SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________________ to ___________________
Commission file number 001-12739
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
(Name of small business issuer in its charter)
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FLORIDA 59-2327381
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
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1810 N.E. 144TH STREET, NORTH MIAMI, FLORIDA 33181
(Address of principal executive offices) (Zip Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(Title of class)
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Check whether the Company (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenue for the fiscal year ended December 31, 1998 were
$21,968,955.
The aggregate market value of the voting stock held by non-affiliates of the
Company, based upon the closing bid price of the Company's common stock, $.001
par value per share (the "Common Stock") as of April 12, 1999 of $1 5/8 per
share, was approximately $2,388,000. There is no non-voting stock.
The number of shares of the Company's Common Stock which were outstanding as of
March 31, 1999 was 3,167,921.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders, scheduled to be held in May 1999, are incorporated by reference
into Part III hereof. Certain exhibits listed in Part III of this Annual Report
on Form 10-KSB are incorporated by reference from prior filings made by the
Company under the Securities Act of 1933, as amended (the "Securities Act") and
the Securities Exchange Act of 1934 (the "Exchange Act").
Transitional Small Business Disclosure Format (Check one):
Yes No X
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
INDEX
PART I
PAGE
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Item 1. Description of Business..................................................................................1
Item 2. Description of Property.................................................................................10
Item 3. Legal Proceedings.......................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.....................................................10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................................11
Item 6. Management's Discussion and Analysis or Plan of Operation...............................................12
Item 7. Financial Statements and Supplementary Data.............................................................17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................................17
PART III
Item 9. Directors, Executive Officers, Promoters and Central Persons;
Compliance with Section 16(a) of the Exchange Act.......................................................18
Item 10. Executive Compensation..................................................................................18
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................18
Item 12. Certain Relationships and Related Transactions..........................................................18
Item 13. Exhibits and Reports on Form 8-K........................................................................18
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants...................................F-2
Consolidated Balance Sheet at December 31, 1998......................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997..................................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998 and 1997..................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997..................................................F-6
Summary of Significant Accounting Policies...........................................F-7
Notes to Consolidated Financial Statements..........................................F-12
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PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-KSB CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. THESE FORWARD-LOOKING STATEMENTS
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 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 HEREIN. 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.
ITEM 1. DESCRIPTION OF BUSINESS
(A) OVERVIEW
The Company designs, manufactures, markets and distributes networking
and computer connectivity products in the United States and internationally. The
Company offers its customers a broad range of networking products, including
network interface cards, hubs, transceivers, routers and repeaters, and computer
connectivity products, including cables, connectors, installation products, data
sharing devices, fiber optic cables and multimedia input and output devices. The
Company sells its products to a broad range of customers, including original
equipment manufacturers ("OEM") and retail customers (such as computer
superstores and dealers, mail order customers and other distributors) in North
America, Latin America, and Eastern and Western Europe.
The Company works with several manufacturers that manufacture and
assemble the Company's products using designs and manufacturing specifications
(including quality control) provided by the Company. For these designs and
manufacturing specifications, the Company uses its own designs, as well as
standard industry designs. The Company's manufacturers are located primarily in
the Far East, allowing the Company to maintain competitive pricing for its
products due to comparatively lower labor-related costs of production in the Far
East. The Company also assembles a very small percentage of its products at the
Company's North Miami facility and expects to produce connectivity products in
the future at its newly acquired CCCI manufacturing operation.
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In February 1997, the Company completed its initial public offering
("IPO"). The Company used the net proceeds of the IPO to repay indebtedness, for
product development and design, to increase its inventory to support customer
requirements, to increase its sales force, to implement the "ISO 9000" standard,
for advertising and marketing, for acquisitions and for working capital. Since
the IPO, the Company has completed four acquisitions.
