SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to__________
Commission File No. 000-21889
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 2327-381
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1810 N.E. 144th Street
NORTH MIAMI, FLORIDA 33181
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (305) 944-7710
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No_____
The number of shares outstanding of the issuer's Common Stock, as of
August 11, 1997, is 1,732,500 shares.
Transitional Small Business Disclosure Format (check one)
Yes _____ No X
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
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Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at
June 30, 1997...............................................................................................3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1997 and 1996...........................................................4
Condensed Consolidated Statements of Shareholders' Equity for the six months ended
June 30, 1997...............................................................................................5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 ........................................................................6
Notes to Condensed Consolidated Financial Statements........................................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL POSITION AND RESULTS OF OPERATIONS.......................................................12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................................................17
Item 2. CHANGES IN SECURITIES.................................................................................17
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................17
Item 4. SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS.................................................................................17
Item 5. OTHER INFORMATION.....................................................................................17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1997
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ASSETS
CURRENT
Cash $ 1,116,956
Accounts receivable, net of allowance for
doubtful accounts of $70,000 3,350,124
Inventories 4,532,738
Prepaid expenses and other current assets 309,749
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Total current assets 9,309,567
PROPERTY AND EQUIPMENT, NET 401,010
OTHER ASSETS 59,500
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$ 9,770,077
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes payable $ 272,300
Accounts payable and accrued expenses 1,501,487
Income taxes payable 141,445
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Total current liabilities 1,915,232
Notes payable-shareholders 1,439,125
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Total liabilities 3,354,357
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COMMITMENTS AND CONTINGENCIES (NOTE 4)
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SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000
shares authorized; none issued -
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,732,500 shares issued 1,733
Paid-in capital 6,013,357
Retained earnings 418,795
Cumulative foreign currency translation adjustment (18,165)
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Total shareholders' equity 6,415,720
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$ 9,770,077
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET SALES $ 3,547,685 $ 3,065,280 $ 7,141,734 $ 6,581,211
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OPERATING EXPENSES:
Cost of sales 2,192,903 1,878,888 4,098,579 3,977,848
Selling, general and administrative expenses 1,252,632 980,515 2,580,591 1,948,022
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Total operating expenses 3,445,535 2,859,403 6,679,170 5,925,870
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INCOME FROM OPERATIONS 102,150 205,877 462,564 655,341
Other income (expense)
Interest (23,567) (30,031) (71,993) (59,270)
Other 26,627 (21,941) 3,264 (15,775)
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INCOME BEFORE INCOME TAXES 105,210 153,905 393,835 580,296
Provision for income taxes 52,418 (32,479) 145,070 17,282
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NET INCOME $ 52,792 $ 186,384 $ 248,765 $ 563,014
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PRO FORMA AMOUNTS:
Income before income taxes $ 105,210 $ 153,905 $ 393,835 $ 580,296
Provision for income taxes 52,418 24,521 156,110 203,282
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Pro forma net income $ 52,792 $ 129,384 $ 237,725 $ 377,014
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Pro forma net income per share $ .02 $ .10 $ .12 $ .30
Weighted average number of shares of common
stock outstanding 2,170,665 1,254,948 1,919,394 1,254,948
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Supplemental pro forma net income per share $ .03 $ .13
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
CUMULATIVE
FOREIGN TOTAL
CURRENCY STOCK-
COMMON PAID-IN RETAINED TRANSLATION HOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
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BALANCE AT JANUARY 1, 1997 $ 813 $ 45,901 $ 3,762,635 $ (4,891) $ 3,804,458
DISTRIBUTIONS (NOTE 2) - 459,560 (2,458,685) - (1,999,125)
NET PROCEEDS FROM ISSUANCE OF COMMON
STOCK AND WARRANTS 920 4,373,976 - - 4,374,896
NET INCOME - - 248,765 - 248,765
RECLASSIFICATION OF CUMULATIVE UNDISTRIBUTED
EARNING APPLICABLE TO THE COMPANY'S
S CORPORATION STATUS - 1,133,920 (1,133,920) - -
CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT - - - (13,274) (13,274)
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BALANCE AT JUNE 30, 1997 $ 1,733 $ 6,013,357 $ 418,795 $ (18,165) $ 6,415,720
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 1996
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OPERATING ACTIVITIES:
Net income $ 248,765 $ 563,014
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for losses on accounts receivable 5,000 (8,089)
Depreciation and amortization 19,167 32,160
Deferred income taxes (32,000) -
(Increase) decrease in:
Accounts receivable (639,521) 172,785
Inventories 162,180 28,053
Prepaid expenses and other current assets (155,167) (42,669)
Other assets (7,500) -
Increase (decrease) in:
Bank overdraft - (74,889)
Accounts payable and accrued expenses (1,516,581) (975,038)
Income taxes payable 124,544 (41,946)
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Net cash used in operating activities (1,791,113) (346,619)
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INVESTING ACTIVITIES:
Additions to property equipment (17,553) (46,670)
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FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings (1,353,993) 518,969
Dividend distributions (260,000) (164,694)
Payment on notes payable-shareholders (300,000) -
Proceeds from sale of stock and warrants, net 4,637,085 -
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Net cash provided by financing activities 2,723,092 354,275
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NET INCREASE (DECREASE) IN CASH 914,426 (39,014)
Effect of exchange rate changes in cash (13,274) (2,847)
CASH, AT BEGINNING OF YEAR 215,804 203,804
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CASH, AT END OF PERIOD $ 1,116,956 $ 161,943
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SUPPLEMENTAL INFORMATION:
Cash paid for
Interest $ 28,311 $ 47,670
Taxes $ 59,143 $ 59,228
Non-cash distribution to shareholders in the form of a
convertible subordinated promissory note $ 1,739,125 $ -
Non-cash distribution credited to paid-in capital $ 719,560 -
Non-cash reclassification of cumulative undistributed earnings
applicable to the Company's S corporation status $ 1,133,920 $ -
Deferred offering costs charged against paid-in capital
in connection with initial public offering $ 262,189 $ -
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF The accompanying unaudited condensed consolidated
PRESENTATION financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting
of normal recurring accruals, except for the
adjustment to record deferred taxes discussed below
considered necessary for a fair presentation) have
been included. Operating results for the six month
period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for
the year ending December 31, 1997. For further
information, refer to the consolidated financial
statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996.
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 2), 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 2.
Supplemental pro forma net income per share for the
six months ended June 30, 1997 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 295,000 shares,
calculated at an offering price of $6.00 per share,
sold by the Company in the offering to repay
borrowings, including the $300,000 payment made to
shareholders with respect to the convertible
subordinated notes of $1,739,125 at the date of the
public offering of the Company's common stock. The
computation gives effect to elimination of interest
costs associated with the borrowings, net of pro
forma income taxes.
Through February 14, 1997, AESP with the consent of
its stockholders, 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 income tax is required for periods prior to
the Company's initial public offering.
7
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AESP Germany and AESP Sweden, subsidiaries of the
Company, are subject to taxation in Germany and
Sweden, and accordingly, calculate and report the
tax charges in accordance with applicable statutory
regulations.
Upon the Company becoming subject to income taxes, a
net deferred tax asset was recorded for the six
months ended June 30, 1997 for the tax effect of
cumulative temporary differences between financial
statement and tax purposes. Such net deferred tax
asset resulted principally from temporary
differences relating to allowance for doubtful
accounts and the repatriation of the income of the
foreign subsidiaries and aggregated approximately
$13,000.
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 arising from the differences between
financial statement and income tax bases of assets
and liabilities.
