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 SEPTEMBER 30, 1998
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. 001-12739
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2327381
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1810 N.E. 144TH STREET
NORTH MIAMI, FLORIDA 33181
(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
November 9, 1998, is 2,282,201 shares.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
Part I. Financial Information
PAGE
----
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and December 31, 1997...................3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1998 and 1997 (unaudited)....4
Condensed Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 1998 (unaudited)...............5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited)...................6
Notes to Condensed Consolidated Financial Statements (unaudited).......7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.............................................13
Part II. Other Information
Item 1. LEGAL PROCEEDINGS................................................18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................18
Item 3. DEFAULTS UPON SENIOR SECURITIES..................................18
Item 4. SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS............................................18
Item 5. OTHER INFORMATION................................................18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.................................19
2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 669,251 $ 424,036
Accounts receivable, net of allowance for doubtful accounts of $106,091
at September 30, 1998 and $132,000 at December 31, 1997 4,024,070 5,037,267
Inventories 4,828,766 5,765,156
Income tax refund 429,000 -
Current deferred tax asset 506,000 131,411
Prepaid expenses and other current assets 108,760 249,814
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 10,565,847 11,607,684
Property and equipment, net 400,394 427,360
Intangible assets, net 680,809 761,203
Deferred tax asset 790,000 139,586
Other assets 130,292 69,365
- --------------------------------------------------------------------------------------------------------------------------
$ 12,567,342 $ 13,005,198
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes Payable $ 1,945,000 $ 227,078
Accounts payable and accrued expenses 2,017,928 3,042,476
Income taxes payable 277,353 235,525
Current deferred tax liability - 9,407
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,240,281 3,514,486
Deferred tax liability 64,581 64,581
Notes payable-shareholders 1,439,125 1,439,125
Long-term debt - 3,015
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,743,987 5,021,207
- --------------------------------------------------------------------------------------------------------------------------
Commitment and contingency (Note 4)
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000
shares authorized; none issued - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 2,282,201 shares issued 2,283 2,283
Paid-in capital 6,868,374 6,843,374
Retained earnings (4,589) 1,235,413
Cumulative foreign currency translation adjustment (42,713) (97,079)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,823,355 7,983,991
- --------------------------------------------------------------------------------------------------------------------------
$ 12,567,342 $ 13,005,198
==========================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 5,213,425 $ 5,000,358 $ 15,975,563 $ 14,518,559
- -------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of sales 3,539,312 3,044,146 9,516,078 8,575,434
Selling, general and administrative
expenses 2,056,649 1,756,911 6,334,009 5,071,069
Write off of uncollectible accounts
receivable from Russian distributor
and inventory 2,081,474 - 2,081,474 -
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 7,677,435 4,801,057 17,931,561 13,646,503
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (2,464,010) 199,301 (1,955,998) 872,056
Other income (expense):
Interest (73,447) (40,071) (199,062) (115,107)
Other (9,962) 7,423 33,886 10,687
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,547,419) 166,653 (2,121,174) 767,636
Provision for income taxes (benefit) (914,011) 89,746 (881,172) 284,532
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,633,408) $ 76,907 $ (1,240,002) $ 483,104
Net Income (Loss) Per Common Share $ (0.72) $ 0.04 $ (0.54) $ 0.25
Net Income (Loss) Per Common Share
Assuming Dilution (0.72) 0.04 (0.54) 0.23
=============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
CURRENCY SHARE-
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 2,283 $ 6,843,374 $ 1,235,413 $ (97,079) - $ 7,983,991
Compensation expense in connection with
issuance of stock options - 25,000 - - - 25,000
Net loss - - (1,240,002) - $ (1,240,002) (1,240,002)
Other comprehensive income
Foreign currency translation
adjustment - - - 54,366 54,366 54,366
--------------
(1,185,636)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 2,283 $ 6,868,374 $ (4,589) $ (42,713) $ - $ 6,823,355
=============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (1,240,002) $ 483,104
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Provision for losses on accounts receivable - (2,833)
Depreciation and amortization 219,360 55,472
Deferred income taxes (1,034,410) (32,000)
Write off of uncollectable accounts receivable and inventory 2,081,474 -
Compensation expense in connection with issuance of stock options 25,000 -
(Increase) decrease, net of business segment acquired, in:
Accounts receivable (388,277) (881,793)
Inventories 256,390 217,967