In September, 1997, the Company acquired the assets of the networking
division of Focus Enhancements, Inc. ("Focus"). The Company now sells its
networking products under the "Focus Networking" tradename to retail customers,
primarily in the United States and Europe. The Company also has a supply
agreement with Focus pursuant to which Focus purchases certain OEM connectivity
components from the Company. In November, 1997, the Company acquired Dataholding
AS (now called Jotec/AESP AS), a distributor of connectivity and computer
products headquartered in Oslo, Norway. During the fourth quarter of 1998, the
Company acquired AESP Ukraine, an independent but affiliated distributor of the
Company's products located in the Ukraine. In March 1999, the Company
completed the acquisition of the assets of Communications Components Company,
Inc. ("CCCI"), which manufactures a line of network connectivity products and
systems.
(B) BUSINESS OF ISSUER
NETWORKING AND COMPUTER CONNECTIVITY INDUSTRY-OVERVIEW
Information is proliferating worldwide, and demand for that
information, by businesses, governments, universities and individuals, is
likewise exploding, driven primarily by the exponential increase in use of the
Internet for communications, information gathering and electronic commerce.
Furthermore, as business becomes more complex and geographically diverse, the
demand for information on which to base decision making, delivered to the
"transaction point", wherever in the world that point might be, has fueled the
proliferation of networks and computer connectivity systems.
These trends have created an ever-increasing demand for bandwidth, to
accommodate both the Internet and network traffic. However, the growth and
technological advancement of the hardware backbone for networking and computer
connectivity has simply not kept pace with that demand. The worldwide struggle
to bring networking and computer connectivity hardware up to the level of demand
represents a business opportunity for the Company, and the Company's strategic
objective is to become a leading distributor in the networking and computer
connectivity equipment industry.
The networking and computer connectivity market consists of two
wholesale categories: manufacturers of computers and peripherals and
distributors, and three retail categories, including retail stores, catalog
companies and, most recently, web-based selling organizations. The Company's
strategy is to market to all five of these potential customer groups.
Manufacturers and distributors of networking and computer connectivity
products range in size from channel dominant companies with annual sales of over
$250 million to independent or
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specialized distributors with annual sales of $1-3 million. Small distributors
predominate the channel, reflecting both the specialized nature of technology
and the variety of OEM and end-user customers for connectivity hardware.
The networking and computer connectivity industry is characterized by
extremely rapid technological change. To maintain and enhance its competitive
position, the Company must adapt to technological change, constantly upgrade and
expand its product line, and eliminate obsolete products within that line. Thus,
purchasing and inventory management are important determinants of the Company's
operating success.
The networking and computer connectivity industry is also characterized
by inevitable price erosion across the life cycle of products and technologies.
To maintain its profitability in the face of constantly shrinking gross margins,
the Company's strategy is to seek out low cost producers without sacrificing
quality and to seek to develop and maintain efficient internal operations
allowing the Company to control its internal costs and expenses.
While the market for networking and computer connectivity hardware is
one of the fastest growing segments of the technology industry, the technology
industry has historically experienced cyclical downturns. Any such downturns,
unexpected changes in technology or shifts in the distribution channel for
networking and computer connectivity equipment could have a materially adverse
effect on the Company.
PRODUCTS AND SERVICES
The Company's product line consists of four categories: networking,
connectivity, audio/video and accessories.
Networking products are products which connect a computer to another
computer, a network server, the Internet, the public switched telephone network
or another enterprise. Networking products are divided into two sub-categories:
active and passive. Active networking products include interface cards,
transceivers, hubs, routers and repeaters. Passive networking products include
patch panels, patch cables and wallplates.
Connectivity products are products which connect a computer to
peripheral equipment, such as printers, external storage devices, scanners,
facsimiles or communications devices. Connectivity products include cables,
plugs and interface devices. Within the computer industry, the trend in
connectivity equipment is toward the development of so-called universal
interfaces, using USB, Finewire and SCSI standards. These universal interfaces
allow many different devices, such as monitors, keyboards, printers and modems,
to be connected using one universal interface per connection. Universal
interfaces have the potential to replace a number of connectivity products
currently marketed by the Company. However, while there can be no assurance, the
Company believes that future sales of universal interfaces have the potential to
be equal to or greater than sales of the connectivity devices replaced by such
interfaces.
