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, 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
August 12, 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
June 30, 1998 (unaudited) and December 31, 1997..........................3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1998 and 1997 (unaudited)............4
Condensed Consolidated Statements of Shareholders' Equity
for the six months ended June 30, 1998 (unaudited).......................5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (unaudited) .........................6
Notes to Condensed Consolidated Financial Statements.....................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION................................................12
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....................................18
2
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 968,891 $ 424,036
Accounts receivable, net of allowance for doubtful accounts of $103,492
at June 30, 1998 and $132,000 at December 31, 1997 5,298,575 5,037,267
Inventories 6,255,173 5,765,156
Current deferred tax asset 145,522 131,411
Prepaid expenses and other current assets 224,454 249,814
- -----------------------------------------------------------------------------------------------------------
Total current assests 12,892,615 11,607,684
PROPERTY AND EQUIPMENT, NET 519,187 427,360
INTANGIBLE ASSETS 705,651 761,203
DEFERRED TAX ASSET 140,516 139,586
OTHER ASSETS 81,525 69,365
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$ 14,339,494 $ 13,005,198
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes payable $ 2,026,000 $ 227,078
Accounts payable and accrued expenses 2,410,531 3,042,476
Current deferred tax liability 9,407 9,407
Income taxes payable - 235,525
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 4,445,938 3,514,486
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Notes payable-shareholders 1,439,125 1,439,125
Deferred tax liability 64,581 64,581
Long term debt - 3,015
- -----------------------------------------------------------------------------------------------------------
Total liabilities 5,949,644 5,021,207
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COMMITMENTS AND CONTINGENCIES
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000
shares authorized; none issued - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 2,282,201 shares issued at December 31, 1997 and
June 30, 1998 2,283 2,283
Paid-in capital 6,868,374 6,843,374
Retained earnings 1,628,819 1,235,413
Cumulative foreign currency translation adjustment (109,626) (97,079)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,389,850 7,983,991
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$ 14,339,494 $ 13,005,198
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET SALES $ 5,144,232 $ 4,591,500 $ 10,762,138 $ 9,518,201
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of sales 2,929,115 2,785,087 5,976,766 5,531,288
Selling, general and administrative expenses 2,073,392 1,569,391 4,277,360 3,314,158
Total operating expenses 5,002,507 4,354,478 10,254,126 8,845,446
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 141,725 237,022 508,012 672,755
Other income (expense)
Interest (82,088) (29,982) (125,615) (75,036)
Other 42,056 26,627 43,848 3,263
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 101,693 233,667 426,245 600,982
Provision (benefit) for income taxes (47,310) 83,248 32,839 194,786
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 149,003 $ 150,419 $ 393,406 $ 406,196
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Net income per common share $ .07 $ .07 $ .17 $ .22
Net income per common share assuming dilution $ .06 $ .07 $ .17 $ .21
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
CUMULATIVE
FOREIGN TOTAL
CURRENCY STOCK-
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
Net income - - 393,406 - $ 393,406 393,406
Options issued in connection with
consulting services - 25,000 - - - 25,000
Cumulative foreign currency
translation adjustment - - - (12,547) (12,547) (12,547)
--------------
380,859
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 2,283 $ 6,868,374 $ 1,628,819 $ (109,626) $ 8,389,850
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDING JUNE 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 393,406 $ 406,196
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for losses on accounts receivable 72,703 5,000
Depreciation and amortization 83,865 19,167
Deferred income taxes (15,041) (32,000)
Amortization of goodwill 55,552 -
Options issued in connection with consulting services 25,000 -
(Increase) decrease in:
Accounts receivable (334,011) (438,076)
Inventories (490,017) 329,585
Prepaid expenses and other current assets 25,360 (152,587)
Other assets (12,160) (33,124)
Increase (decrease) in:
Accounts payable and accrued expenses (631,945) (1,951,006)
Income taxes payable (235,525) 145,302
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,062,813) (1,701,543)
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Reduction in investments - 61,122
Additions to property equipment (175,692) (81,998)
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Net cash used in investing activities (175,692) (20,876)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings 1,795,907 (974,010)
Dividend distributions - (728,720)
Payment on notes payable-shareholders - (300,000)
Proceeds from sale of stock and warrants, net - 4,637,085
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,795,907 2,634,355
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 557,402 911,936