Prepaid expenses and other current assets 141,054 (284,377)
Income tax receivable (429,000) -
Other assets (60,927) (33,624)
Increase (decrease), net of business segment acquired, in:
Accounts payable and accrued expenses (1,024,548) (1,529,399)
Income taxes payable 41,828 211,369
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (1,412,058) (1,796,114)
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Reduction in investments - 59,832
Acquisition of business segment - (174,683)
Additions to property and equipment (112,000) (98,761)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (112,000) (213,612)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Return of capital - (305,818)
Net proceeds (payments) on borrowings 1,714,907 (1,631,328)
Dividend distributions - (412,909)
Payment on notes payable-shareholders - (300,000)
Proceeds from sale of stock and warrants, net - 4,637,085
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,714,907 1,987,030
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 190,849 (22,696)
Effect of exchange rate changes in cash 54,366 (50,366)
CASH, AT BEGINNING OF YEAR 424,036 628,135
- -----------------------------------------------------------------------------------------------------------------------
CASH, AT END OF PERIOD $ 669,251 $ 555,073
=======================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest $ 211,597 $ 55,718
Taxes $ 329,889 $ 104,237
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
Issuance of common stock for acquisition of business segment $ - $ 700,000
=======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
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), have been included. Operating
results for the nine month period ended September 30,
1998 are not necessarily indicative of the results
that may be expected for the year ending December 31,
1998. 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, 1997.
Through February 13, 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 February
13, 1997.
Had the Company not been taxed as an S Corporation,
the Company would have been taxed approximately
$11,000 additionally during the nine months ended
September 30, 1997. This additional amount of
taxation has an insignificant effect on the earnings
per share calculations.
AESP Germany, Jotec/AESP and AESP Sweden,
subsidiaries of AESP, are subject to taxation in
Germany, Norway and Sweden, respectively, and
accordingly, calculate and report the tax charges in
accordance with applicable statutory regulations.
On February 13, 1997, and concurrent with the
Company's initial public offering ("IPO"), the
Company elected C Corporation tax status and a net
deferred tax asset was recorded for the three months
ended March 31, 1997. Such net deferred tax asset
resulted
7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
principally from temporary differences relating to
allowance for doubtful accounts.
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. ACQUISITION In November 1997, the Company completed a merger with
Jotec/AESP by exchanging 360,000 shares of its common
stock for all of the common stock of Jotec/AESP.
The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial
statements presented have been restated to include
the combined balance sheet, statements of income and
cash flows of Jotec/AESP as though it had always been
a part of the Company.
There were no transactions between the Jotec/AESP and
the Company prior to the combination, and immaterial
adjustments were recorded to conform Jotec/AESP's
accounting policies to those of the Company. Certain
reclassifications were made to the Jotec/AESP's
financial statements to conform to the Company's
presentations.
The results of operations for the separate companies
and the combined amounts for the nine months ended
September 30, 1997 presented in the consolidated
financial statements follows:
8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 1997
----------------------------------------
Net Sales
The Company $11,146,954
Jotec/AESP 3,371,605
----------------------------------------
Combined 14,518,559
----------------------------------------
Net Income
The Company 317,902
Jotec/AESP 165,202
----------------------------------------
Combined $ 483,104
========================================
Included in shareholder distributions for the nine
months ended September 30, 1997 are distributions in
the amount of $412,909 related to Jotec/AESP.
3. EARNINGS PER SHARE The following reconciles the components of the
earnings per share (EPS) computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INCOME
(LOSS) SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per common share
Net income (loss) available to
common shareholders $(1,633,408) 2,282,201 $(0.72) $ 76,907 2,092,500 $0.04
Effect of Dilutive Securities:
Exercisable options to purchase
shares of common stock 23,000
8 1/2% convertible notes 23,024 359,781
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
shareholders plus assumed
conversions $(1,633,408) 2,282,201 $(0.72) $ 99,931 2,475,281 $0.04
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per common share
Net income (loss) available to
common shareholders $(1,240,002) 2,282,201 $ (0.54) $ 483,103 1,925,907 $ 0.25
Effect of Dilutive Securities:
Exercisable options to purchase
shares of common stock 63,000
8 1/2% convertible notes 34,536 300,476
- -----------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $(1,240,002) 2,282,201 $ (0.54) $ 517,639 2,289,383 $ 0.23
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The 8 1/2% convertible stockholder notes amounting to
$1,439,125 are convertible at $4 per share and are
considered dilutive.