2. INITIAL PUBLIC The Company completed an initial public offering in
OFFERING AND February and March 1997 of an aggregate of 920,000
REORGANIZATION shares of $.001 par value per share common stock of
the Company at $6.00 per share plus an aggregate of
920,000 redeemable common stock purchase warrants of
the Company at $.125 per warrant, including an
over-allotment option of 120,000 shares and
warrants. In this connection, the Company received
net proceeds of approximately $4,862,000, (or
$4,375,000 net of certain capitalized expenses in
connection with the Company's initial public
offering) of which $1,470,000 was utilized to repay
its line of credit, and $300,000 to make a principal
payment on the subordinated promissory note to the
Company's principal shareholders. (See below.)
The accompanying financial statements give effect to
the recapitalization, effected on February 13, 1997,
of the Company in connection with the 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 were owned by the shareholders of
AESP. The contribution of shares is accounted for
under the
8
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
pooling of interest method as the transaction is a
combination of companies under common control.
In connection with the initial public offering,
immediately prior to the effectiveness of the
registration statement, AESP issued a stock dividend
in the form of a stock split, whereby the 66 2/3
shares of stock then outstanding (after cancellation
of the shares held in treasury), were 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
per share and 1,000,000 shares of preferred stock,
$.001 par value per share.
Upon completion of the initial public offering, the
Company entered into a financial advisory agreement
with the underwriters for a period of two years, for
an aggregate fee of $47,000.
In connection with the initial public offering, the
Company (i) made a distribution to its principal
shareholders of $1,739,125, in the form of a seven
year, prime + 1%, convertible (at $4.00 per share)
subordinated promissory note payable, (ii) entered
into five year employment agreements with its
current shareholders which includes a minimum annual
compensation of $150,000 plus performance bonuses
and (iii) issued options, to each of its two
principal shareholders, to purchase 180,250 shares
of common stock at the initial public offering price
of $6.00 per share; such options 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). In connection with
the favorable conversion price of the subordinated
promissory notes referred to above, the Company
recorded a $719,560 distribution to the principal
shareholders, with a corresponding credit to paid-in
capital. Such amount is based upon the difference in
the conversion price and the public offering price
times the number of shares issuable upon conversion
of the notes.
In addition to the foregoing distribution, in April
1997, the Company made a distribution of
approximately $260,000 to its two principal
shareholders, representing the income taxes due by
them in connection with the Company's S Corporation
earnings through February 14, 1997. Such amount has
been charged to paid-in capital.
9
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The aforementioned employment agreements 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 insurance policy and an
automobile allowance.
Effective January 1, 1997, the Company entered into
a consulting agreement for a period of one year in
which the consultant will be paid $16,300 per month.
In addition, the Company granted the consultant, in
1996, 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.
3. NOTES PAYABLE Notes payable consist of the following:
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JUNE 30, 1997
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Prime + .50% (9.0% at June 30, 1997)
line of credit with a financial institution
in the amount of $2,500,000, payable monthly,
due July 1997. $ 202,000
8.5% note payable to an entity owned by
the stockholders of the Company, payable
upon demand. 70,300
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$ 272,300
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4. CONTINGENCY On June 18, 1997, the Florida Department of Revenue
issued to the Company, a Notice of Intent to Make
Audit Changes with respect to a proposed assessment
of sales and use tax for the period August 1, 1991
through July 31, 1996. The assessment was made
primarily due to the failure by the Company to
properly document through resale certificates the
noncollection of the sales and use tax. The proposed
assessment, including penalties and interest, total
approximately $1,100,000.
10
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company strongly disagrees with the proposed
assessment and intends to provide the necessary
resale certificates which form the basis for the
proposed assessment. By providing such certificates,
the Company believes the facts underlying the
proposed assessment will be resolved in the
Company's favor. However, no assurance can be given
that the Company will be successful in reducing the
proposed assessment referred to above.
5. SUBSEQUENT Effective August 1, 1997, the Company's line of
EVENTS credit with a financial institution was renewed and
increased to $4.5 million. Borrowings under the new
line of credit bear interest at the rate of prime
plus .25% and are secured by a lien on all of the
Company's accounts receivable, inventory and
equipment. Borrowings under the new line of credit
are based upon specific percentages of eligible
accounts receivable and inventory. The new line of
credit is due July 28, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-QSB CONTAIN FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO,
ECONOMIC, COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE
COMPANY'S OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES, AND THE FACTORS
DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE COMPANY'S PROSPECTUS DATED FEBRUARY 13, 1997.
RESULTS OF OPERATIONS
Please refer to the Company's "Results of Operations" section in Item 6
of its Annual Report on Form 10-KSB for the year ended December 31, 1996, which
is incorporated into this Quarterly Report on Form 10-QSB by reference. Item 6
of the Annual Report contains a discussion of, among other things, the
importance to the Company of the impact on the Company's operating results from
period to period of the mix of sales between retail and original equipment
manufacturer ("OEM") sales. Item 6 also contains a discussion on how the
Company's retail sales have increased in comparison to its OEM sales, and how
this increase has positively impacted the Company's gross profit margins while
also causing an increase in selling, general and administrative ("SG&A")
expenses, which are generally higher with respect to retail sales.
For the six month and the three month periods ended June 30, 1997, the
Company achieved net sales of $7,141,734 and $3,547,685, respectively, which
were increases of 8.5% and 15.7%, respectively, when compared to the net sales
of $6,581,211 and $3,065,280 during the same periods in 1996. These increases in
net sales from period to period were due primarily to increases in retail sales,
including East European retail sales, despite the decreases in OEM sales from
period to period.
The Company added a number of new retail sales accounts during the six
month period ended June 30, 1997. These new retail sales accounts accounted for
approximately one half of the increase in retail sales. The remainder of the
increase in retail sales was due to increased sales to the existing customer
base. East European retail sales increased due primarily to the addition of new
customers. OEM sales decreased from period to period primarily due to the
financial problems (unrelated to the Company) of two large OEM customers during
the second half of 1996. During the first six months of 1996, these two
customers made significant purchases from the Company which were not repeated
during the first six months of 1997. The Company is presently building its OEM
sales group in order to broaden its base of OEM customers and increase its
future OEM sales. No assurance can be given that the Company, in this regard,
will be successful.
Gross profit margin for the six month period ended June 30, 1997 was
42.6% compared to a 39.6% gross profit margin for the same period in 1996. This
increase in gross profit margin was primarily due to the change in sales mix
from period to period from OEM sales to retail and international sales, which
generally produce a greater gross profit margin than OEM sales. Gross
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profit margin for the three month period ended June 30, 1997 was 38.2% compared
to 38.7% for the same period in 1996.
SG&A expenses increased significantly to $2,580,591 for the six month
period ended June 30, 1997 and to $1,252,632 for the three month period ended
June 30, 1997. These amounts were increases of $632,569, or 32.5%, for the six
month period ended June 30, 1997 and $272,117, or 27.8%, for the three month
period ended June 30, 1997, when compared to the same periods in 1996. Expenses
related to sales and marketing increased approximately $291,000 for the 1997 six
month period, and approximately $154,000 for the 1997 three month period, due to
increased expenditures for advertising, travel, trade shows attendance, and
sales and marketing salaries and commissions. These additional sales and
marketing expenses were incurred primarily in connection with the Company's
efforts to build future sales of domestic retail and OEM products through the
opening of a Western regional sales office and warehouse, as well as due to the
increased sales and marketing costs associated with the shift of sales from OEM
sales to retail and international sales when compared to the same periods in the
previous year. Administrative expenses increased approximately $341,000 for the
six month period, and approximately $118,000 for the three month period, ended
June 30, 1997, primarily due to additional expenditures during 1997 for
professional fees, insurances and salaries. These additional administrative
expenses were incurred primarily due to the increased administrative
requirements of being a public company as well as the costs associated with the
Company's search for future acquisition candidates.