Effect of exchange rate changes in cash (12,547) (79,079)
CASH, AT BEGINNING OF YEAR 424,036 628,135
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CASH, AT END OF PERIOD $ 968,891 $ 1,460,992
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SUPPLEMENTAL INFORMATION:
Cash paid for
Interest $ 130,485 $ 40,248
Taxes $ 363,049 $ 104,237
- ------------------------------------------------------------------------------------------------------------------
</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 PRESENTATION
The accompanying unaudited condensed consolidated 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 six month period ended June 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 six months ended June 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
7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
status and a net deferred tax asset was recorded for the three months ended
March 31, 1997. Such net deferred tax asset resulted 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
presented in the consolidated financial statements follow:
8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Sales
The Company $ 8,163,900 $ 7,141,734
Jotec/AESP 2,598,238 2,376,467
- -------------------------------------------------------------------------------
Combined 10,762,138 9,518,201
- -------------------------------------------------------------------------------
Net Income
The Company 75,305 248,765
Jotec/AESP 318,101 157,431
- -------------------------------------------------------------------------------
Combined $ 393,406 $ 406,196
- -------------------------------------------------------------------------------
</TABLE>
Included in shareholder distributions for the six months ended June 30, 1997 are
distributions in the amount of $457,815 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 JUNE 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 per common share
Net income available to
common shareholders $149,003 2,282,201 $ .07 $ 150,419 2,092,500 $ .07
Effect of Dilutive Securities:
Exercisable options to purchase
shares of common stock 16,780 -
8 1/2% convertible notes 23,024 359,781 23,024 359,781
- ----------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $172,027 2,658,762 $ .06 $ 173,443 2,452,281 $ .07
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 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 per common share
Net income available to
common shareholders $ 393,406 2,282,201 $ 0.17 $ 406,196 1,841,229 $ 0.22
Effect of Dilutive Securities:
Exercisable options to purchase
shares of common stock 11,305 -
8 1/2% convertible notes 46,048 359,781 34,536 270,333
- ----------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $ 439,454 2,653,287 $ 0.17 $ 440,732 2,111,562 $ 0.21
- ----------------------------------------------------------------------------------------------------------------------------
</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 1998. As of June 30, 1998 options to purchase
20,500 shares of common stock were exercisable.
Options to purchase 70,200 shares of common stock at $3.50 were granted on
November 7, 1997. These options expire in 2007. As of November 7, 1997 options
to purchase 22,100 shares of common stock were exercisable.
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 June 30, 1998.
Options to purchase 360,500 shares, 36,000 shares, 23,000 shares, 40,000 shares
and 120,000 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
10
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 December 31, 1997.
4. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which 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:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 393,406 $ 406,196
Other comprehensive income (loss),
net of tax (12,547) (79,079)
- -------------------------------------------------------------------------------
Comprehensive income $ 380,859 $ 327,117
</TABLE>
11
<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; 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 and Norway. 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
exclusive distributors in Russia and Ukraine. 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.
For the six month period ended June 30, 1998, the Company achieved net sales
of $10.8 million which was an increase of $1.3 million or 13.7% when compared to
net sales of $9.5 million during the same period in 1997. For the three month
period ended June 30, 1998, the Company achieved net sales of $5.1 million which
was an increase of $0.5 million or 10.9% when compared to net sales of $4.6
million during the same period in 1997.
Contributing to the increase in net sales for the three and six month
periods in 1998 were increases from period to period in sales of active
networking products (in September 1997, the
12
<PAGE>
Company acquired the "Focus Networking" line of active networking products from
Focus Enhancements, Inc.) and increases in sales of passive networking products
(primarily to the Company's exclusive distributors in Russia and the Ukraine).
Offsetting these increases, in part, were small decreases from period to period
of U.S. OEM sales and in sales of passive computer connectivity products to US
retailers.
The mix of products sold by the Company has changed significantly over the
past year. For the six months ended June 30, 1998, 20.1% of the sales of the
Company were of active and passive networking products, compared to 5.2% for the
same period in 1997. OEM product sales were 10.2% of net sales for the six month
period ended June 30, 1998, compared to 13.4% for the same period in 1997.
