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 MARCH 31, 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
May 11, 1998, is 2,282,201 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at
March 31, 1998....................................................... 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997........................................ 4
Condensed Consolidated Statements of Shareholders' Equity for the
three months ended March 31, 1998 and 1997........................... 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997................................. 6
Notes to Condensed Consolidated Financial Statements..................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION...............................................11
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................15
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................15
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS..................................................15
Item 5. OTHER INFORMATION.....................................................15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................15
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 1998
- - -------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash $ 917,656
Accounts receivable, net of allowance for doubtful accounts of $77,256 5,422,065
Inventories 6,232,863
Prepaid expenses and other current assets 376,300
- - -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 12,948,884
PROPERTY AND EQUIPMENT, NET 502,566
INTANGIBLE ASSETS, NET 733,427
OTHER ASSETS 218,865
- - -------------------------------------------------------------------------------------------------------------------
$ 14,403,742
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes payable $ 1,792,000
Accounts payable and accrued expenses 2,887,374
Income taxes payable 39,319
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,718,693
Notes payable-shareholders 1,439,125
Other liabilities 30,869
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities 6,188,687
- - -------------------------------------------------------------------------------------------------------------------
COMMITMENTS
- - -------------------------------------------------------------------------------------------------------------------
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
Paid-in capital 6,843,374
Retained earnings 1,479,816
Accumulated other comprehensive income (loss) (110,418)
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,215,055
- - -------------------------------------------------------------------------------------------------------------------
$ 14,403,742
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 5,617,906 $ 4,926,701
- - -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of sales 3,047,651 2,721,679
Selling, general and administrative expenses 2,203,968 1,774,767
- - -------------------------------------------------------------------------------------------------------------------
Total operating expenses 5,251,619 4,496,446
- - -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 366,287 430,255
OTHER INCOME (EXPENSE)
Interest (43,527) (45,054)
Other 1,792 (23,363)
- - -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 324,552 361,838
Provision for income taxes 80,149 107,648
- - -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 244,403 $ 254,190
===================================================================================================================
Net income per common share $ 0.11 $ 0.16
Net income per common share - assuming dilution $ 0.10 $ 0.14
- - -------------------------------------------------------------------------------------------------------------------
</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>
ACCUMULATED TOTAL
OTHER STOCK-
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS INCOME INCOME EQUITY
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <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 - - 244,403 - 244,403 244,403
Other comprehensive income (Note 4):
Foreign currency translation
adjustment - - - (13,339) (13,339) (13,339)
--------------
Comprehensive income 231,064
==============
- - ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ 2,283 $ 6,843,374 $ 1,479,816 $ (110,418) $ 8,215,055
==============================================================================================================================
</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>
THREE MONTHS ENDED MARCH 31, 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 244,403 $ 254,190
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for losses on accounts receivable 32,426 6,685
Depreciation and amortization 68,876 23,667
(Increase)decrease in:
Accounts receivable (417,224) (576,592)
Inventories (467,707) 351,309
Prepaid expenses and other current assets 4,925 (140,387)
Other Assets (9,914) (57,624)
Increase (decrease) in:
Accounts payable and accrued expenses (155,102) (1,467,424)
Income taxes payable (196,206) 117,027
Other liabilities (46,134) -
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (941,657) (1,489,149)
- - -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment (116,306) (21,741)
Additions to investments (42,621)
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (116,306) (64,362)
- - -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings 1,564,922 (1,267,241)
Shareholder distributions - (457,815)
Payment on notes payable-shareholders - (300,000)
Proceeds from sale of stock and warrants, net - 4,637,085
- - -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,564,922 2,612,029
- - -------------------------------------------------------------------------------------------------------------------
Net increase in cash 506,959 1,058,518
Effect of exchange rate changes in cash (13,339) (20,943)
Cash, at beginning of year 424,036 628,135
- - -------------------------------------------------------------------------------------------------------------------
Cash, at end of period $ 917,656 $ 1,665,710
===================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid for
Interest $ 53,716 $ 26,065
Taxes $ 270,472 $ 35,000
- - -----------------------------------------------------------------------------------------------------------------
</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 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, except for the
adjustment to record deferred taxes which is
discussed below considered necessary for a
fair presentation) have been included.