Interest expense, net of interest income, for the six month period
ended June 30, 1997 was $71,993, which was an increase of $12,723, or 21.5%,
when compared to the same period in 1996. The increase in net interest expense
for the six month period ended June 30, 1997 was primarily due to increased
total combined borrowing, and higher average interest rates on the Company's
line of credit and the subordinated promissory notes to the Company's principal
shareholders during the 1997 period. Interest expense, net of interest income,
for the three month period ended June 30, 1997 was $23,567, which was a decrease
of $6,464, or 21.5%, when compared to the same period in 1996. The decrease in
net interest expense for the 1997 three month period was primarily due to
decreased total combined borrowing from period to period, partially offset by
higher average interest rates on the Company's line of credit and the
subordinated promissory notes to the Company's principal shareholders during the
1997 period.
As a result of the factors set forth above, the Company's income before
taxes was $393,835 for the six month period ended June 30, 1997 and $105,211 for
the three month period ended June 30, 1997. These were respective decreases of
$186,461, or 32.1%, and $48,695, or 31.6% , when compared to the same periods in
1996.
Pro forma net income, which reflects the Company's net income had the
Company been taxed as a C Corporation for the entire six month period in 1996
and 1997 was $237,725 ($.12 per share), for the six month period ended June 30,
1997, and $52,792 ($.02 per share), for the three month period ended June 30,
1997, compared to $377,014 ( $.30 per share), for the six month period and
$129,384 ( $.10 per share), for the three month period in 1996. There were 52.9%
or 664,446, more
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weighted shares outstanding during the six month period ended June 30, 1997 and
73.0% or 915,717, more weighted shares outstanding during the three month period
ended June 30, 1997 than there were in the same periods in 1996, due to the
Company's winter 1997 initial public offering.
OUTLOOK FOR 1997
THE INFORMATION CONTAINED IN THIS SECTION IS FORWARD LOOKING
INFORMATION AND IS BASED UPON INFORMATION CURRENTLY AVAILABLE TO THE COMPANY.
THE RESULTS OF OPERATIONS ACTUALLY ACHIEVED BY THE COMPANY MAY DIFFER MATERIALLY
FROM THESE ESTIMATES. THESE ESTIMATES MAY ALSO BE SUBJECT TO NUMEROUS FACTORS,
AS MORE PARTICULARLY SET FORTH BELOW, MANY OF WHICH ARE BEYOND THE CONTROL OF
THE COMPANY.
The Company believes that the trends described above will continue to
impact the Company's results of operations for the balance of 1997. The Company
believes that its efforts to increase its OEM and retail sales will take time,
and that the costs of such growth in the short term will have to be absorbed by
the Company's existing operations, adversely impacting results of operations for
the balance of 1997. While the Company expects that these efforts will begin to
show results through increased sales during 1998, there can be no assurance that
this will occur.
The Company is also exploring potential acquisitions of other
companies, assets or 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.
If the Company were to complete one or more acquisitions, it might have a
material impact on the Company's results of operations, either positively or
negatively (based upon the particularities of the acquisition candidate and the
Company's success in integrating that acquisition candidate into their existing
business).
Based upon these factors and the information currently available to the
Company, and without accounting for the impact of any acquisitions which may be
completed during the balance of the year, the Company is estimating that its net
sales for 1997 will approximate $15 million (compared to net sales of $13.7
million for 1996) and that its earnings per share for the 1997 year will be
between $.25 and $.30 per share (compared to $.57 per share for 1996), based
upon 63.3% more weighted average shares outstanding in 1997 as compared to the
number of weighted average shares outstanding in 1996.
These estimates are subject to many variables which may impact upon the
revenues and earnings achieved by the Company during 1997 and for future
periods. Revenues and gross profit are particularly impacted by the level of OEM
and retail sales achieved during any period and by whether the Company is
successful in its efforts to expand its sales activities in all of its markets.
For further information regarding the risks and uncertainties encountered in the
Company's business, see the Company's Annual Report on Form 10-K for 1996 and
the Company's Prospectus, dated February 13, 1997.
14
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On February 19, 1997 the Company closed its initial public offering of
800,000 shares of Common Stock and 800,000 of Redeemable Common Stock Purchase
Warrants. On March 20, 1997 the Company sold an additional 120,000 shares of
Common Stock and 120,000 of its Redeemable Common Stock Purchase Warrants in
connection with the exercise by the underwriters of an over-allotment option.
Collectively, the Company raised net proceeds of approximately $4,862,000 in its
initial public offering (or $4,375,000 net of certain capitalized expenses in
connection with the offering).
At June 30, 1997 the Company's working capital was $7,394,335 and its
current ratio was 4.86:1, compared to working capital of $3,119,645 and a
current ratio of 1.67:1 as of December 31, 1996. The increase in working capital
and the current ratio was due primarily to the receipt of the proceeds of the
Company's initial public offering which contributed to the increase in cash, the
decrease in current portion of long-term debt through repayment of amounts due
under the Company's line of credit, and the decrease in accounts payable and
accrued expenses.
As of June 30, 1997, accounts receivable increased $634,521, or 23.4%,
due primarily to increases in sales. Inventories decreased $162,180, or 3.5%,
from December 31, 1996 to June 30, 1997. The Company believes that its current
inventory level is sufficient to meet its anticipated level of sales for 1997
due to increased sales, and in particular sales to international customers.
As of June 30, 1997, accounts payable and accrued expenses had
decreased $1,516,581, or 50.3%, compared to December 31, 1996. This decrease is
primarily due to a portion of the proceeds of the Company's initial public
offering being used to pay accounts payable and various accrued expenses.
The Company had, as of June 30, 1997, a $2,500,000 revolving line of
credit with an institutional lender. Borrowings under this line bore interest at
the rate of prime plus .5%, and were secured by accounts receivable, inventory,
and all other assets of the Company. The line of credit was personally
guaranteed by the Company's principal shareholders. As of June 30, 1997, the
amounts due under the line of credit had decreased $1,268,000 to $202,000, when
compared to December 31, 1996, primarily due to a portion of the proceeds from
the Company's initial public offering being used to pay down the line.
Borrowings available to the Company under the revolving line of credit were
based upon specific percentages of accounts receivable and inventory and the
additional amount available to the Company to borrow under the revolving line of
credit was approximately $2,054,000 as of June 30, 1997.
The Company has, as of August 1, 1997, renewed their revolving line of
credit with an institutional lender. The renewed revolving line of credit has
been increased to $4,500,000, and borrowings under the renewed revolving line of
credit bear interest at the rate of prime plus .25%. The renewed line of credit
continues to be secured by a lien on all accounts receivable, inventory,
equipment and all other assets of the Company. The new revolving line of credit
is no longer
15
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personally guaranteed by the Company's principal shareholders. The Company
intends to borrow funds from the revolving line of credit to fund its future
growth, after utilizing the net proceeds of the initial public offering. There
can be no assurance that the Company will be in a position to borrow funds at
the time they become necessary.
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 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 personally paid
taxes on undistributed profits of the Company for the period from January 1,
1996 to February 13, 1997, for which the Company reimbursed them. The
distributions for this purpose were approximately $260,000 and were made in
April 1997.
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 on February 13, 1997, executed two seven year Convertible Subordinated
Promissory Notes (the "Principal Shareholders' Notes") each in the amount of
$869,562.50 in favor of Messrs. Stein and Briskin. The Principal Shareholders'
Notes 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.
