 1995 and for Two Years Ended
December 31, 1995 and 1994................................................ F-5
Consolidated Statements of Shareholders' Equity at September 30, 1996,
at December 31, 1995 and 1994, and at January 1, 1994..................... F-6
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 and for the Two Years Ended
December 31, 1995 and 1994................................................ F-7
Summary of Significant Accounting Policies................................. F-8
Notes to Consolidated Financial Statements................................ F-11
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Advanced Electronic Support Products, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheet of Advanced
Electronic Support Products, Inc., and subsidiaries as of December 31, 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the two years then ended. 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 did
not audit the financial statements of Advanced Electronic Support Products
Computertillbehor i Sweden AB, a foreign subsidiary, which statements reflect
total assets of $420,532 as of December 31, 1995, and total revenues of
$845,094 and $649,968 for each of the two years then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such subsidiary,
is based solely on the report of the other auditors.
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 our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Advanced Electronic Support
Products, Inc., and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for each of the two years then ended in
conformity with generally accepted accounting principles.
Miami, Florida BDO Seidman, LLP
June 28, 1996, except for
Note 1 which is as
of February 13, 1997
F-2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS
COMPUTERTILLBEHOR I SWEDEN AB
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Advanced Electronic Support Products Computertillbehor i Sweden AB
We have audited the accompanying balance sheets of Advanced Electronic
Support Products Computertillbehor i Sweden AB as of December 31, 1995 and
1994 and the related statements of income, stockholders' equity and cash
flows for the years then ended. 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 in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Electronic
Support Products Computertillbehor i Sweden AB at December 31, 1995 and 1994,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles in the United
States.
July 12, 1996, except for
Note 11 which is as of
November 11, 1996
Thomas Parck
Godkand revisor (Approved Public Accountant in Sweden)
KPMG Bohlins AB
F-3
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
PROFORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996
--------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 3)
CURRENT
Cash ........................................................ $ 203,804 $ 214,490 $ 214,490
Accounts receivable, net of allowance for doubtful accounts
of $66,000 and $72,000 in 1995 and 1996, respectively (Note
5) ........................................................ 3,015,018 2,585,929 2,585,929
Inventories ................................................. 3,197,950 3,218,287 3,218,287
Prepaid expenses and other current assets ................... 105,591 119,913 119,913
---------- ---------- ----------
Total current assets ......................................... 6,522,363 6,138,619 6,138,619
Property and equipment, net (Note 2) ......................... 380,667 426,867 426,867
---------- ---------- ----------
$6,903,030 $6,565,486 $6,565,486
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank overdraft .............................................. $ 74,889 $ -- $ --
Notes payable (Note 3) ...................................... 1,117,302 1,457,755 1,457,755
Accounts payable ............................................ 2,258,865 1,320,679 1,320,679
Income taxes payable ........................................ 46,603 -- --
---------- ---------- ----------
Total current liabilities .................................... 3,497,659 2,778,434 2,778,434
Convertible promissory note payable .......................... -- -- 1,612,043
---------- ---------- ----------
Total liabilities ............................................ 3,497,659 2,778,434 4,390,477
---------- ---------- ----------
Commitments (Notes 8, 9 and 12)
Shareholders' equity (Notes 1 and 12):
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued .................................... -- -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
812,500 shares issued ...................................... 813 813 813
Paid-in capital ............................................. 45,901 45,901 45,901
Retained earnings ........................................... 3,345,549 3,728,161 2,116,118