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Audio/video products are products that provide audio and video input
and output to computers, networks, homes and offices. These products include
connectivity devices for multimedia applications. Accessories are component
products used in conjunction with networking, connectivity and audio/video
products, and include such products as tools, testers, power backups and surge
suppressors.
The Company has also recently added several new product lines, via the
addition of the Plugged-In(TM) line of ultra high quality computer cables and
the acquisition in 1999 of the CCCI "Signamax"(TM) product line of passive
networking products.
The Company is constantly expanding and changing its product line
within the aforementioned categories to expand the total number of products it
can offer customers, to attract new customers, to penetrate new geographic and
vertical markets and to increase gross sales. For example, in countries outside
the United States, electrical power is of different voltages and frequencies,
and power connections are of different configurations. By expanding its product
line to include products for different voltages, frequencies and connection
configurations, and warehousing these products near potential customers, the
Company has successfully expanded its sales activities into a number of Western
and Eastern European countries.
In order to provide assistance to its customers and to be competitive
with other companies in its industry, the Company offers certain of its
customers several services. These services include: stock rotation (where the
customer can return unsold products of a type which the Company currently sells
for credit towards purchases of new products); price protection (where the
customer is entitled to receive a lower price if the Company publishes a lower
price to a similarly situated customer for the same product on its next
semiannual pricing list); enhanced packaging; custom packaging; technical and
design support (where the customer receives advice from the Company on which
product or design specification is appropriate for a particular situation);
assembly support (where customers rely on the Company to assemble the component
parts the customer traditionally had done itself); training (where the customer
receives training from the Company on the different capabilities and
applications of the Company's products); extended warranties;
merchandising/display programs and quality control.
MANUFACTURING AND SUPPLIERS
All of the products purchased by the Company from its suppliers have
been manufactured to the Company's specifications. Those specifications are
derived either from specifications provided to the Company by its OEM customers
or from industry standard specifications. Products sold by the Company to its
OEM customers are typically manufactured to the customer's unique
specifications. Products sold by the Company to its retail customers are
typically manufactured to industry standard specifications. The Company
contracts with manufacturers using two methodologies.
Under the first methodology, typically used for the manufacture of
custom designed products, the Company contracts with a primary manufacturer
(a/k/a an "assembler") and then directs that manufacturer to various component
manufacturers with whom the Company also has contracted. The component
manufacturers then supply components to the assembler, who is responsible for
final
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manufacturing of the finished product. The value of this methodology to the
manufacturing of custom designed products is that the Company can enforce its
specifications at every step of the component manufacturing and final assembly
process. Under the second methodology, typically used for the manufacture of
industry standard specification products, the Company contracts only with the
primary manufacturer, which makes its own arrangements with component suppliers.
The Company enforces its specifications on the primary manufacturer, which is
responsible for the enforcement of the Company's specifications on the component
suppliers with whom it has contracted.
Due to the high volume and labor intensive nature of manufacturing
computer connectivity products, most of the products sold by the Company are
manufactured outside the United States in such countries as Taiwan, the Peoples'
Republic of China and Hong Kong. The Company also assembles a small percentage
of its products at the Company's North Miami, Florida facility. Additionally, as
a result of its recent acquisition of CCCI, the Company now manufactures
connectivity products at its Broomall, Pennsylvania manufacturing facility.
For the production of each specific type of retail product, the Company
usually maintains an on-going relationship with several suppliers to insure
against the possibility of problems with one supplier adversely impacting the
Company's business. For the production of OEM products, the Company usually uses
a single supplier for each product, with other factories providing competitive
price quotes and being available to supply the same product if a primary
supplier fails to produce for reasons outside the Company's control. However,
while the Company believes that it could easily replace a sole source of supply
if required, there can be no assurance of this fact. In an effort to produce
defect-free products and maintain good working relationships with its suppliers,
the Company keeps in contact with its suppliers, regularly inspecting the
manufacturing facilities of the suppliers and implementing quality assurance
programs in the supplier's factories.