Operating results for the three month period
ended March 31, 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, Advanced
Electronic Support Products, Inc. ("AESP"),
with the consent of its shareholders,
elected to be taxed as an S Corporation.
Shareholders of an S Corporation are taxed
on their proportionate share of the
Company's taxable income. Accordingly, no
provision for federal income taxes 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 three months ended March 31,
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 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.
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.
- 7 -
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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:
THREE MONTHS ENDED MARCH 31, 1998 1997
- - -------------------------------------------------------------------------------
Net Sales
The Company $ 4,216,522 $ 3,594,049
Jotec/AESP 1,401,384 1,332,652
- - ------------------------------------------------------------------------------
Combined 5,617,906 4,926,701
- - ------------------------------------------------------------------------------
Net Income
The Company 68,522 195,972
Jotec/AESP 175,881 58,218
- - ------------------------------------------------------------------------------
Combined $ 244,403 $ 254,190
==============================================================================
Included in shareholder distributions for
the three months ended March 31, 1997 are
distributions in the amount of $457,815
related to Jotec/AESP.
- 8 -
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share The following reconciles the components of
the earnings per share (EPS) computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 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 $ 244,403 2,282,201 $ 0.11 $ 254,190 1,587,167 $ 0.16
Effect of Dilutive Securities:
Options to purchase
shares of common stock 81,333 63,000
9 1/2% convertible shareholder notes 21,875 359,781 10,938 179,891
- - ---------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $ 266,278 2,723,315 $ 0.10 $ 265,128 1,830,058 $ 0.14
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The 9 1/2% convertible shareholder 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
March 9, 1998 options to purchase 20,500
shares of common stock were exercisable. For
the three months ended March 31, 1998, the
average number of exercisable options that
are considered dilutive is 15,033.
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
March 31, 1998, options to purchase 66,300
shares were still outstanding (with options
on 3,900 shares having been forfeited) of
which options on 22,100 shares were
exercisable. For the three months ended
March 31, 1998, the average number of
exercisable options that are considered
dilutive is 66,300.
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 March 31, 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 the
three months ended March 31, 1998 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. Such options with expiration dates
from 2002 to 2007, were outstanding at March
31, 1998.
- 9 -
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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: (i) a statement of
income and comprehensive income, (ii) a
statement of comprehensive income or (iii) a
statement of shareholders' equity. The
Company has elected to report comprehensive
income on its condensed consolidated
statement of shareholders' equity.
Comprehensive income is comprised of net
income and all changes to shareholders'
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 THREE MONTHS ENDED MARCH 31, 1998 1997
- - ---------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 244,403 $ 254,190
Other comprehensive income (loss),
net of income taxes (13,339) (20,943)
- - ---------------------------------------------------------------------------------
Comprehensive income $ 231,064 $ 233,247
- - ---------------------------------------------------------------------------------
</TABLE>
- 10 -
<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 FROM PERIOD TO PERIOD BETWEEN ORIGINAL EQUIPMENT MANUFACTURER
SALES (WHICH HAVE COMPARATIVELY LOWER GROSS PROFIT MARGINS WITH LOWER EXPENSES)
AND RETAIL SALES (WHICH HAVE COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH
HIGHER EXPENSES); 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
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, 1997, 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 three month period ended March 31, 1998, the Company had net
sales of $5.6 million, which was an increase of 14.0% when compared to net sales
of $4.9 million for the same period in 1997. During the three month period ended
March 31, 1998, sales to customers in the United States increased approximately
$94,600, or 3.3%, when compared to the same period in 1997. This increase in
sales to customers in the United States was due primarily to increases in sales
of the Company's Focus Networking TM products, which were offset by small
decreases in passive networking products and OEM custom cable products sold in
the United States. The Company acquired the assets of the networking division of
Focus Enhancements, Inc. ("Focus") in September 1997. During the three month
period ended March 31, 1998, sales to foreign customers increased approximately
$597,000, or 28.4%, when compared to the same period in 1997. This increase in
sales to foreign customers was due primarily to increases in retail related,
passive networking products sold through the Company's West European
subsidiaries, and increased sales of networking installer-related products to
the Company's exclusive distributors in Russia and the Ukraine.