Cumulative foreign currency translation adjustment ......... 13,108 12,177 12,177
---------- ---------- ----------
Total shareholders' equity ................................... 3,405,371 3,787,052 2,175,009
---------- ---------- ----------
$6,903,030 $6,565,486 $6,565,486
========== ========== ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------------
1994 1995 1995 1996
------------- -------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES (Notes 4, 5 and 6) ................. $8,797,001 $13,721,014 $8,859,018 $9,713,478
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Cost of sales ............................... 4,905,143 8,507,520 5,408,497 5,824,083
Selling, general and administrative expenses 2,993,700 3,951,931 2,529,886 3,055,775
---------- ----------- ---------- ----------
Total operating expenses ..................... 7,898,843 12,459,451 7,938,383 8,879,858
---------- ----------- ---------- ----------
INCOME FROM OPERATIONS ....................... 898,158 1,261,563 920,635 833,620
Other income (expenses), net ................. 88,201 73,911 (102,217) (95,492)
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES ................... 986,359 1,335,474 818,418 738,128
Provision for income taxes (Note 10) ........ 11,534 44,680 18,184 10,057
---------- ----------- ---------- ----------
NET INCOME ................................... $ 974,825 $ 1,290,794 $ 800,234 $ 728,071
========== =========== ========== ==========
PRO FORMA AMOUNTS (NOTE 1):
Income before income taxes .................. 986,359 1,335,474 818,418 738,128
Provision for income taxes (Note 10) ....... 347,534 483,680 311,184 267,057
---------- ----------- ---------- ----------
PRO FORMA NET INCOME ......................... $ 638,825 $ 851,794 $ 507,234 $ 471,071
========== =========== ========== ==========
Pro forma net income per share ............... $ .52 $ .70 $ .41 $ .39
Weighted average number of shares of common
stock outstanding .......................... 1,223,178 1,223,178 1,223,178 1,223,178
========== =========== ========== ==========
Supplemental pro forma net income per share . $ .64 $ .36
=========== ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
--------- ------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ........... $813 $45,901 $ 1,582,107 $ -- $ 1,628,821
Distributions ........................ -- -- (193,495) -- (193,495)
Net Income ........................... -- -- 974,825 -- 974,825
Cumulative foreign currency
translation adjustment ............. -- -- -- (1,363) (1,363)
---- ------- ----------- ------- -----------
Balance at December 31, 1994 ......... 813 45,901 2,363,437 (1,363) 2,408,788
Distributions ........................ -- -- (308,682) -- (308,682)
Net Income ........................... -- -- 1,290,794 -- 1,290,794
Cumulative foreign currency
translation adjustment ............. -- -- -- 14,471 14,471
---- ------- ----------- ------- -----------
Balance at December 31, 1995 ......... 813 45,901 3,345,549 13,108 3,405,371
Period Ended September 30, 1996
(Unaudited):
Distributions ........................ -- -- (345,459) -- (345,459)
Net Income ........................... -- -- 728,071 -- 728,071
Cumulative foreign currency
translation adjustment ............. -- -- -- (931) (931)
---- ------- ----------- ------- -----------
Balance at September 30, 1996
(Unaudited) ........................ $813 $45,901 $ 3,728,161 $12,177 $ 3,787,052
==== ======= =========== ======= ===========
Proforma period ended
September 30, 1996 (Unaudited):
Balance at December 31, 1995 ......... $813 $45,901 $ 3,345,549 $13,108 $ 3,405,371
Distributions ........................ -- -- (1,957,502) -- (1,957,502)
Net income ........................... 728,071 -- 728,071
Cumulative foreign currency
translation adjustment ............. -- -- -- (931) (931)
---- ------- ----------- ------- -----------
Proforma balance at September 30,
1996 (Unaudited) ................... $813 $45,901 $ 2,116,118 $12,177 $ 2,175,009
==== ======= =========== ======= ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------------
1994 1995 1995 1996
------------ -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................... $ 974,825 $ 1,290,794 $ 800,234 $ 728,071
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on disposition of property
and equipment .............................. 5,290 -- -- --
Provision for losses on accounts receivable .... 2,298 5,812 13,598 6,000
Depreciation and amortization ................... 38,177 62,548 17,936 38,160
Deferred income taxes ........................... (2,224) (5,679) -- --
(Increase) decrease in:
Accounts receivable ............................ (894,555) (1,414,312) (808,591) 423,089
Inventories .................................... (183,553) (1,277,611) (728,653) (20,337)
Prepaid expenses and other