Over the last five years, the Company has progressively expanded its
supplier base. Presently, the Company works with approximately 40 suppliers. The
Company has one supplier (located in China), which supplied approximately 10
percent of the Company's purchases during 1998 and 1997. No other source of
supply accounted for more than 10 percent of the Company's purchases during 1998
or 1997, and other than purchase orders, the Company does not enter into supply
or requirements contracts with its suppliers. The Company believes that purchase
orders, as opposed to supply or requirement agreements, provide the Company with
more flexibility in responding quickly to customer demand. Nevertheless, the
loss of one or more suppliers could have an adverse impact on the Company.
QUALITY CONTROL
The Company's goal is to provide its customers with defect-free
products. Working with its primary manufacturers and often with the
manufacturers of the component parts, the Company has instituted quality control
measures at five stages throughout the manufacturing process. At the first
stage, the Company works with its primary manufacturers to institute a general
quality control check upon the entry of the various component parts into the
primary manufacturers' factory (a.k.a. the incoming inspection). At the second
stage, the primary manufacturer checks to ensure that the contacts which are
being fitted with connectors function properly. The third and fourth stages of
quality control occur after each molding process, with the final product being
subject to quality
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control upon shipment to the Company. The fifth and final stage of quality
control occurs at one of the Company's distribution warehouses (North Miami,
Pleasanton, Germany, Sweden and Norway). At this final stage of quality control,
the Company tests a certain percentage of each shipment of the products it
receives to ensure the products meet the Company's quality standards.
In 1998, the Company was certified as being in compliance with the"ISO
9000" standard. The ISO 9000 standard is an international manufacturing standard
which is becoming more prevalent across numerous industries. Almost all of the
Company's current suppliers are either ISO 9000 compliant or in the process of
implementing ISO 9000 procedures.
CUSTOMER BASE
The Company's customer base is divided into two categories: OEM and
retail. OEM customers are generally manufacturers of computer-related
audio-video equipment which use the Company's products as part of their finished
products. Retail customers are local and regional resellers, value-added
resellers and distributors, educational institutions and catalog houses. Catalog
houses constitute a large share of the Company's U.S. retail sales. The retail
mass merchandising market also represent a significant growth area for the
Company. The Company does not sell its products directly to end-users.
Substantially all of the Company's revenues are derived from the sale
of its products through third parties. Domestically, the Company's products are
sold to end users primarily through OEM customers, wholesale distributors, value
added resellers ("VARs"), mail order companies, computer superstores and
dealers. In Europe, the Company's products are sold through wholesale
distributors and mail order companies, dealers and VARs. Accordingly, the
Company is dependent on the continued viability and financial stability of its
resellers. The Company's resellers often offer products of several different
companies, including, in many cases, products that are competitive with the
Company's products. There can be no assurance that the Company's resellers will
continue to purchase the Company's products or provide them with adequate levels
of support. The loss of, or a significant reduction in sales volume to, a
significant number of the Company's resellers could have a material adverse
effect on its results of operations.
Sales to the Company's exclusive distributor in Russia, AESP-Russia,
amounted to 15.1% of the Company's net sales for 1997 and 9.2% of the Company's
net sales for 1998. However, in August, 1998, due to deteriorating economic
conditions in Russia, AESP Russia experienced a cessation of business volume. As
a consequence, the Company elected, during its third fiscal quarter of 1998, to
take a one-time charge of approximately $2.1 million, representing the write-off
of inventory and accounts receivable relating to AESP-Russia. See Item 6.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." The Company is
currently selling products to its Russian distributor on a paid-in-advance
basis.
The Company's top 10 customers (including AESP-Russia) accounted for
approximately 40% of the Company's net sales for the year ended December 31,
1997 and for approximately 31% of the Company's net sales for the year ended
December 31, 1998. No one customer accounted for more than 10% of net sales in
1998.