Options to purchase 61,500 shares of common stock at
$2.75 were granted on March 9, 1998. These options
expire in 2008. As of September 30, 1998 options to
purchase 20,500 shares of common stock were
exercisable, and were not included in the computation
of diluted EPS, since they have an anti-dilutive
effect.
Options to purchase 70,200 shares of common stock at
$3.50 were granted on November 7, 1997. These options
expire in 2008. As of September 30, 1998 options to
purchase 22,100 shares of common stock were
exercisable but were not included in the computation
of diluted EPS, since they have an anti-dilutive
effect.
Options to purchase 200,000 shares of common stock at
$6.00 per share were outstanding during 1997 and
1996, but were not included in the computation of
diluted EPS as the options' exercise price was
greater than the average market price of the common
shares. The options, which expire in 2006, were
outstanding at September 30, 1998.
Options to purchase 200,000 shares of common stock at
$3.53 per share were granted on July 23, 1998. These
options expire in
10
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2003. As of September 30, 1998 options to purchase
100,000 shares of common stock were exercisable but
were not included in the computation of diluted EPS
as the option's exercise price was greater than
the average market price of the common shares.
Options to purchase 85,000 shares of common stock at
$3.53 were granted on July 23, 1998. These options
expire in 2003. As of September 30, 1998 options to
purchase all 85,000 shares of common stock were
exercisable, but were not included in the computation
of diluted EPS as the option's exercise price was
greater than the average market price of the common
shares.
Options to purchase 380,500 shares, 36,000 shares,
23,000 shares, 40,000 shares and 75,000 shares of
common stock at $6.00, $5.88, $4.00, $6.00, and $3.69
per share, respectively, were outstanding during
1997, but not included in the computation of diluted
EPS as the options' exercise price was greater than
the average market price of the common shares. The
options with expirations from 2002 to 2007 were
outstanding at September 30, 1998.
Subsequent to September 30, 1998, certain of the
foregoing options were repriced, as follows:
NUMBER OF SHARES OLD OPTION PRICE NEW OPTION PRICE
-----------------------------------------------------
60,700 $3.50 $1.625
56,700 2.75 1.625
85,000 3.53 1.625
36,000 5.88 1.625
200,000 3.53 1.625
200,000 6.00 1.625
4. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which INCOME requires that all
components of comprehensive income and total
comprehensive income be reported on one of the
following: a statement of income and comprehensive
income, a statement of comprehensive income or a
statement of stockholders' equity. Comprehensive
income is comprised of net income and all changes to
stockholders' equity, except those due to investments
by owners (changes in paid in capital) and
distributions to owners (dividends). For interim
reporting purposes, SFAS 130 requires disclosure of
total comprehensive income.
Total comprehensive income is as follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997
-----------------------------------------------------
Net (loss) income $(1,240,002) $483,104
Other comprehensive
income (loss),
net of tax 54,366 (40,101)
-----------------------------------------------------
Comprehensive (loss)
income $(1,185,636) $443,003
-----------------------------------------------------
11
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. WRITEDOWN OF In the three months ending September 30, 1998, the
ACCOUNTS Company recorded a write-off of $2,081,474 related to
RECEIVABLE AND losses that it expects to incur as a result of the
INVENTORY financial and economic conditions in Russia and of
its Russian distributor and the impact which such
conditions are expected to have on the Company's
results of operations for the third quarter of 1998.
6. NOTES PAYABLE At September 30, 1998, the Company has a revolving
line of credit agreement with a bank that limited
borrowings to a percentage of receivables and
inventories and contained certain covenants relating
to the Company's net worth and indebtedness, among
others. This credit agreement was collateralized by
substantially all the assets of the Company. At
September 30, 1998, the Company was in default of
certain of the loan agreement financial covenants.
Additionally, the loan matured on October 26, 1998.
The Company is presently negotiating a renewal of
this loan.