The Company believes that its current cash balance, along with the
unused balances available under its existing line of credit and the net cash
flow anticipated to be generated from operating activities, will be adequate to
fund the Company's operations in 1997. This is a projection, however, and no
assurance can be given that the Company's cash from operations and from its
available line of credit will be sufficient to meet the Company's cash
requirements during 1997. For example, if the Company were to make a significant
acquisition during 1997, it might require additional capital in order to
complete such acquisition and/or finance the operations of the acquired
business, depending upon the particular circumstances of the acquisition and the
Company's capital resources at that time.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 25, 1997, the Florida Department of Revenue issued to the
Company a Notice of Intent to Make Audit Changes with respect to a proposed
assessment of sales and use tax covering the period August 1, 1991 through July
31, 1996. The proposed assessment was made primarily due to the failure by the
Company to properly document through resale certificates the noncollection of
the sales and use tax. The proposed assessment, including penalties and
interest, totaled approximately $1,100,000. The Company strongly disagrees with
the proposed assessment and intends to provide the necessary resale certificates
which form the basis for the proposed assessment. By providing such
certificates, the Company believes the facts underlying the proposed assessment
will be resolved in the Company's favor thereby potentially reducing the
proposed assessment to be paid by the Company. Notwithstanding the Company's
actions to contest the assessments as described above, no assurance can be given
that the Company will be successful in reducing the proposed assessment.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
Effective as of August 1, 1997, the Company entered into a Loan
Agreement with SunTrust Bank Miami, N.A. ("SunTrust"), pursuant to which the
Company can borrow up to a maximum of $4,500,000 under a revolving line of
credit. The new revolving line of credit replaces the Company's previously
existing lending facility with SunTrust in the original amount of $2,500,000.
Borrowings under this new revolving line of credit bear interest at the rate of
prime plus .25% per annum and are secured by lien on all accounts receivable,
inventory and equipment of the Company, and all assets of the Company.
Borrowings available to the Company under the new revolving line of credit are
based upon specific percentages of eligible accounts receivable and inventories.
The term of the new revolving line of credit terminates on July 28, 1998.
17
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.13 Loan Agreement, dated as of
August 1, 1997
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended June 30, 1997.
18
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
Date: August 13, 1997 By: /S/ SLAV STEIN
--------------------------------------
SLAV STEIN, President and Chief Executive
Officer
By: /S/ RANDALL N. PAULFUS
--------------------------------------
RANDALL N. PAULFUS, Chief Financial
Officer
19
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EXHIBIT INDEX
EXHIBIT
- -------
10.13 Loan Agreement, dated as of August 1, 1997
27.1 Financial Data Schedule
EXHIBIT 10.13
LOAN AGREEMENT
THIS LOAN AGREEMENT IS
made on this
____ day of _______, 1997, by and between:
SunTrust Bank Miami, National Association
a national banking association, having an address at
1111 Lincoln Road, Miami Beach, Florida 33139
hereafter referred to as
("BANK");
and the following entity:
Advanced Electronic Support Products, Inc.,
("AESP")
a Florida corporation having an address at
1810 Northeast 144th Street, Miami, Florida 33181
hereafter referred to as
("BORROWER").
RECITALS:
BORROWER has applied to the BANK for a Revolving Line of Credit which
will enable BORROWER to borrow from BANK up to $4,500,000.00, subject to the
terms and conditions hereof. The proceeds of the requested Revolving Line of
Credit are to be used for working capital of BORROWER as needed from time to
time.
BANK is willing to grant the request of BORROWER provided that: (i) the
BORROWER pledges certain collateral to BANK, including, but not limited to,
presently existing and hereafter acquired accounts, accounts receivable,
equipment and inventory, including the proceeds thereof, as security for the
repayment of the total indebtedness represented by the Revolving Promissory Note
executed by BORROWER in favor of BANK of even date herewith; and (ii) BORROWER
agrees to be bound by the terms and conditions of this Agreement and all other
Loan Documents executed concurrently herewith.
<PAGE>
NOW, THEREFORE, in consideration of the extension of credit from BANK
to BORROWER and other good and valuable consideration hereby acknowledged as
received by each party from the other, it is agreed that:
1. DEFINITIONS:
For purposes of this Loan Agreement, including any Exhibits hereto,
unless specifically excepted or the context otherwise requires:
1.01 "AVAILABLE CREDIT" shall mean the amount of money available to
BORROWER hereunder which amount shall be calculated by subtracting the
outstanding principal balance under the Revolving Promissory Note, plus any
accrued and unpaid interest, from $4,500,000.00.
1.02 "BORROWER" shall mean Advanced Electronic Support Products, Inc.,
a Florida corporation.
1.03 "CASH FLOW" shall be determined in accordance with generally
accepted accounting principles and shall mean net profit increased by interest
paid, depreciation and amortization and decreased by dividends paid.
1.04 "DOMESTIC ACCOUNTS RECEIVABLE" shall be accounts receivable due on
account of deliveries to be made within the United States.
1.05 "DOMESTIC ELIGIBLE ACCOUNTS RECEIVABLE" shall mean at any date of
determination thereof (which date shall be in BANK'S sole reasonable discretion)
Domestic Accounts Receivable of the BORROWER which are not Eligible Insured
Domestic Accounts Receivable and
2
<PAGE>
which are unpaid for a period of less than ninety (90) days from the original
date of the invoices issued to solvent going concerns. There shall be excluded
from Eligible Domestic Accounts Receivable all receivables from subsidiaries,
affiliated companies or entities related to the BORROWER.
1.06 "ELIGIBLE INSURED DOMESTIC ACCOUNTS RECEIVABLE" shall mean, at any
date of determination thereof, (which date shall be at BANK'S sole reasonable
discretion) Domestic Accounts Receivable of Borrower which are unpaid for a
period of (90) days or less and are insured in full by a policy issued by the
American Credit Indemnity Company, provided, however, that if such company
becomes unsatisfactory to BANK, in the exercise of its reasonable business
judgment, another insurance company shall be substituted.
1.07 "DOMESTIC INVENTORY" shall mean all inventory of the BORROWER
which is located in the United States of America, encumbered by a UCC-1 in favor
of BANK and held for sale to customers in the United States of America.
1.08 "ELIGIBLE DOMESTIC INVENTORY" shall be 90% of the Domestic
Inventory which thereby provides for a 10% inventory reserve.
1.09 "ELIGIBLE INSURED FOREIGN RECEIVABLES" shall mean, at any date of
determination thereof, (which date shall be at BANK'S sole reasonable
discretion) Foreign Accounts Receivable of Borrower which are unpaid for a
period of (90) days or less and are insured in full by a policy issued by the
American Credit Indemnity Company, provided, however, that if such company
becomes
3
<PAGE>
unsatisfactory to BANK, in the exercise of its reasonable business judgment,
another insurance company shall be substituted.
1.10 "ELIGIBLE FOREIGN ACCOUNTS RECEIVABLE" shall mean at any date of
determination thereof (which date shall be selected in BANK's sole reasonable
discretion) all Foreign Accounts Receivable of AESP/MIAMI which are not Eligible
Insured Foreign Receivables and which are unpaid for a period of less than
ninety (90) days from the date of original invoices which are issued to solvent
going concerns. There shall be excepted from Eligible Foreign Accounts
Receivable all receivables from subsidiaries, affiliated companies, or entities
related to BORROWER.
1.11 "EVENT OF DEFAULT" shall have the meaning assigned thereto in
Article VII hereof.
1.12 "FOREIGN ACCOUNTS RECEIVABLE" shall be accounts receivable due on
account of deliveries to be made outside of the United States.