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The Company believes that due to the vagaries of the computer industry,
it is likely that some customers who are significant customers in one period may
become insignificant customers in future periods. The reduction in net sales
attributable to the Company's top ten customers from period to period reflects
the Company's attempts to diversify its customer base and reduce its dependence
on any one set of customers. However, the loss of one or more significant
customers could have a material adverse impact on the Company's business and
results of operations.
MARKETING AND SALES
The Company's marketing and sales efforts are directed by its Sales and
Marketing Department. The Marketing Department is responsible for, among other
things, publishing the Company's catalogs for each product line as well as the
general Company catalog, assisting the sales group (described below) in
preparing for sales shows, advertising the Company's products in industry
publications, working with mail-order catalogs to prepare advertising space in
such catalogs, and providing designs for packaging the Company's products. The
Sales Department is responsible for, among other things, contacting potential
customers with information and prices for the Company's products, following
leads from trade shows, providing customer support and visiting customers on a
regular basis. The Marketing Department is responsible for worldwide marketing
while the Sales Department is divided in responsibility by geographic location.
OEM sales are handled by salespersons located in the Company's
headquarters in North Miami, Florida. All OEM customers receive their shipments
from the Company's North Miami warehouse. Retail sales are generally handled
from the Company's headquarters in North Miami, Florida and from the German,
Swedish, Ukrainian and Norwegian offices and warehouses.
COMPETITION.
The Company competes with many companies that manufacture, distribute
and sell computer connectivity and networking products. While these companies
are largely fragmented throughout different sectors of the computer connectivity
industry, a number of these companies have greater assets and possess greater
financial and personnel resources than those of the Company. Some of these
competitors also carry product lines which the Company does not carry and
provide services which the Company does not provide. There can be no assurance
that competitive pressure from these companies will not materially adversely
affect the Company's business and financial condition in the future. In the
event that more competitors begin to carry products which the Company carries
and price competition with respect to the Company's products significantly
increases, competitive pressures could force the Company to reduce the prices of
its products, which would result in reduced profit margins and prolonged price
competition and would have a material adverse effect on the Company's operating
results and financial condition. A variety of other potential actions by the
Company's competitors, including increased promotion and accelerated
introduction of new or enhanced products, could also have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
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GROWTH STRATEGY
The Company's strategic objective is to become a leader in the computer
and network connectivity equipment market, and to make the name "AESP"
synonymous with state-of-the-art hardware in this segment.
RETAIL & OEM CUSTOMER BASE
The Company intends to increase its revenues and income in the retail
and OEM markets by continuing to broaden its customer base in existing markets
and by expanding into new markets. In order to increase national and
international customer base, the Company intends to continue to market to large
catalog companies, to increase both its product line and inventory and to expand
its sales reach in the US, Eastern and Western Europe and in the future into
Latin America. To expand its OEM customer base, the company intends to expand
its business with computer product and networking hardware manufacturers, and to
solicit manufacturers in other fast-growing vertical markets, such as
networking, telecommunications, medical instrumentation and cable TV.
STRATEGIC ACQUISITIONS
The other element of the Company's growth strategy is to acquire other
companies, assets and/or product lines that will compliment or expand the
Company's business. The Company is seeking companies which market to the
networking, telecommunications, cable audio/video and computer industries. The
Company believes that acquisitions, mergers, asset purchases or other strategic
alliances in these categories should enable it to achieve operating leverage on
its existing resource base.
The Company's ability to expand by acquisition has been, and will
continue to be limited by the availability of suitable acquisition candidates,
in both the United States and internationally, and by the Company's financial
condition and the price of its Common Stock. The Company's ability to complete
acquisitions may also be limited by certain restrictive covenants contained in
the Company's credit agreement. See Item 6. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION-FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES." In addition, acquisitions involve risks that could adversely affect
the Company's operating results, including but not limited to the assimilation
of personnel, inventory, product lines, customers and liabilities of the
acquiree company; the effect of amortization of intangible assets, such as
goodwill, on the earnings of the Company and the retention of key executives of
the acquiree company. There can be no assurance that the Company will be
successful in consummating acquisitions on acceptable terms.