7. SUBSEQUENT EVENTS Subsequent to September 30, 1998, the Company
acquired all the outstanding common stock of
its distributor located in the Ukraine. The purchase
price of this acquisition was valued at approximately
$1,050,000, the amount equal to the outstanding
amount due from the distributor to the Company. This
acquisition will be accounted for under the purchase
method, whereby the purchase price will be allocated
to the underlying assets and liabilities based upon
their estimated fair values.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
THE FOLLOWING: COMPETITION FROM OTHER MANUFACTURERS AND DISTRIBUTORS OF
CONNECTIVITY AND NETWORKING PRODUCTS BOTH NATIONALLY AND INTERNATIONALLY;
ECONOMIC CONDITIONS IN THE COMPANY'S MARKETS, THE BALANCE OF THE MIX BETWEEN
ORIGINAL EQUIPMENT MANUFACTURER ("OEM") SALES (WHICH HAVE COMPARATIVELY LOWER
GROSS PROFIT MARGINS WITH LOWER EXPENSES) AND RETAIL SALES (WHICH HAVE
COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO
PERIOD, AND THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND
ASSEMBLY OF PRODUCTS AND THE ABSENCE OF SUPPLY AGREEMENTS. THESE AND ADDITIONAL
FACTORS ARE DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1997. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE
AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING), ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENT. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
RESULTS OF OPERATIONS
The Company sells connectivity products in the following categories:
passive connectivity products; passive networking products; active networking
products; and OEM connectivity products. Passive connectivity products are
primarily computer and telecommunication cables, connectors, adapters, etc.
Passive networking products are networking oriented cables, connectors and
adapters, as well as raceways and wall plates, etc. Active networking products
are hubs, transceivers and network adapters, etc. The Company's connectivity
products are sold to retail customers in the United States, Sweden, Germany,
Norway and, effective October 1998, the Ukraine. The Company's OEM products are
primarily sold to U.S. OEM customers and consist primarily of custom cables and
custom cable assemblies. The Company also has an exclusive distributor in
Russia. The Company's customers include: computer and networking retailers;
computer and networking value added retailers (VARs); networking and
telecommunication installers; computer, networking, and telecommunication
oriented catalog houses; and OEM manufacturers.
Net sales for the nine months ended September 30, 1998 were $16.0 million,
an increase of 10.0% compared to the net sales of $14.5 million for the nine
months ended September 30, 1997. This increase is due primarily to increases in
sales in Europe made through the Company's subsidiaries in Norway, Sweden and
Germany as well as sales made to the Company's exclusive distributors in Russia
and the Ukraine (the Company acquired its Ukranian distributor in October 1998).
13
<PAGE>
Net sales for the three months ended September 30, 1998 were $5.2
million, an increase of 4.3% compared to net sales of $5.0 million for the three
months ended September 30,1997. This increase is due primarily to increases in
net sales in Norway, Sweden and Germany, reduced in part by a reduction in sales
to the Company's Russian distributor. Sales to the Company's Russian distributor
were 12.3% of sales in the first nine months of 1998 and 11.2% of sales for the
first nine months in 1997.
During the three and nine months ended September 30, 1998, sales of active
networking and OEM products increased to 18.6% and 19.1% respectively, of net
sales, compared to 12.5% and 10.6%, respectively, of net sales during the same
period in 1997. During the three months ended September 30, 1998, the Company's
worldwide sales of active networking and OEM products increased to 19.1% of net
sales, compared to 10.6% of net sales during the same period in 1997.
Due to a severe economic downturn in Russia which became evident during
the third quarter of 1998, the Company ceased shipping products to its exclusive
distributor in Russia during the third quarter of 1998 and has written down both
the accounts receivable due to the Company from its Russian distributor as well
as the value of certain inventory which the Company was holding to sell to its
Russian distributor. This one-time charge of $2.1 million severely impacted
operating results for the three and nine month periods ended September 30, 1998.
The Company is taking steps to both increase sales to make up for the
loss of sales relating to its Russian distributor and to reduce its costs where
appropriate. Additionally, the Company intends to continue to work closely with
its Russian distributor and if and when the Russian economy recovers, it hopes
to be able to again do business with its Russian distributor and to recover some
of the one-time charge.
Cost of sales for the nine months ended September 30, 1998 was $9.5
million, an increase of 11.0% compared to cost of sales of $8.6 million for the
nine months ended September 30, 1997. Cost of sales for the three months ended
September 30, 1998 was $3.5 million, an increase of 16.3% compared to cost of
sales of $3.0 million during the three months ended September 30,1997.