Passive connectivity product sales accounted for 69.7% of total sales for the
six months ended June 30, 1998 and 81.4% for the same period in 1997.
For each product category, geographic location, and customer type, the
Company experiences varying gross margins, as well as different overall profits
after sales and marketing expenses. These differing margins and profits are due
to differing competitive pressures and differing methods of marketing for each
type of product, geographic location and customer type. In general, for product
categories, the Company gains its comparably highest gross margins from sales of
passive connectivity and networking products and its comparably lowest gross
margins come from sales of OEM products. Similarly, for different geographic
locations, the Company gains its comparably highest gross margins from sales
made in Scandinavia and its lowest gross margins from sales made in Germany.
Finally, for different customer types, the Company gains its greatest gross
margin from sales to retail customers and its lowest gross margin from sales to
OEM customers.
The gross profit margin rate for the six month period ended June 30, 1998
was 44.5% which was an increase of 2.6% when compared to the gross profit margin
of 41.9% during the same period in 1997. The gross profit margin for the three
month period ended June 30, 1998 was 43.1% which was an increase of 3.8% when
compared to the gross profit margin rate of 39.3% during the same period in
1997.
The increases in the gross profit margin are due, in general, to the
combination of several factors, including increases in the margin rate in the
Norwegian subsidiary, Jotec/AESP, due primarily to the subsidiary offsetting its
lower margin computer sales with higher margin connectivity products sales;
increases in sales of relatively high margin products to the Company's exclusive
distributors in Russia and Ukraine; increases in AESP-Germany margin rate due
primarily to a greater percentage of total sales into Germany being made of
relatively higher margin passive connectivity products and a lower percentage of
total sales of comparatively lower margin active networking products; and
decreases in the gross margin rate in AESP-Sweden, the Company's Swedish
subsidiary, due to this subsidiary increasing sales to relatively low margin
Swedish catalog house customers.
Due to the combination of the factors set forth above, the overall gross
margin amounts for the six month period ended June 30, 1998 increased $798,000,
or 20%, when compared to the same
13
<PAGE>
period in 1997. Similarly the overall gross margin amounts for the three month
period ended June 30, 1998 increased $409,000, or 22.7%, when compared to the
same period in 1997.
Sales and marketing expenses, a component of SG&A expenses, are greatest for
sales of passive connectivity and all networking products, and the Company's
comparably lowest sales and marketing expenses are generated in conjunction with
sales of OEM products. Sales and marketing expenses are greatest for sales made
in the U.S. and Germany and lowest for sales made into Scandinavia. Finally, the
Company experiences its greatest sales and marketing expenses from sales to
retail customers and its lowest from sales to OEM customers.
Selling general and administrative ("SG&A") expenses, which include sales
and marketing expenses, increased to $4.3 million during the six months ended
June 30, 1998, which was an increase of $1.0 million or 30.3% when compared to
the same period in 1997. During the three months ended June 30, 1998 SG&A
expenses were $2.1 million which was an increase of $0.5 million, or 31.3%, when
compared to the same period in 1997. These increases were due primarily to
increases in SG&A expenses experienced in AESP-Germany and the Company's Miami
home office. The increases in AESP-Germany SG&A expenses for the six month
period ended June 30, 1998 were due primarily to increases in salaries and
commissions, sales and marketing expenses, and repairs and maintenance expenses.
The increases in Miami home office SG&A expenses for the six month period ended
June 30, 1998 were due primarily increases in salaries and commissions, sales
and marketing expenses, insurance and consulting fees, and goodwill amortization
expenses. The increases in Miami home office SG&A expenses for the three month
period ended June 30, 1998 were due primarily to increases in sales and
marketing expenses, and goodwill amortization expense.
Due to the factors set forth above, income from operations for the six month
and three month periods ended June 30, 1998 were $508,000 and $142,000
respectively, which were decreases of $165,000 and $95,000 respectively, or
24.5% and 40.1%, when compared to income from operations for the same period in
1997.
Interest expense for the six month period ended June 30, 1998 increased from
$75,000 to $125,000, an increase of 66.7% when compared to the same period in
1997. Interest expense for the three month period ended June 30, 1998 increased
from $30,000 to $82,000 when compared to the same period in 1997. The increases
in interest expense incurred by the Company is due primarily to the increased
borrowings on the Company's line of credit to fund the Company's growth.