1.13 "LETTERS OF CREDIT" shall mean documentary letters of credit
issued by BANK for the account of BORROWER not to exceed the aggregate of any
Available Credit at the time requested.
1.14 "LOAN" shall mean the extension of credit, including the issuance
of any Letter of Credit, by BANK to BORROWER as set forth herein and in the Loan
Documents.
1.15 "LOAN DOCUMENTS" shall mean this Loan Agreement, the Revolving
Promissory Note, Security Agreement, UCC-1 Financing Statements, Guaranty
Agreements, and any and all other
4
<PAGE>
instruments or documents delivered to BANK in connection with the
Loan.
1.16 "MATURITY DATE" shall mean July 26, 1998.
1.17 "NOTE" shall mean the Revolving Promissory Note executed by
BORROWER to evidence the Loan governed hereby.
1.18 "PERSON" (or "PERSONS") shall mean a natural person, a
corporation, a business trust, an association, a company, partnership, a joint
venture, trust or other entity or a government or any agency or political
subdivision thereof.
1.19 "PRIME RATE" shall mean the interest rate (not necessarily the
lowest or best rate) charged by SunTrust Banks, Inc. in its sole discretion, as
its prime rate, calculated on a daily moving basis.
1.20 "REVOLVING LINE OF CREDIT" shall mean the maximum amount available
to BORROWER, or so much thereof as shall be outstanding from time to time, not
in any event, to exceed $4,500,000.00.
1.21 "SECURITY AGREEMENT" shall mean that certain Security Agreement
executed simultaneously herewith in which BORROWER pledges to BANK all of
BORROWER'S assets including but not limited to presently owned or hereafter
acquired accounts, accounts receivable, inventory, intangibles, contract
rights,, furniture, fixtures, equipment, including the proceeds, products, and
offspring thereof.
1.22 "ADJUSTED TANGIBLE NET WORTH" means the aggregate value of all
assets (adjusted for the convertible subordinated shareholder notes which shall
be deducted from total liabilities
5
<PAGE>
and added to total assets), less (i) goodwill and other intangible assets, (ii)
investments in affiliates of the Borrower, (iii) advances to affiliates, and
(iv) the aggregate amount of all liabilities of the Borrower. For purposes
hereof, the value of the assets of the Borrower and the goodwill of the Borrower
shall be determined in accordance with generally accepted accounting principles.
II. EXTENSION OF CREDIT:
2.01 REVOLVING CREDIT. Subject to the terms and conditions hereof and
so long as there exists no Event of Default or event which, with the lapse of
time or the giving of notice or both, would become an Event of Default, the BANK
will, from time to time, until the Maturity Date, at the request of BORROWER,
make loan advances to BORROWER which loan advances may be repaid and reborrowed
subject to each of the following conditions:
(a) BANK shall have no obligation to make any loan advances or
issue any Letters of Credit which in the aggregate exceed the principal sum of
$4,500,000.00, reduced by the aggregate principal amount of any and all loan
advances and Letters of Credit outstanding at the time of request, and further
reduced by any outstanding accrued and unpaid interest or other amounts owing
under any of the Loan Documents.
(b) The total of all advances made hereunder from time to time
shall not exceed the sum of the following, determined at the time of each
advance, subject to the further limits of section (c) below:
6
<PAGE>
i. 95% of Eligible Insured Domestic Accounts
receivable;
ii. 80% of Domestic Eligible Accounts
Receivable;
iii. 90% of Eligible Insured Foreign Receivables
which are due to AESP/Miami;
iv. 50% of Eligible Foreign Accounts Receivable.
up to a maximum of $400,000.00 of the
aggregate of such Eligible Foreign Accounts
Receivable which amount shall not include
more than $100,000.00 of Eligible Foreign
Accounts Receivable due from any one entity.
Notwithstanding the foregoing Receivables
due from customers in Canada shall not be
included in the determination of the
$400,000.00 limit;
v. 40% of all Eligible Domestic Inventory which
is not pre-sold;
vi. 60.0% of Eligible Domestic Inventory which
is pre-sold OEM inventory, up to $835,000.00
of such inventory which shall limit the
advances under this section vi. to
$500,000.00; and
vii. 40% of Eligible Domestic Inventory which is
pre-sold OEM inventory in excess of
$835,000.00 of such inventory.
7
<PAGE>
(c) The provisions of section (b) above shall be subject
to the following:
i. For purposes of subsections (vi) and (vii),
domestic presold OEM inventory shall be OEM
inventory which has been presold (as
evidenced by written orders) to a third
party purchaser in the United States who is
unrelated to and unaffiliated with the
BORROWER, which is located in the BORROWER'S
offices or warehouses, and which is
encumbered by the UCC-1 executed
simultaneously herewith.
ii. The total of all advances made against on
inventory shall not exceed the lower of
$2,000,000.00 or the amount advanced against
receivables at such time.
iii. $100,000.00 shall be deducted from eligible
funds to be advanced hereunder to satisfy
the sublimit required by SunTrust Banks,
Inc. for foreign currency transactions.
(d) BORROWER shall confirm all advances under the Revolving
Line of Credit in writing within five (5) days after an advance request.
(e) BORROWER agrees that the proceeds of the Revolving
Promissory Note will be used for basic working capital requirements and
inventory purchases including issuance of commercial Letters of Credit for
BORROWER.
8
<PAGE>
2.02 TERMS OF NOTE.
(a) The obligation of the BORROWER to repay the indebtedness
is evidenced by the Revolving Promissory Note. The Note bears interest at a rate
per annum equal to one-quarter of one percent (.0025%) in excess of the Prime
Rate. All interest calculations are made on a daily moving basis, computed on a
360- day year.
(b) Interest shall be due and payable monthly commencing
August 26, 1997 and shall be billed and payable monthly thereafter. BANK may
automatically debit BORROWER's account held by the BANK when BORROWER is billed
for accrued and unpaid interest. BORROWER shall execute at closing BANK's form
of automatic debit authorization in the form attached hereto as Exhibit "B".
(c) The Note shall mature on the Maturity Date at which time
the entire outstanding principal balance together with accrued and unpaid
interest (and any fee due under Sections 4.04 and 8.03 hereof) shall be due and
payable in full immediately by the BORROWER.
2.03 OPTIONAL PREPAYMENT OF NOTE. Upon at least three (3) business days
prior written or telegraphic notice to BANK, BORROWER may prepay the obligation
evidenced by the Note in whole at any time or in part from time to time, without
premium or penalty, but only if interest accrued on the principal amount is
current or prepaid to the date of prepayment. No optional, partial prepayment of
the Note shall excuse BORROWER from the next required regular payment due
thereunder.
9
<PAGE>
2.04 MANNER OF PAYMENT AND DEFAULT CLAUSE. All payments of principal
and interest are payable at the office of BANK addressed as follows: SunTrust
Bank Miami, National Association, Miami Beach Office, Attention: Vice President
Commercial Loans; 1111 Lincoln Road, Miami Beach, Florida 33139; or such other
office of the BANK as is acceptable to the parties hereto. Payments shall be
made in lawful money of the United States of America which shall be legal tender
for debts public and private at the time of payment. If any principal or
interest payment shall not be paid on or before five (5) days from the due date,
then the entire unpaid principal balance together with any accrued and unpaid
interest on the Note shall be immediately due and payable without notice or
demand at the option of the BANK and the unpaid principal balance and unpaid
accrued interest on the Note shall bear default interest at the maximum rate
allowed by law.