Gross profit margin for the nine months ended September 30, 1998 was
40.4%, a decrease of 0.5% compared to gross profit margin of 40.9% during the
nine months ended September 30, 1997. Gross profit margin for the three months
ended September 30, 1998 was 32.1%, a decrease of 7.0% compared to the gross
profit margin of 39.1% during the three months ended September 30,1997. The
gross profit margin decreases are due primarily to the product mix shift from
relatively high margin passive connectivity and networking products to the
relatively lower margin active networking and OEM products, and to the loss of
sales to the Company's Russian distributor, which sales historically had added
positively to gross profit margin.
Selling, general and administrative ("SG&A") expenses for the nine months
ended September 30, 1998 were $6.3 million, which is an increase of 24.9%
compared to SG&A expenses of $5.1 million for the nine months ended September
30, 1997. SG&A expenses for the three months ended September 30, 1998 were $2.1
million, an increase of 17.1% compared to SG&A expenses of $1.8 million during
the three months ended September 30,1997. Increases in SG&A reflect increases in
costs relating to marketing, travel and advertising expenses necessary to launch
the Focus Networking product line; increases in salaries; increases in
depreciation and amortization, and increases in legal, accounting and consulting
fees.
14
<PAGE>
Due to the factors set forth above, losses from operations for the nine
month and three month periods ended September 30, 1998 were $2.0 million and
$2.5 million, respectively. Income from operations, exclusive of the one-time
charge taken by the Company, would have been approximately $125,000 and a loss
of approximately $383,000 for the nine and three month periods ended September
30, 1998, compared to operating income of $872,000 and $199,000, respectively,
for the 1997 nine and three month periods.
Interest expense for the 1998 nine and three month periods was $199,000
and $73,000 respectively, which were increases of approximately 72.9% and 83.3%
when compared to interest expense during the same periods in 1997. The increase
in interest expense is primarily due to increases in net borrowings by the
Company from period to period.
The Company incurred a net loss for the three and nine months ended
September 30, 1998 of $1.63 million ($.72 per basic and diluted share) and $1.24
million ($.54 per basic and diluted share), compared to net income of $77,000
($.04 per basic and diluted share) and $483,000 ($.25 per basic share and $.23
per diluted share) for the comparable 1997 periods. The net loss for the 1998
periods was caused by the factors described above, offset, in part, by income
tax benefits of $900,000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997, the Company completed a public offering,
in which the Company raised net proceeds of approximately $4.9 million ($4.4
million net of certain capitalized expenses in connection with the offering).
At September 30, 1998, the Company's working capital was approximately
$6.3 million and its current ratio was 2.49:1 compared to working capital of
approximately $8.1 million and a current ratio of 3.30:1 as of December 31,
1997. At September 30, 1998, the Company's net book value per basic share was
$2.99 per basic share, compared to $3.50 as of December 31, 1997.
As of September 30, 1998, cash balances had increased approximately
$245,000, or 57.8% when compared to cash balances on December 31, 1997. Trade
accounts receivable decreased approximately $1.0 million, or 20.1%, when
compared to trade accounts receivable balances on December 31, 1997, due
primarily to the one-time write-off of approximately $1.4 million in trade
accounts receivable due from the Company's exclusive distributor in Russia. At
September 30, 1998, inventories had decreased approximately $0.9 million, or
16.2% compared to inventory balances on December 31, 1997, due primarily to the
write-off of approximately $0.7 million of inventories held by the Company to
support sales to the Company's exclusive distributor in Russia.
Net property and equipment decreased approximately $27,000, or 6.3% when
compared to net property and equipment balances on December 31, 1997. The
Company is in the process of installing a new management and accounting computer
system which it anticipates completing by the end of the fourth quarter of 1998.
Costs associated with the new system approximate $150,000.
15
<PAGE>
On September 30, 1997 the Company acquired the assets of the networking
product line of Focus Enhancements, Inc. and accounted for the transaction as a
purchase of assets. Due to this accounting treatment the Company recorded an
intangible asset which balance as of September 30, 1998 was, net of
amortization, approximately $681,000.