Other than as required by the Company's Articles of Incorporation,
By-Laws, and applicable law, shareholders of the Company are not entitled to
vote on acquisitions, mergers or other business combinations.
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CORPORATE ORGANIZATION
The Company's operations are divided into five departments: (1) the
Sales and Marketing Department, (2) the International Sales Department
(including sales offices in Sweden, Germany and Norway), (3) the Purchasing
Department, (4) the Operations Department (including the MIS, shipping,
warehouse and quality control and production groups), and (5) the
Finance/Accounting Department. The Sales and Marketing Department covers sales
in Latin America, the United States and Canada. Account Managers and Customer
Service Representatives service this department from the Company's North Miami,
Florida headquarters. The International Sales Department covers sales in Eastern
and Western Europe, with offices in Sweden, Germany, the Ukraine and Norway, and
an exclusive distributor in Russia.
EMPLOYEES
As of December 31, 1998, the Company had 112 employees worldwide, as
follows: 71 employees in Miami, 11 of whom were in administration and
Finance/Accounting, 4 of whom were in purchasing, 20 of whom were in sales,
marketing and customer service and 36 of whom were in operations; 7 employees in
Sweden; 10 employees in Germany, 14 employees in Norway and 10 employees in
the Ukraine. None of the Company's employees are covered by collective
bargaining agreements. The Company believes that its relationship with its
employees is good.
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ITEM 2. DESCRIPTION OF PROPERTY
The table set forth below identifies the principal properties
currently being utilized by the Company. All properties are leased, are in good
condition and are maintained on a regular basis [and are adequate for the
Company's present requirements]. RSB Holdings, Inc., a related party, owns the
corporate headquarters, product assembly and central warehouse, and leases such
properties to the Company. Under the terms of the Company's credit agreement,
RSB Holdings has executed landlord waivers, permitting the lender the priority
right to enter the Company's premises and seize collateral in the event of a
default under the credit agreement (see "Liquidity and Capital Resources"
below). See Note 10 to Notes to Consolidated Financial Statements for
information regarding the financial terms of the Company's leases.
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APPROXIMATE
SQUARE
FACILITY DESCRIPTION LOCATION FOOTAGE
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Corporate Headquarters, Product Assembly and North Miami, FL 10,000
Central Warehouse
Warehouse North Miami, FL 20,000
Sales Office and Warehouse Tierp, Sweden 5,000
Sales Office and Warehouse Oslo, Norway 14,000
Sales Office and Warehouse Sulzemoos, Germany 5,000
Bonded Warehouse Vinnitsa, Ukraine 10,000
Sales Office Vinnitsa, Ukraine 18,500
Sales Office and Manufacturing Broomall, Pennsylvania 5,085
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ITEM 3. LEGAL PROCEEDINGS
As of April 13, 1999, the Company was not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock and redeemable stock purchase warrants are
traded on the NASDAQ Small Cap Market under the symbols "AESP" and "AESPW,"
respectively. The high and low bid prices of the common stock and the warrants
for each quarter during the Company's two most recent fiscal years, as reported
by NASDAQ, are set forth below:
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COMMON STOCK WARRANTS
HIGH LOW HIGH LOW
1997
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First Quarter 7 7/8 6 1/8 2 3/4 1 1/2
Second Quarter 9 4 1/4 2 3/4 1 3/16
Third Quarter 5 3/4 2 15/16 1 23/32 3/4
Fourth Quarter 5 3 1/8 1 1/4 1/2
1998
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First Quarter 3 3/4 2 1/2 7/8 9/32
Second Quarter 4 11/16 3 1/16 1 1/4 11/32
Third Quarter 4 5/32 1 3/4 5/8 1/8
Fourth Quarter 2 7/16 1 7/32 7/32 1/16
</TABLE>
At March 22, 1999, the number of holders of record of the Company's
Common Stock was approximately 20. However, the Company's transfer agent
estimates that there are approximately 610 beneficial holders of the Company's
common stock.