III. REPRESENTATIONS AND WARRANTIES.
BORROWER hereby represents and warrants to BANK, in order to induce
BANK to extend the credit requested, that:
3.01 AUTHORIZATION OF LOAN, ETC. The execution, delivery, and
performance by BORROWER of this Loan Agreement, the Note, and all other Loan
Documents delivered to BANK by the BORROWER: (a) have been duly authorized by
the BORROWER through its Board of Directors and do not violate BORROWER'S
Articles of Incorporation; and (b) will not violate (i) any provision of law
(including, without limitation, any applicable usury or similar law), (ii) any
order of any court or other agency of government in any matter to which
10
<PAGE>
BORROWER is a party or as a result of which it is bound, or (iii) any material
indenture, agreement or other instrument or obligation to which BORROWER is a
party or subject to, or by which the BORROWER or any of its assets are subject
to, or will be in conflict with, result in a breach of, or constitute (with
notice or lapse of time or both) a default under any such indenture, agreement
instrument or obligation.
3.02 NO ADVERSE CHANGE. There has been no material adverse change in
the business, properties, assets, operations or condition (financial or
otherwise) of BORROWER since the date of the last financial statements of
BORROWER furnished to BANK. As of the date hereof, there are no material
unrealized or anticipated losses in connection with any loans, advances and
other commitments of the BORROWER. BORROWER further represents that there will
be no change of ownership or management of BORROWER through the Maturity Date.
BORROWER shall give BANK thirty (30) days written notice of any proposed change
in management, including any officers and directors of the company. BANK shall
not unreasonably withhold its consent to a change in management. Any change of
ownership, or any change in management not approved by BANK prior to approval by
BANK shall constitute an Event of Default under Article VII herein.
3.03 LITIGATION. There are no actions, suits, or proceedings (whether
or not purportedly on behalf of BORROWER) pending or affecting BORROWER at law
or in equity or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign,
11
<PAGE>
which involves or affects the extension of credit herein contemplated or the
possibility of any judgment or liability which if determined adversely to
BORROWER would result in any material adverse change in the business,
operations, properties or assets or in the condition (financial or otherwise) of
BORROWER. BORROWER is not in default with respect to any final judgment, writ,
injunction, decree, rule or regulation of any court or federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which would have a materially adverse
effect on BORROWER.
3.04 PAYMENT OF TAXES. BORROWER has filed all federal, state and local
tax returns as well as paid any and all import or export duties, fees, taxes,
licenses or other mandatory charge which may result in a material effect on
BORROWER'S financial condition or affect in any way the Collateral given BANK
hereunder if not so filed or paid with respect to the operations of BORROWER
which are required to be filed or paid for the present fiscal year, and all
prior fiscal years or as are otherwise due. BORROWER has paid or caused to be
paid to any respective taxing or licensing authority all taxes as shown on said
returns or on any assessment or deficiency received by any of them to the extent
that such taxes have become due.
3.05 AGREEMENTS. BORROWER is not a party to any agreement or instrument
or subject to any charter or other restriction materially and adversely
affecting its business, properties, assets, operations or condition (financial
or otherwise). BORROWER
12
<PAGE>
is not in material default in the performance, observation, or fulfillment of
any of the obligations, covenants, or conditions contained in any material
agreement, instrument or obligation to which the BORROWER is a party. This Loan
Agreement is not prohibited by the terms or affected by any other agreement or
instrument referred to hereinabove.
3.06 COMPLIANCE WITH APPLICABLE LAWS. BORROWER is in compliance with
all laws, ordinances, rules, regulations, and all other legal requirements, the
violation of which would have a material effect on the business, properties,
assets, operations or condition of BORROWER.
3.07 LOCATION OF BORROWER'S ASSETS. All inventory and other assets of
BORROWER are located in properties specified in the UCC-1.
3.08 BROKERS. There is no broker entitled to a commission on account of
the loan.
IV. CONDITIONS OF LENDING.
The obligation of the BANK to make the Loan hereunder and any advances
subsequent to the execution of this Agreement is, and hereafter through the
Maturity Date, will be subject to the following conditions:
4.01 REPRESENTATIONS AND WARRANTIES. As of the date hereof and at the
time of every advance made under the Note, the representations and warranties
set forth in Article III hereof shall be true and correct. Should any material
change occur which affects the representations and warranties set forth in
Article III
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<PAGE>
above, BORROWER agrees to immediately notify BANK in writing of such changes.
4.02 NO DEFAULT. At the time of each advance hereunder and after giving
effect thereto, BORROWER shall be in compliance with all of the terms and
provisions set forth herein on its part to be observed or performed, and no
Event of Default specified in Article VII or otherwise herein, nor any event
which upon notice or lapse of time or both would constitute such an Event of
Default, shall have occurred and be continuing. On the date of each advance
hereunder, at BANK's request BORROWER shall deliver to the BANK a certificate,
dated as of the date of such loan and signed by the appropriate corporate
officer(s) of the BORROWER, confirming such compliance as aforesaid and with the
condition precedent set forth in Section 4.01 hereof; whether or not BANK
requests such a certificate, BORROWER'S request for an advance shall be deemed
to be a representation by BORROWER that the conditions of this Section 4.02 have
been satisfied.
4.03 FINANCIAL AUDITS. BANK shall be entitled to conduct quarterly
audits of BORROWER'S business operation in the event BANK believes the BORROWER
is experiencing material adverse changes to business operations. BANK shall
charge BORROWER'S account for any audit fees subsequent to any audit actually
conducted. Failure by BANK to conduct one or more audits shall not operate as a
waiver of BANK's right to conduct any other audit. BORROWER shall provide BANK
semi-annual financial statements of all affiliates and/or subsidiaries of
BORROWER.
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<PAGE>
4.04 ADDITIONAL FINANCIAL INFORMATION. The BANK shall have the right
from time-to-time to demand additional financial information from the BORROWER,
and the BORROWER shall forthwith supply such additional information to the BANK.
The BANK shall also have the right to require additional covenants to be
performed by the BORROWER based upon changes in business conditions of the
BORROWER.
V. AFFIRMATIVE COVENANTS.
BORROWER covenants and agrees that from the date hereof and until
payment in full of all the principal and accrued interest on the Note, unless
the BANK shall otherwise consent in writing, BORROWER will:
5.01 NOTICE. Give prompt written notice to the BANK of (a) any
proceedings instituted by or against BORROWER in any federal or state court or
before any commission or other regulatory body, federal, state or local, or of
any such proceedings threatened against BORROWER in writing by any federal,
state or other governmental agency, which, if adversely determined, would have a
material adverse effect on the businesses, properties, assets, operations or
condition (financial or otherwise) of BORROWER; and (b) any other action, event
or condition of any nature which may reasonably be expected to lead to or result
in a material adverse effect on the businesses, properties, assets, operations
or condition (financial or otherwise) of BORROWER, or which, with notice or
lapse of time or both, would constitute an Event of
15
<PAGE>
Default under this Loan Agreement or a default under any other material
agreement by which BORROWER is bound.
5.02 PAYMENT OF DEBTS, TAXES, ETC. Pay all debts and perform all
obligations promptly and in accordance with the terms thereof and pay and
discharge or cause to be paid and discharged promptly all taxes, assessments and
governmental charges or levies imposed upon BORROWER or upon its income or
receipts or upon any of its properties and assets before the same shall be in
default, as well as all lawful claims for labor, materials and supplies or
otherwise which, if unpaid, might become a lien or charge upon such properties
and assets or any part thereof; provided, however, that BORROWER shall not be
required to perform such obligations or pay such debts (except for obligations
for money borrowed), taxes, assessments, or governmental charges or levies or
claims for labor, materials, and supplies which are being contested in good
faith and by proper proceedings diligently pursued.