The Company had a $4.5 million revolving line of credit with a financial
institution (the "Credit Facility"), which line of credit matured on October 26,
1998. Borrowings under the Credit Facility bear interest at the rate of prime,
plus 0.25% per annum. Available borrowings under the Credit Facility are based
upon specific percentages of the Company's U.S.-based accounts receivable and
inventories. The Credit Facility is secured by a lien on the Company's
world-wide accounts receivable, inventory and all other assets of the Company.
The Company is currently in default under two of the financial covenants
contained in its Credit Facility. The Company is currently negotiating with its
lender for an extension of its credit facility and for a waiver of the covenant
defaults. While there can be no assurance, the Company expects to receive an
extension of its Credit Facility and a waiver of the covenant defaults. If the
Company's lender were to insist upon repayment of its facility at this time, it
would have a material adverse impact on the Company's financial condition and
business.
The Company is currently negotiating both with its lender and with other
potential lenders to obtain a new line of credit which will allow the Company to
borrow additional funds. There can be no assurance that the Company will be
successful in obtaining additional funding. The Company's inability to obtain
increased financing would likely inhibit the Company's ability to further
develop its business.
In that regard, the Company may need to raise additional capital in the
future to fund its operations and continued growth. The effect of any sales of
equity securities (or debt securities convertible into equity securities) by the
Company may be dilutive to the Company's existing shareholders. The Company
believes that its current cash available will allow the Company to meet its
requirements through the end of 1998.
At September 30, 1998, the Company had borrowed approximately $1.9 million
on its Credit Facility, on average. Accounts payable and accrued expenses
decreased approximately $1.0 million, or 33.7% when compared to accounts payable
and accrued expenses balances on December 31, 1997.
For the nine months ended September 30, 1998, approximately $1.4 million
of cash was used in operations. Operating cash, along with borrowings under the
Credit Facility, were used primarily to fund net losses and to reduce trade
accounts payable.
The Company's management does not believe that inflation has had a
significant effect on the Company's operations during the last several years.
16
<PAGE>
YEAR 2000 ISSUES
The Company has substantially completed its assessment of the impact of
year 2000-related problems on the Company, including its information technology
systems (such as its computer systems) and its non-information technology
systems (such as its equipment and manufacturing process). With respect to the
Company's information technology systems, the Company believes that its computer
systems are presently year 2000 compliant. The Company is currently updating its
computer system, at a cost of approximately $150,000, in order to have the
computer systems required for the future growth of its business. The Company
anticipates that the new updated computer system will also be year 2000
compliant. Beyond the measures described above, the Company does not anticipate
requiring any material remediation programs with respect to its non-information
technology systems. The Company is also currently assessing whether Year 2000
related problems of its customers and suppliers will adversely impact the
Company, although the Company has not yet reached any conclusions on these
issues.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is currently in default of certain financial covenants under
its Credit Facility. See Note 6 of Notes to Condensed Consolidated Financial
Statements (Unaudited) and "Management's Discussion and Analysis or Plan of
Operation-Financial Condition, Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
In October 1998, the Company acquired its exclusive distributor in the
Ukraine for approximately $1,050,000, which is an amount equal to the
outstanding receivables due to the Company from its distributor. This
acquisition is not expected to significantly increase revenues, but should
provide the Company with control over the distribution of its products in the
Ukrainian market.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1998. On October 19, 1998, the Company filed a Report on
Form 8-K reporting that the Company would take a one-time charge relating to
the condition of the Russian economy and the effect it is having on the
Company's Russian distributor.
19
<PAGE>
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: November 16, 1998 By: /S/ RANDALL N. PAULFUS
----------------------------------------
Randall N. Paulfus, Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 669,251
<SECURITIES> 0
<RECEIVABLES> 4,130,161
<ALLOWANCES> (106,091)
<INVENTORY> 4,828,766
<CURRENT-ASSETS> 10,565,847
<PP&E> 784,038
<DEPRECIATION> (383,644)
<TOTAL-ASSETS> 12,567,342
<CURRENT-LIABILITIES> 4,240,281
<BONDS> 0
0
0
<COMMON> 2,283
<OTHER-SE> 6,821,072
<TOTAL-LIABILITY-AND-EQUITY> 12,567,342
<SALES> 15,975,563
<TOTAL-REVENUES> 15,975,563
<CGS> 9,516,078
<TOTAL-COSTS> 17,931,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,062
<INCOME-PRETAX> (2,121,174)
<INCOME-TAX> 881,172
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,240,002)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