current assets ............................... (62,858) 51,659 115,272 (14,322)
Increase (decrease) in:
Bank overdraft ................................. -- 74,889 -- (74,889)
Accounts payable and accrued expenses ......... 418,773 1,090,830 424,765 (938,186)
Income taxes payable ........................... 8,702 33,787 (17,197) (46,603)
--------- ----------- --------- ---------
Net cash provided by (used in) operating activities 304,875 (87,283) (182,636) 100,983
--------- ----------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment ............... (39,303) (362,102) (158,111) (84,360)
--------- ----------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings ............. (154,286) 647,049 483,573 340,453
Loan from (repayment to) affiliate ................ 73,740 46,260 46,260 --
Dividend distributions ............................ (193,495) (308,682) (308,682) (345,459)
--------- ----------- --------- ---------
Net cash provided by (used in) financing activities (274,041) 384,627 221,151 (5,006)
--------- ----------- --------- ---------
NET INCREASE (DECREASE) IN CASH .................... (8,469) (64,758) (119,596) 11,617
Effect of exchange rate changes in cash ............ (113,087) 31,284 27,921 (931)
CASH, AT BEGINNING OF YEAR ......................... 358,834 237,278 237,278 203,804
--------- ----------- --------- ---------
CASH, AT END OF PERIOD ............................. $ 237,278 $ 203,804 $ 145,603 $ 214,490
========= =========== ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest ......................................... $ 24,976 $ 65,416 $ 53,302 $ 98,457
Taxes ............................................ 2,832 13,468 4,861 56,660
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
DESCRIPTION OF BUSINESS
Advanced Electronic Support Products, Inc., (AESP) is primarily a
wholesaler of computer cables and accessories whose customers are computer
dealers and retailers located in the U.S. and foreign markets. The Company
grants credit to customers without collateral.
SUBSIDIARIES AND BASIS OF PRESENTATION
As the subsidiaries, Advanced Electronic Support Products
Computertillbehor i Sweden AB ("AESP Sweden") and AESP Computerzubehor GmbH
("AESP Germany"), are based and operating in Germany and Sweden, the
functional and reporting currency for statutory purposes is the German Mark
and Swedish Krona, respectively. These financial statements have been
translated to United States Dollars (U.S. $) using a methodology consistent
with Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation. Assets and liabilities are translated to U.S. $ at the rate
prevailing on the balance sheet dates and the income statements have been
translated from the functional currency to U.S. $ using an average exchange
rate for the applicable period. Exchange gains (losses) (approximately
$64,000 and $18,000 for the years ended December 31, 1995 and 1994,
respectively, and $(20,613) and $(41,108), for the nine months ended
September 30, 1996 and 1995, respectively) are included in other income in
the accompanying consolidated statements of income.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AESP and the subsidiaries (collectively, the Company). Intercompany
transactions and balances have been eliminated in combination.
INVENTORIES
Year ended inventories are stated at the lower of cost or market using the
last in, first-out method for AESP and the first-in, first-out method for the
subsidiaries. Inventory of AESP would be approximately the same had they used
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
is computed by the straight line and accelerated methods based on the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the life of the asset or the lease.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective
merchandise.
INCOME TAXES
AESP, with the consent of its shareholders, elected to be taxed as an S
Corporation. Shareholders of an S Corporation are taxed on their
proportionate share of the Company's taxable income. Accordingly, no
provision for federal or state income tax is required.
F-8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The pro forma provisions for income taxes and net income assume that the
Company was subject to income tax.
AESP Germany and AESP Sweden are subject to taxation in Germany and
Sweden, respectively, and accordingly, calculate and report the tax charges
in accordance with applicable statutory regulations.
For the purpose of these financial statements the Company has adopted the
provisions of Statement of Financial Accounting Standards (SFAS) 109,
Accounting for Income taxes for all periods presented. Under the asset and
liability method of SFAS 109, deferred taxes are recognized for differences
between financial statement and income tax bases of assets and liabilities.