Taxes on income for the six month period ended June 30, 1998 decreased from
$195,000 to $33,000, or a decrease of 83.1% when compared to the same period in
1997. Taxes on income for the three month period ended June 30, 1998 decreased
from $83,000 to a benefit of $47,000, or a decrease of 156.6% when compared to
the same periods in 1997. The tax rates have declined due to the Company
experiencing a higher percentage of total profits in low effective tax rate
countries and locations.
14
<PAGE>
Due to the factors set forth above, net income for the six month and three
month periods ended June 30, 1998 were $393,000 and $149,000 respectively, which
were decreases of $13,000 and $1,000, respectively, or 3.2% and 0.7% when
compared to the same period in 1997.
For the six month period ended June 30, 1998 average basic and fully diluted
earnings per share were $0.17 and $0.17 respectively, compared to $0.22 and
$0.21 for the same period in 1997. A contributing factor for this decline in
earnings per share is that during the six month periods ended June 30, 1997 and
1998, the average basic shares outstanding increased by 23.9% from 1,841,229
shares to 2,282,201 shares and the average fully diluted shares outstanding
increased by 25.7% from 2,111,562 to 2,653,287.
For the three month periods ended June 30, 1997 and 1998, the average basic
and fully diluted earnings per share were practically unchanged at $0.07 and
$0.06 respectively compared to $0.07 and $0.07 for the same period in 1997.
During the three month periods ended June 30, 1997 and 1998, the average basic
shares and fully diluted shares outstanding increased by 9.1% and 8.4%
respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997, the Company completed its IPO, in which
the Company raised net proceeds of $4,862,000 ($4,375,000 net of certain
capitalized expenses in connection with the offering).
At June 30, 1998, the Company's working capital was $8.4 million and its
current ratio was 2.90:1, compared to working capital of $8.1 million and a
current ratio of 3.30:1 as of December 31, 1997. The Company's working capital
increased due primarily to the combination of profitable operations; increases
in cash; increases in worldwide trade accounts receivable and inventories;
decreases in accounts payable; and increases in borrowings.
At June 30, 1998, cash balances had increased $545,000, or 128.5% when
compared to cash balances on December 31, 1997. Trade accounts receivable
increased $261,000, or 5.2% when compared to trade accounts receivable balances
on December 31, 1997, due primarily to the increases in sales levels. At June
30, 1998, inventories had increased $490,000, or 8.5% when compared to inventory
balances on December 31, 1997, due primarily to the establishment and initial
stocking of a new European bonded warehouse in Rotterdam. It is management's
intention to utilize the Rotterdam warehouse in the future as the main stocking
facility for all of Company's European operations, thereby enabling the Company
to reduce overall worldwide inventory balances by closing currently open bonded
warehouses in the Ukraine and Germany, as well as by allowing the Company to
reduce local stock levels throughout Europe without decreasing customer service
due to inventory availability.
Net property and equipment increased $92,000, or 21.5% when compared to net
property and equipment balances on December 31, 1997 primarily due to payments
for new computer hardware
15
<PAGE>
and inventory management and accounting software. This new system, with total
cost approximating $150,000, is expected to be placed in service beginning in
the third quarter of 1998.
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 June 30, 1998 was, net of amortization,
$706,000.
The Company has a $4,500,000 revolving line of credit with a financial
institution. Borrowings under the line bear interest at the rate of prime plus
0.25% per annum. Available borrowings under the line of credit are based upon
specific percentages of the Company's US-based accounts receivable and
inventories. The line of credit is secured by a lien on the Company's world wide
accounts receivables, inventory and all other assets of the Company. The credit
facility matured on July 26, 1998, and while the Company is currently in the
process of renewing the facility, there can be no assurance that the credit
facility will be renewed or even if renewed that it can be renewed on its
current terms. Based upon the current agreement, the Company had availability
under its existing line of credit of $397,000 at August 1, 1998.