5.03 COMPLIANCE WITH APPLICABLE LAWS. Promptly and faithfully comply
with, conform to, and obey all present and future laws, ordinances, rules,
regulations, and all other legal requirements applicable to BORROWER, the
violation of which would have a materially adverse effect on the business,
properties, assets or operations of BORROWER.
5.04 INSURANCE POLICIES. Maintain ordinary and necessary insurance
policies in good standing and pay promptly all premiums when due and payable
thereon, including but not limited to coverage against general liability, fire,
and theft. All coverages shall
16
<PAGE>
include BANK as a Loss Payee with thirty (30) days prior written notice of
cancellation. BORROWER shall deliver to BANK copies of all insurance policies
and/or binders in force no later than ten (10) days prior to the expiration of
any current policy.
5.05 FINANCIAL COVENANTS. Borrower shall comply with the following
financial covenants:
(a) Borrower shall maintain a minimum Adjusted Tangible Net
Worth of $7,250,000.00.
(b) Borrower shall maintain a ratio of Adjusted Total
Liabilities to Adjusted Tangible Net Worth of no more than .75. Adjusted Total
Liabilities shall mean total liabilities minus the convertible subordinated
shareholder notes.
(c) For every consecutive four fiscal quarters, Borrower shall
maintain a ratio of Cash Flow to the sum of all principal and interest due from
Borrower to any lender and all dividends paid by Borrower of not less than 1.5.
On a quarterly basis, no later than forty-five (45) days after the end
of each fiscal quarter, BORROWER shall provide BANK with proof of BORROWER'S
compliance with the foregoing requirements. Said proof shall be in the form of
reviewed consolidated financial statements. Such statements shall also be
certified by BORROWER to be true and correct.
5.06 FINANCIAL REPORTS. Deliver the following financial reports to
BANK:
(a) Within one hundred twenty (120) days after the end of each
fiscal year of BORROWER: (i) the consolidated audited
17
<PAGE>
financial statements of BORROWER and its affiliates and subsidiaries for such
year, together with an unqualified opinion with respect to same from a certified
public accounting firm acceptable to the BANK in its reasonable discretion.
(b) Within one hundred twenty (120) days after the end of the
fiscal year of each of BORROWER'S affiliates, an audited statement prepared by
an certified public accounting firm acceptable to the BANK in its reasonable
discretion.
(c) Within thirty (30) days after filing with the I.R.S., a
complete copy of the BORROWER'S and each of its subsidiary's corporate income
tax returns and, if the time for filing has been extended, a copy of the
extension request;
(d) On a quarterly basis, no later than forty-five (45) days
after the end of each fiscal quarter, reviewed consolidating financial
statements of the BORROWER and all entities related to the BORROWER. Such
statements shall also be certified by the BORROWER to be true and correct.
(e) On a monthly basis, a Borrowing Base Certificate,
substantially in the form attached hereto as Exhibit "A", supported by a current
accounts receivable aging, a detailed pre-sold (OEM) inventory breakdown and a
compliance certificate executed by an officer of the Borrower, in the form
attached to the Borrowing Base Certificate. Said certificate will be provided
ten (10) days after the end of each month of the term of the Revolving
Promissory Note;
18
<PAGE>
(f) On a monthly basis, the Specific Customer Endorsement of
the American Credit Indemnity Company Insurance policy.
(g) No later than thirty (30) days prior to policy expiration,
evidence of renewal of the American Credit Indemnity Company Insurance Policy.
Failure to comply with this provision shall entitle Bank to all remedies
provided in this Agreement and, in addition, shall automatically cause Section
2.01(b) to be modified by reducing 95% to 80% in section i. and by reducing 95%
to 50% in section iii. Said reductions shall be effective until the Borrower
complies with this provision.
5.07 INVENTORY AUDIT. Provide an audit of the inventory of the BORROWER
as of the last day of each fiscal year of the BORROWER. The audit shall be
prepared, by an auditor acceptable to the BANK. The audit shall identify the
type and quantity of the assets contained within the inventory and the value for
same. The audit shall be delivered no later than thirty (30) days after the end
of each fiscal year of the BORROWER.
5.08 DEPOSITORY ACCOUNTS. Maintain the depository accounts of the
BORROWERS in the BANK. Said account shall include, but not be limited to, monies
received from the issuance of equity offerings, pending the use of such funds.
VI. NEGATIVE COVENANTS.
BORROWER covenants and agrees that from the date hereof until payment
in full of the principal and interest on the Note, unless
19
<PAGE>
the BANK shall otherwise consent in writing, BORROWER will not (directly or
indirectly):
6.01 INDEBTEDNESS, GUARANTEES AND LIENS. Incur, create, assume or
permit any type of indebtedness, guarantee or lien, which would in the BANK's
sole judgment, taken in the aggregate or individually, materially affect the
BORROWER'S business, properties, assets or operations or jeopardize the
BORROWER's ability to repay the loan hereunder. The BORROWER's covenants
include, but are not limited to, agreeing not to pledge, hypothecate, or
otherwise encumber the equipment or inventory of BORROWER. BORROWER shall not
change its business address and shall continually collect all accounts
receivable at said address. Should BORROWER propose to change its business
address or the address where accounts receivable are collected, BORROWER shall
give BANK thirty (30) days prior written notice of said change.
6.02 DIVIDENDS. Declare or pay any dividends.
VII. EVENTS OF DEFAULT.
Each and every occurrence of one or more of the following events shall
constitute an "Event of Default" (hereinafter called "Events of Default"):
(a) any representation or warranty made herein shall prove to
be false or misleading in any material respect;
(b) any report, certificate, financial statement or other
instrument furnished in connection with this Loan Agreement or Loan Document
shall prove to be false or misleading in any material respect;
20
<PAGE>
(c) default shall be made in the payment of the principal of,
or the interest on the Note,, for a period of seven (7) days from the date when
said payments are due and payable;
(d) default shall be made by BORROWER with respect to (i) any
liability for borrowed money beyond any applicable period of grace, or (ii) the
performance of any other obligation incurred in connection with any such
liability for borrowed money beyond any applicable period of grace, if, in each
case, the effect of such default is to accelerate the maturity of such liability
or cause any other material liability to become due prior to its stated
maturity;
(e) default shall be made under the terms and conditions of
any of the Loan Documents;
(f) default shall be made in the due observance or performance
of any other covenant, condition or agreement on the part of BORROWER to be
observed or performed pursuant to the terms of this Loan Agreement or the other
Loan Documents and such default shall have continued for a period of thirty (30)
days;
(g) BORROWER shall (i) apply for or consent to the appointment
of a receiver, trustee, or liquidator of the BORROWERS business, properties,
assets or operations, (ii) admit in writing their inability to pay their debts
as they mature, (iii) make a general assignment for the benefit of creditors,
(iv) be adjudicated a bankrupt or insolvent, or (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or take advantage
21
<PAGE>
of any bankruptcy, reorganization, insolvency, readjustment of debts,
dissolution or liquidation, law or statute, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any such law
or statute or if action shall be taken by BORROWER for the purpose of effecting
any of the foregoing, or (vi) any order, judgment, decree or writ shall be
entered upon an application of a creditor of any BORROWER by a court of
competent jurisdiction which either: (1) attaches any material portion of any
BORROWER's assets under judicial process, or (2) approves a petition seeking an
appointment of a receiver or trustee of any material part of any BORROWER's
assets, or (vii) any order, judgment, decree or writ shall be entered against
BORROWER for an amount in excess of $25,000.00;
(h) an order, judgment or decree shall be entered without the
application, approval, or consent of the debtor by any court of competent
jurisdiction, approving a petition seeking reorganization of BORROWER or any of
them or appointing a receiver, trustee or liquidator of BORROWER and such order,
judgment, or decree shall continue unstayed and in effect for any period of
forty-five (45) consecutive days, provided the order, judgment or decree shall
have a material adverse effect on BORROWER;
(i) the failure of BORROWER to keep its properties insured by
carriers acceptable to BANK and insuring against loss or damage by fire, theft
and other hazards; liability; and such other risks as BANK may require. Said
policies shall not be cancelable without at least thirty (30) days prior notice
to BANK. Not later
22
<PAGE>
than thirty (30) days prior to expiration of any policy required hereunder,
BORROWER shall provide BANK with a certificate evidencing renewal of same;
(j) acquire any new business, corporation or other entity,
without prior written approval of the BANK.