Upon the Company becoming subject to income taxes, a deferred tax
liability will be recorded, through a charge to operations, for the tax
effect of cumulative temporary differences between financial statement and
tax purposes. Such deferred tax liability results principally from temporary
differences relating to allowance for doubtful accounts and the repatriation
of the income of the foreign subsidiaries and would have amounted to
approximately $33,000 at September 30, 1996 had the Company been subject to
federal and state taxes at such date.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
estimated amounts.
EARNINGS PER SHARE
Pro forma net income per share is based on the weighted average number of
shares of common stock outstanding during each period, after giving effect to
the stock split (described in Note 1), the assumed conversion of the notes to be
issued to the existing shareholders at $4.00 a share, and the exercise of the
options with respect to 23,000 shares as described in Note 12.
Supplemental pro forma net income per share for the year ended December
31, 1995 and for the nine months ended September 30, 1996 is based on the
weighted average number of outstanding shares of common stock used in the
computation of pro forma net income per share plus the 195,833 and 254,167
shares, calculated at an offering price of $6.00 per share, being sold by the
Company in the offering to repay borrowings, including the $200,000 payment
to be made to shareholders with respect to the convertible, subordinated
notes, of $1,175,000 at December 31, 1995 and $1,525,000 at September 30,
1996, respectively. The computation gives effect to elimination of interest
costs associated with the borrowings, net of pro forma income taxes.
FUTURE ACCOUNTING PRONOUNCEMENT
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure.
The Company does not presently intend to adopt the fair value based method
but instead will disclose the effects of the calculation required by the
statement.
F-9
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended September 30, 1996 and
1995 are unaudited. In the opinion of management, such financial statements
include all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of financial position and the results of
operations. The results of operations for the nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the
full year.
F-10
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. REORGANIZATION
The accompanying financial statements give effect to the recapitalization,
effected on February 12, 1997, of the Company in connection with the
contemplated public offering of its common stock, the termination of AESP's
federal income status as an S-Corporation and the contribution, to AESP, of
the shares of stock in AESP Sweden and AESP Germany, whose shares of common
stock are owned by the shareholders of AESP. The contribution of shares will
be accounted for under the pooling of interest method as the transaction will
be treated as a combination of companies under common control.
In connection with the public offering, immediately prior to the
effectiveness of the registration statement, AESP will issue a stock dividend
in the form of a stock split, whereby the 66 2/3 shares of stock presently
outstanding (after cancellation of the shares held in treasury), will be
converted into 812,500 shares of common stock. AESP increased its authorized
capital from 100 shares, $1 par value to 20,000,000 shares of common stock,
$.001 par value and 1,000,000 shares of preferred stock, $.001 par value.
The components of shareholders' equity, all shares and per share amounts
have been retroactively adjusted to reflect the stock split.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ----------------
<S> <C> <C>
Leasehold improvements ......................... $222,529 $295,282
Office equipment ............................... 82,488 93,320
Machinery and equipment ........................ 45,766 45,766
Furniture and fixtures ......................... 48,843 49,963
Vehicles ....................................... 79,639 79,294
-------- --------
479,265 563,625
Less: accumulated depreciation and amortization 98,598 136,758
-------- --------
$380,667 $426,867
======== ========
</TABLE>
F-11
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ----------------
<S> <C> <C>
Prime + .75% (9.25% at December 31, 1995) line of credit
with a financial institution in the amount of
$1,850,000, payable monthly, due July 25, 1996. ........ $ 975,000 $ --
Prime plus .50% (9% at September 30, 1996) line of credit
with a financial institution in the amount of $2,500,000