Since the Company's current line of credit allows borrowings based only upon
accounts receivable from US customers and on inventories held in the U.S., the
Company believes that some time within the next year the Company's ability to
borrow under its current facility may become constrained because of increases in
accounts receivable due to the Company from non-U.S. customers and increases of
foreign inventories. To facilitate the Company's international growth, the
Company is currently negotiating with various financial institutions, including
its current lending institution, to develop a new facility that will allow the
Company to borrow additional funds based upon its foreign assets. There can be
no assurance that the Company will be successful in obtaining such funds or, if
obtained, that they can be obtained on terms favorable to the Company.
At June 30, 1998, the Company had borrowed on its line of credit $2,026,000.
This represents an increase in borrowing on the line of credit of $1,799,000
when compared to the line of credit balances of $227,000 on December 31, 1997.
The additional borrowings were made necessary to finance the increases in trade
accounts receivable and inventories as well as the paydown in trade accounts
payable and accrued income taxes.
Accounts payable and accrued expenses decreased $632,000, or 20.8% when
compared to accounts payable and accrued expenses balances on December 31, 1997.
Income taxes payable decreased $235,000, or 100.0% when compared to income taxes
payable balances on December 31, 1997.
For the six months ended June 30, 1997, $1.7 million of cash was used in
operations. Such cash usage was the net of operating cash provided from net
income, the reduction of inventories and the increase in income tax liability,
and operating cash used to increase accounts receivable and prepaid expenses as
well as to reduce accounts payable and accrued expenses. For the six months
ended June
16
<PAGE>
30, 1998, $1.1 million of cash was used in operations. Such cash usage was the
net of operating cash provided from net income and amortizations, and operating
cash used to increase accounts receivable and inventory as well as to reduce
accounts payable and accrued taxes and expenses.
For the six months ended June 30, 1997, net cash provided by financing
activities was $2.6 million. Such cash provided was the net of proceeds from the
Company's initial IPO in February 1997, less payments on debt and stockholder
distributions. For the six months ended June 30, 1998, net cash provided by
financing activities was $1.8 million and was primarily provided from borrowings
on the Company's line of credit.
The Company believes that, subject to growing foreign markets as described
above, the unused balances available under the existing line of credit along
with the net cash flow generated from operating activities, will be adequate to
fund the Company's operations during 1998. 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 1998.
The Company's management does not believe that inflation has had a
significant effect on the Company's operations during the last several years.
The Company's management believes the Company has historically been able to pass
on increased costs of production in the price charged for its products.
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 does not anticipate incurring any
additional cost in making sure that the modifications which are being made to
the Company's computer system are compliant with year 2000 requirements.
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
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 29, 1998, the Company held its 1998 Annual Meeting of Shareholders,
at which the holders of 1,685,559 shares of the Company's outstanding common
stock (approximately 73.9%) were represented either in person or by proxy. At
the shareholders meeting, the following persons were elected to serve as
directors of the Company until the 1999 Annual Meeting of Shareholders or until
their successors are elected and qualified: Slav Stein, Roman Briskin, Terrence
R. Daidone, William B. Coldrick and L. Phillips Reams. The vote for the election
of directors was as follows:
NAME VOTES FOR VOTES AGAINST
- ---- --------- -------------
Slav Stein....................... 1,681,359 4,200
Roman Briskin.................... 1,681,359 4,200
Terrence R. Daidone.............. 1,681,859 3,700
William B. Coldrick.............. 1,681,859 3,700
L. Phillips Reams................ 1,610,059 75,500
ITEM 5. OTHER INFORMATION
None
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 have been filed during the quarter ended
June 30, 1998.
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: August 14, 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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 968,891
<SECURITIES> 0
<RECEIVABLES> 5,402,067
<ALLOWANCES> (103,492)
<INVENTORY> 6,255,173
<CURRENT-ASSETS> 12,892,615
<PP&E> 890,321
<DEPRECIATION> (371,134)
<TOTAL-ASSETS> 14,339,494
<CURRENT-LIABILITIES> 4,445,938
<BONDS> 0
0
0
<COMMON> 2,283
<OTHER-SE> 8,387,567
<TOTAL-LIABILITY-AND-EQUITY> 14,339,494
<SALES> 10,762,138
<TOTAL-REVENUES> 10,762,138
<CGS> 5,976,766
<TOTAL-COSTS> 10,254,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,615
<INCOME-PRETAX> 426,245
<INCOME-TAX> 32,839
<INCOME-CONTINUING> 393,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393,406
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