During the continuance of any such event, BANK at its option
exercised by written notice from the BANK to BORROWER, may declare the Note to
be forthwith due and payable, both as to principal and interest, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived, anything herein or in the Note to the contrary
notwithstanding and the BANK may enforce any or all of the BANK's rights and
remedies set forth in the Loan Documents.
VIII. MISCELLANEOUS.
8.01 NOTICE. Any notice shall be conclusively deemed to have been
received by a party hereto and to be effective on the day on which delivered to
such party at the address set forth below (or at such other address as such
party shall specify to the other parties in writing) or if sent by registered
mail, on the third business day after the day on which mailed, postage prepaid,
addressed to such party at said address:
(a) If to the BANK at the following address:
SunTrust Bank Miami, National Association
Commercial Lending Department
1111 Lincoln Road
Miami Beach, Florida 33139
Attention: Vice President
23
<PAGE>
(b) If to the BORROWER at the following address:
Advanced Electronic Support Products, Inc.
1810 Northeast 144th Street
Miami, Florida 33181
8.02 SURVIVAL OF REPRESENTATIONS. All covenants, agreements,
representations, and warranties made herein and in the certificates delivered
pursuant hereto shall survive the Maturity Date. Whenever in this Loan Agreement
reference is made to any of the parties hereto, such reference shall be deemed
to include the successors and assigns of such party; and all covenants, promises
and agreements by or on behalf of BORROWER which are contained in this Loan
Agreement shall inure to the benefit of the successors and assigns of the BANK.
8.03 APPLICABLE LAW. This Loan Agreement and all Loan Documents shall
be construed in accordance with and governed by the laws of the State of
Florida.
8.04 INTEREST. Nothing herein contained nor in any instrument or
transaction related hereto shall be construed or so operate as to require
Borrower or any person liable for the payment of this Note to pay interest in an
amount or at a rate greater than the maximum allowed by applicable laws in
effect from time to time. Should any interest or other charges in the nature of
the interest paid by Borrower or any parties liable for the payment of this Note
result in the computation or earning of interest in excess of the maximum rate
of interest allowed by applicable law in effect from time to time, then any and
all such excess shall be and the same is hereby waived by Bank, and all such
excess received shall
24
<PAGE>
automatically be credited against and in reduction of the Principal, and any
portion of said excess which exceeds the Principal shall be paid by Bank to
Borrower or any parties liable for the payment of this Note, it being the intent
of the parties hereto that under no circumstances shall Borrower or any parties
liable for payment hereunder be required to pay interest in excess of the
maximum rate allowed by applicable law in effect from time to time.
8.05 EXPENSES. BORROWER will pay (a) any and all documentary stamp
taxes, intangible taxes, costs and expenses applicable to the loans hereunder
at, before or after execution of any Note hereunder; (b) for all recording and
filing costs hereunder; and (c) any and all costs for preparation of loan
documents, consummation and protection of the Loan, including, but not limited
to, attorney's fees for BANK's counsel.
8.06 MODIFICATION OF AGREEMENT. No modification, amendment or waiver of
any provision of this Loan Agreement, any Loan Document, or of the Note, nor any
consent to any departure by BORROWER therefrom, shall in any event be effective
unless the same shall be in writing and signed by the BANK and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given. No notice to or demand on BORROWER shall in any case entitle
BORROWER to any other or further notice or demand in the same, similar or other
circumstances.
8.07 WAIVER OF RIGHTS BY BANK. Neither any failure nor any delay on the
part of the BANK in exercising any right, power, or
25
<PAGE>
remedy hereunder or under the Note or Loan Documents shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise of any other right, power, or remedy hereunder.
8.08 TIME OF PERFORMANCE AND EXTENSIONS. Time is of the essence with
regard to any required action, payment or other covenant of BORROWER hereunder
or in any other Loan Document. Failure to timely comply with any required
action, payment or covenant hereunder shall constitute an Event of Default under
Article VII herein. Should any payment of principal of or interest on the Note
become due and payable on other than a business day, the maturity thereof shall
be extended to the next succeeding business day, and, in the case of any
prepayment of principal, interest shall be payable thereon at the rate per annum
herein specified during such extension. The term "business day" shall mean any
day not a Saturday, Sunday, or legal bank holiday in the State of Florida.
8.09 SEVERABILITY. In case any one or more of the provisions contained
in this Loan Agreement or the Loan Documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby.
8.10 COUNTERPARTS. This Loan Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute one
26
<PAGE>
agreement. This Loan Agreement shall be effective when counterparts which, when
taken together, bear the signatures of all the parties hereto, shall have been
lodged with the BANK.
8.11 REPRESENTATION AND WARRANTY BY THE BANK. The BANK represents and
warrants to BORROWER that the Note evidencing this Loan is made in the ordinary
course of its commercial banking business.
8.12 HEADINGS. The headings used herein have been inserted for
convenience only and do not constitute matters to be considered in interpreting
this Loan Agreement.
8.13 WAIVER OF JULY TRIAL. THE BORROWER HEREBY KNOWINGLY VOLUNTARILY
AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY OF, UNDER OR IN CONNECTION
WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE BANK ENTERING INTO THIS AGREEMENT AND THE BANK MAKING ANY
LOAN ADVANCE OR OTHER EXTENSION OF CREDIT TO BORROWER.
IN WITNESS WHEREOF, BORROWER and the BANK have caused this Loan
Agreement to be executed by their duly authorized representatives, all as of the
date first above written.
BORROWER BANK
ADVANCED ELECTRONIC SUPPORT SUNTRUST BANK MIAMI, NATIONAL
PRODUCTS, INC., a Florida ASSOCIATION, a national banking
corporation association
By: /s/ VYACHASLAV STEIN By: /s/ ILLEGIBLE
--------------------------- ----------------------------
VYACHASLAV STEIN, President Assistant Vice President,
Commercial Lending Department
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,116,956
<SECURITIES> 0
<RECEIVABLES> 4,602,738
<ALLOWANCES> (70,000)
<INVENTORY> 4,532,738
<CURRENT-ASSETS> 9,309,567
<PP&E> 628,332
<DEPRECIATION> 227,322
<TOTAL-ASSETS> 9,770,077
<CURRENT-LIABILITIES> 1,915,232
<BONDS> 0
0
0
<COMMON> 1,733
<OTHER-SE> 6,413,987
<TOTAL-LIABILITY-AND-EQUITY> 9,770,077
<SALES> 7,141,734
<TOTAL-REVENUES> 7,141,734
<CGS> 4,098,529
<TOTAL-COSTS> 6,679,170
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,993
<INCOME-PRETAX> 393,835
<INCOME-TAX> 156,110<F1>
<INCOME-CONTINUING> 237,725<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237,725<F1>
<EPS-PRIMARY> .12<F1>
<EPS-DILUTED> .12<F1>
<FN>
<F1> Proforma as if the Company had been taxed as a C-Corporation during the
period.
</FN>
</TABLE>