payable July 26, 1997 (Guaranteed by shareholders) ..... -- 1,325,000
8.5% note payable to an entity owned by the Shareholders
of the Company, payable upon demand. ................... 120,000 120,000
Other .................................................... 22,302 12,755
---------- ----------
$1,117,302 $1,457,755
========== ==========
</TABLE>
4. FOREIGN OPERATIONS
Information about the Company's operations in different geographic areas
for the years ended December 31, 1995 and 1994 and the nine months ended
September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
SWEDEN
UNITED STATES AND GERMANY ELIMINATION CONSOLIDATED
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Sales to unaffiliated customers .. $ 7,152,103 $1,644,898 $ -- $ 8,797,001
Transfers between geographic areas 641,789 -- (641,789) --
----------- ---------- --------- -----------
Total ............................. $ 7,793,892 $1,644,898 $(641,789) $ 8,797,001
=========== ========== ========= ===========
Operating Income .................. $ 841,836 $ 52,041 $ 4,281 $ 898,158
=========== ========== ========= ===========
Identifiable assets ............... $ 2,853,798 $1,057,035 $ 4,281 $ 3,915,114
=========== ========== ========= ===========
Year Ended December 31, 1995:
Sales to unaffiliated customers .. $11,376,399 $2,344,615 $ -- $13,721,014
=========== ========== ========= ===========
Transfers between geographic areas 888,433 -- (888,433) --
----------- ---------- --------- -----------
Total ............................. $12,264,832 $2,344,615 $(888,433) $13,721,014
=========== ========== ========= ===========
Operating Income .................. $ 1,139,541 $ 132,325 $ (10,303) $ 1,261,563
=========== ========== ========= ===========
Identifiable assets ............... $ 5,797,358 $1,111,694 $ (6,022) $ 6,903,030
=========== ========== ========= ===========
</TABLE>
F-12
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
4. FOREIGN OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
SWEDEN
UNITED STATES AND GERMANY ELIMINATION CONSOLIDATED
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1995:
Sales to unaffiliated customers .... $7,030,697 $1,828,321 $ -- $8,859,018
Transfers between geographic areas . 733,727 -- (733,727) --
---------- ---------- --------- ----------
Total ............................... $7,764,424 $1,828,321 $(733,727) $8,859,018
========== ========== ========= ==========
Operating Income .................... $ 801,057 $ 143,780 $ (24,202) $ 920,635
========== ========== ========= ==========
Identifiable assets ................. $4,778,797 $1,141,866 $(548,675) $5,371,988
========== ========== ========= ==========
Nine months ended September 30, 1996:
Sales to unaffiliated customers .... $7,698,278 $2,015,200 $ -- $9,713,478
========== ========== ========= ==========
Transfers between geographic areas . 804,081 -- (804,081) --
---------- ---------- --------- ----------
Total ............................... $8,502,359 $2,015,200 $(804,081) $9,713,478
========== ========== ========= ==========
Operating Income .................... $ 764,347 $ 63,106 $ 6,167 $ 833,620
========== ========== ========= ==========
Identifiable assets ................. $5,994,647 $1,180,326 $(609,487) $6,565,486
========== ========== ========= ==========
</TABLE>
Transfers between geographic areas are made at prices which approximate
prices charged to unaffiliated customers and have been eliminated from
combined revenues.
Identifiable assets are those assets, that are identified with the
operations in each geographic area. Foreign sales, including those of AESP,
for the years ended December 31, 1995 and 1994 approximated 22% and 23% of
combined revenues, respectfully and for the nine months ended September 30,
1996 and 1995 approximated 23% and 18% of combine revenues, respectively.
5. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $170,000 and $59,000 during the
years ended December 31, 1995 and 1994, respectively, and sales of
approximately $128,000 for the nine months ended September 30, 1995 to an
entity owned by the shareholders of the Company. There were no sales to such
entity for the nine months ended September 30, 1996. Accounts receivable at
December 31, 1995 include approximately $73,000, respectively, from such
entity. There was no receivable from such entity at September 30, 1996.
6. SIGNIFICANT CUSTOMERS
For 1995, two customers accounted for 16.5% and 12.0% of consolidated
revenues. For 1994, no customer accounted for 10% or more of consolidated
revenues. For the nine months ended September 30, 1996 and 1995, one customer
accounted for 14% and 18%, respectively, of consolidated revenues.
7. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including accounts
receivable, accounts payable and short-term debt approximated fair value due
to the relatively short maturity.
F-13
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
8. COMMITMENTS
The Company rents office space under non-cancelable leases expiring in
1998. The minimum future rental commitment for leases in effect at September
30, 1996, including leases to related parties, approximates the following:
YEARS ENDING DECEMBER 31,
-------------------------
1996 ................. $ 41,800
1997 ................. 87,200
1998 ................. 45,200
1999 ................. 43,200
2000 ................. 43,200
Thereafter ........... 21,600
--------
$282,200
========
In July 1996, the Company entered into a five year lease to rent office
and warehouse space from an entity owned by the shareholders of the Company
at $3,600 per month. The mortgage on the property has been guaranteed by the
Company. The balance outstanding at September 30, 1996 and December 31, 1995
approximated $247,000 and $260,000, respectively.
Rent expense in 1995 and 1994 aggregated approximately $112,000 and
$102,000, respectively, including $43,200 and $46,800 to related parties.
Rent expense for the nine months ended September 30, 1996 and 1995,
aggregated approximately $132,000 and $44,000, respectively, including
$36,000 and $32,400, respectively, to related parties.
The Company is liable under a patent license agreement, expiring in 2000,
whereby it is required to pay a fee (as defined) for each product sold
subject to the agreement. During 1995 and 1994, approximately $18,000 and
$17,000, respectively, of royalties were paid. For the nine months ended
September 30, 1996 and 1995, approximately $11,000 and $18,000, respectively,
of royalties were paid.
9. DEFERRED COMPENSATION PLAN
In 1995, the Company adopted a defined contribution plan established
pursuant to Section 401(k) of the Internal Revenue Code. Employees contribute
to the plan a percentage of their salaries, subject to certain dollar
limitations and the Company matches a portion of the employees'
contributions. The Company's contributions to the plan for the 1995 amounted
to $4,300. The Company's contributions to the plan for the nine months ended
September 30, 1996 amounted to $15,629. No contributions were made during the
nine months ended September 30, 1995.
F-14
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
10. INCOME TAXES
The following are the components of pro forma income tax expense:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -------------
Current
Federal . $287,940 $357,568 $277,039 $219,257
State .... 49,055 62,985 16,124 36,957
Foreign . 13,758 50,359 18,184 10,057
-------- -------- -------- --------
350,753 470,912 311,347 266,271
-------- -------- -------- --------
Deferred
Federal . (940) 17,432 (154) 743
State .... (55) 1,015 (9) 43
Foreign . (2,224) (5,679) -- --
-------- -------- -------- --------
(3,219) 12,768 (163) 786
-------- -------- -------- --------
Total ..... $347,534 $483,680 $311,184 $267,057
======== ======== ======== ========
The proforma provision for income taxes represents the estimated income
taxes that would have been reported had AESP not been an S Corporation and
had been subject to Federal and state income taxes.
The reconciliation of proforma and foreign income tax attributed to the
continuing operations computed at the United States federal statutory tax
rate of 34% to income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Tax at the United States statutory rate ... $335,362 $454,062 $278,263 $250,964
States income taxes, net of federal benefit 32,675 42,466 28,409 24,855
Differences in effective income tax of
other countries .......................... (20,503) (12,848) 4,512 (8,762)
-------- -------- -------- --------
Total ...................................... $347,534 $483,680 $311,184 $267,057
======== ======== ======== ========
</TABLE>
F-15
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
10. INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------------
1994 1995 1995 1996
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Deferred tax liability:
Untaxed foreign reserves ....................... $ 5,679 $ -- $ -- $ --
Proforma Items:
Deferred tax assets
Allowance for doubtful account ................ 24,560 24,836 27,766 24,050
Deferred tax liabilities
Repatriation of income of foreign subsidiaries 14,278 33,000 23,000 33,000
------- ------- ------- -------
Net deferred tax asset/(liability) ............. $ 4,603 $(8,164) $ 4,766 $(8,950)
======= ======= ======= =======
</TABLE>
The majority of the provision for income taxes relates to the Swedish
operations. The statutory tax rate in Sweden for 1996, 1995 and 1994 is 28%.