- 11 -
<PAGE>
OEM sales were relatively unchanged for the three months ended March
31, 1998 when compared to the same period in 1997. Effective September 29, 1997,
the Company entered into an exclusive OEM supply agreement with Focus. Pursuant
to this exclusive supply agreement, Focus agreed to purchase over a period of
two years a minimum of $2.5 million of the Company's connectivity products for
Focus to use in their high-end PC-to-TV products in exchange for the ability of
Focus to purchase such products at reduced margins. This exclusive supply
agreement, although expected to decrease the Company's gross profit margin
rates, was expected to increase OEM sales. For the three months ended March 31,
1998, however, Focus only purchased approximately $144,000 in OEM products, an
amount less than the Company anticipated. The Company anticipates that this
amount will increase in the future.
The gross profit margin rate for the three month period ended March 31,
1998, increased from 44.8% to 45.8% compared to the same period in 1997. The
Company's Swedish and German subsidiaries experienced lower gross profit margin
rates due primarily to these companies' larger percentage of total sales to
larger customers, such as distributors and catalog houses, which have a
typically lower gross profit margin rate. Sales of the Company's networking
products also increased which sales tend to generate lower gross profit margin
rates than many of the Company's other products. However, the gross profit
margin rates for the Company's newly acquired Norwegian subsidiary, increased
from period to period, which more than offset the Swedish and German
subsidiaries' reduced gross profit margin rates and the reduced gross profit
margin rates which resulted from increased sales of active networking products.
The Norwegian subsidiary's increased gross profit margin rate was due primarily
to economies of scale that were not available to that subsidiary prior to its
acquisition by the Company in November 1997.
SG&A expenses increased to approximately $2.2 million for the three
month period ended March 31, 1998, which represented an increase of 24.2% when
compared to the same period in 1997. This increase in SG&A expenses was due
primarily to a combination of the following factors: increased costs necessary
to support and service increased sales levels; increased costs due to being a
public company, including fees for professional services; and increased costs
related to the Company's efforts to strengthen its OEM sales. Tangible SG&A
expenses (excluding the amortization of intangibles related to the purchase of
the Focus Networking(TM) product line) are projected to increase in the future
as sales increase. However, the rate of tangible SG&A expense increase is
projected to be at a lower rate than projected sales increases.
Interest expense, net of interest income, for the three month period
ended March 31, 1998 was relatively unchanged as compared to the same period in
1997.
As a result of the factors set forth above, the Company's net income
before taxes was approximately $324,600 for the three month period ended March
31, 1998, a decrease of approximately $37,300 or 10.3% compared to the same
period in 1997. Net income for the three month period in 1998 was approximately
$244,400, compared to approximately $254,200 for the same period in 1997, which
represented a decrease of approximately $9,800, or 3.9%, from period to period.
During the three month periods ended March 31, 1997 and 1998, the
average basic shares outstanding increased by 43.8% from 1,587,168 shares to
2,282,201 shares, and the average fully diluted shares outstanding increased by
48.8% from 1,830,057 shares to 2,723,315 shares. The increases in average shares
outstanding were due primarily to the Company's IPO
- 12 -
<PAGE>
during the first quarter of 1997 as well as stock issued for the two
acquisitions completed in the Fall of 1997. The increased number of average
shares outstanding contributed to a decrease in calculated earnings per share of
31.3%, or $0.05 per share, for basic shares, and 28.6%, or $0.04 per share
assuming dilution, for the three months ended March 31, 1998 when compared to
the same period in 1997.
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 approximately $4,862,000 ($4,375,000
net of certain capitalized expenses in connection with the offering).
At March 31, 1998, the Company's working capital was approximately
$8,230,000 and its current ratio was approximately 2.74:1, compared to working
capital of approximately $8,093,000 and current ratio of 3.30:1, as of December
31, 1997. The increase in working capital and the decrease in current ratio was
due to increased borrowings under the Company's line of credit, increased
inventory and receivables, offset in part by a decrease in payables.
As of March 31, 1998, accounts receivable increased approximately
$385,000, or 7.6%, when compared to December 31, 1997, generally due to
increases in sales and particularly due to increases in sales to the Company's
two exclusive distributors in Russia and the Ukraine. Inventories increased
approximately $468,000, or 8.1%, from period to period primarily due to the
inventory purchased to support the expansion of sales in both Eastern and
Western Europe.
On September 30, 1997, the Company acquired the assets of the
networking product line of Focus and accounted for the transaction as a purchase
of assets. In connection with this acquisition, the Company recorded an
intangible asset with a balance, as of March 31, 1998, of approximately
$733,000, net of amortization.
As of March 31, 1998, notes payable were approximately $1,792,000 which
was an increase of approximately $1,565,000 compared to the balance of
approximately $227,000 as of December 31, 1997. The notes payable increase can
be attributable to the increased levels of inventory and receivables required to
support increased sales levels.
For the three months ended March 31, 1997, net cash used in operations
was approximately $1,489,000. Such cash was used primarily to reduce trade
accounts payable and to increase trade accounts receivable levels. For the three
months ended March 31, 1998, net cash used by operations was approximately
$942,000. Such cash was used primarily to increase accounts receivable and
inventory levels both of which were required to support increased sales.
For the three months ended March 31, 1997, net cash provided by
financing activities amounted to approximately $2,612,000, due primarily to the
completion of the IPO during the period offset by proceeds of the Company's IPO
for payments on shareholder notes and payments of distributions to shareholders.
The cash provided from financing activities during the three months ended March
31, 1998 was approximately $1,565,000 which was provided primarily from
borrowings on the Company's line of credit.
- 13 -
<PAGE>
The Company has a $4,500,000 revolving line of credit with a financial
institution. Borrowings under the line of credit 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 U.S.-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. At
December 31, 1997, the amount due under the line of credit was approximately
$214,000. At March 31, 1998, the amount due under the line of credit was
approximately $1,792,000. The credit facility will mature on July 26, 1998,
and while the Company expects that it will be able to renew the facility, there
can be no assurance that the credit facility will be renewed or even if renewed
that it can be renewed on its current terms.
Since the Company's current line of credit allows borrowings based
only upon accounts receivable from U.S. 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 expected
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 held 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.
The Company's management believes that, subject to growing foreign
markets as described above, net cash flow from operations, as well as borrowings
under the Company's existing line of credit will be adequate to fund the
Company's operations during 1998. This is a projection, however, and no
assurance can be given that this will be the case or that if such funds are
available that such funds will be sufficient to meet the Company's cash
requirements during 1998.
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
$869,562.00 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'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 computer systems are currently year 2000 compliant,
however, the Company is currently updating its computer systems and is taking
steps to ensure that the new systems are also year 2000 compliant.
- 14 -
<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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the
quarter ended March 31, 1998.
- 15 -
<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: May 15, 1998 By: /S/ RANDALL N. PAULFUS
-----------------------
Randall N. Paulfus, Vice President and
Chief Financial Officer
- 16 -
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 917,656 1,665,710
<SECURITIES> 0 144,693
<RECEIVABLES> 5,499,321 4,138,642
<ALLOWANCES> (77,256) 75,000
<INVENTORY> 6,232,863 5,056,452
<CURRENT-ASSETS> 12,948,884 11,148,610
<PP&E> 833,836 669,066
<DEPRECIATION> 331,270 260,107
<TOTAL-ASSETS> 14,403,742 11,785,213
<CURRENT-LIABILITIES> 4,718,693 2,882,159
<BONDS> 0 0
0 0
0 0
<COMMON> 2,283 2,093
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 14,403,742 11,785,213
<SALES> 5,617,906 4,926,701
<TOTAL-REVENUES> 5,617,906 4,926,701
<CGS> 3,047,651 2,721,679
<TOTAL-COSTS> 5,251,619 4,496,446
<OTHER-EXPENSES> 41,735 70,699
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43,527 45,054
<INCOME-PRETAX> 324,552 361,838
<INCOME-TAX> 80,149 107,648
<INCOME-CONTINUING> 244,403 254,190
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 244,403 254,190
<EPS-PRIMARY> .11 .16
<EPS-DILUTED> .10 .14
</TABLE>