11. PROPOSED MERGER
Included in selling, general and administrative expenses for the nine
months ended September 30, 1996, is approximately $125,000 of costs and
expenses in connection with a proposed merger which was unsuccessful.
12. SUBSEQUENT EVENTS
The Company has signed a letter with an underwriter to raise
capital through an initial public offering of 800,000 shares of $.001 par
value per share common stock plus 800,000 redeemable common share purchase
warrants of the Company. The Company has also granted the underwriter an
over-allotment option to sell an additional 120,000 shares and warrants in
the public offering.
Upon completion of the offering, the Company will enter into a financial
advisory agreement with the underwriter for a period of two years, for an
aggregate fee of $47,000.
In connection with the offering, the Company intends to (i) make a
distribution to its current Shareholders of $1,328,095, plus an adjustment for
1996 earnings (as defined), in the form of a seven year, prime + 1%, convertible
(at $4.00 per share), subordinated promissory note payable, (ii) enter into five
year employment agreements with its current shareholders which includes a
minimum annual compensation of $150,000 plus performance bonuses, (iii) issue
options, to each of its two shareholders, to purchase 280,250 shares of common
stock at the initial public offering price, of which 180,250 shares are
considered contingent options which vest and are exercisable seven years after
the date of grant, with provision for earlier vesting based upon future earnings
per share, net income or trading prices of the Company's common stock (all as
defined) and (iv) establish a stock option plan for its employees, initially
providing for 265,000 options, of which options to purchase 3,000 shares have
been granted.
F-16
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
12. SUBSEQUENT EVENTS--(CONTINUED)
At September 30, 1996, the foregoing notes to shareholders would result in
a charge of $1,612,043 to retained earnings. The proforma balance sheet at
September 30, 1996 gives effect to such distribution.
The aforementioned employment agreements will provide for annual
increases, as defined. In the event of a change in control of the Company (as
defined) the shareholders may terminate their employment with the Company for
a lump sum payment of $750,000 each. In addition, the Company will provide
the shareholders with a $1,000,000 term life issued policy and an automobile
allowance.
Effective January 1, 1997, the Company entered into a consulting agreement
for a period of two years in which the consultant will be paid $16,300 per
month. In addition , the Company has granted the consultant a seven year
option to purchase 63,000 shares of its common stock, at $4.00 a share with
respect to 23,000 shares and $6.00 a share with respect to 40,000 shares.
F-17
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES NOT IMPLY
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
-----------------
TABLE OF CONTENTS
PAGE
-------
PROSPECTUS SUMMARY ....... 3
RISK FACTORS ............. 6
USE OF PROCEEDS .......... 14
DIVIDEND POLICY .......... 15
DILUTION ................. 16
CAPITALIZATION ........... 17
SELECTED FINANCIAL
INFORMATION ............ 18
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATION ........... 19
BUSINESS ................. 24
MANAGEMENT ............... 30
CERTAIN TRANSACTIONS .... 35
PRINCIPAL SHAREHOLDERS .. 36
DESCRIPTION OF
CAPITAL STOCK .......... 37
UNDERWRITING ............. 41
LEGAL MATTERS ............ 44
EXPERTS .................. 44
ADDITIONAL INFORMATION .. 44
INDEX TO FINANCIAL
STATEMENTS ............. F-1
UNTIL MARCH 10, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
800,000 SHARES OF COMMON STOCK
AND
800,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
[LOGO]
ADVANCED
ELECTRONIC
SUPPORT
PRODUCTS, INC.
----------
PROSPECTUS
----------
CORPORATE SECURITIES
GROUP, INC.
ARGENT SECURITIES, INC.
February 13, 1997
===============================================================================