Effective December 31, 1998, the Company's principal shareholders
converted $1,439,125 of convertible notes due to them from the Company into
799,514 shares of Common Stock. The conversion price was $1.80 per share. The
conversion price was determined by the Board, after negotiation with the
principal shareholders, and represented a 31% premium over the price of the
Company's common stock on the conversion date. The conversion, which amended the
terms of such instruments to lower the conversion price, was effected in order
to save the Company interest on the convertible debt and to increase the net
worth of the Company. The Company incurred a one-time charge of approximately
$852,000 representing the value of the additional shares of the Company's common
stock issued in conjunction with conversion of this debt. See Item 6.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-RESULTS OF
OPERATIONS."
The Company does not intend to pay any cash dividends on its Common
Stock for the foreseeable future. The Company intends to reinvest its earnings,
if any, in the growth and expansion of its business. Additionally, the Company's
future ability to declare or pay dividends on its Common Stock will be
restricted by the covenants contained in its credit agreement and by the terms
of the Underwriting Agreement which it entered into in connection with its IPO.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
ITEM 6. PLAN OF OPERATION
OVERVIEW
Since its incorporation in 1983, the Company has designed,
manufactured, marketed and distributed computer connectivity and networking
products nationally and internationally. On February 19, 1997, the Company
completed its IPO. Subsequent to the completion of the IPO, the Company has
completed several acquisitions.
Effective September 30, 1997, the Company acquired the assets of the
networking division of Focus. The Company issued an aggregate of 189,701 shares
of its authorized but unissued Common Stock to Focus (valued at $700,000) in
connection with this acquisition. The Company also paid Focus $159,371 to
acquire Focus' inventory of networking products. This acquisition was accounted
for under the purchase method of accounting.
On November 12, 1997, the Company acquired all of the outstanding
shares of Dataholding AS, a Norwegian company ("Dataholding," now called
Jotec/AESP AS), from the shareholders of Dataholding. Dataholding, based in
Oslo, Norway, is a distributor of connectivity and computer products primarily
in Norway. In connection with this acquisition, which was accounted for under
the pooling of interests business combination method of accounting, the Company
issued 360,000 shares of its authorized but unissued Common Stock in exchange
for all of the issued and outstanding capital stock of Dataholding.
In October 1998 the Company acquired its Ukrainian distributor,
AESP-Ukraine, for forgiveness of a $490,000 receivable due to the Company. This
acquisition has been accounted for under the purchase method of accounting and
results of operations of the Ukrainian operation have been included from the
effective date of the acquisition. See Note 2 to Notes to Consolidated Financial
Statements.
In March 1999, the Company acquired the assets of CCCI for $800,000,
payable $250,000 in cash at closing, $150,000 payable through the issue of
86,206 shares of the Company's common stock, and $400,000 payable, with interest
at the rate of 8% per annum, over a three year period. The acquisition has been
accounted for under the purchase method of accounting and results of operations
of CCCI will be included from the effective date of this acquisition.
RESULTS OF OPERATIONS
GENERAL
Net sales consist primarily of gross sales, net of allowances for
returns and other adjustments. Costs of sales consist primarily of product costs
(cost of manufacture or acquisition) and freight charges.
12
<PAGE>
Net sales and gross profits from period to period depend in part on the
volume and mix of OEM and retail sales, as well as the cost and mix of
components and finished products contained in the Company's inventory from time
to time to supply those sales. OEM sales generally have a comparably low gross
profit margin with a relatively high volume of sales per customer, while retail
sales generally have a comparably high gross profit margin with a relatively low
volume of sales per customer. Retail sales consequently require more time and
effort, as well as high operating expenses (including overhead), to achieve a
comparably higher gross profit margin. The overall mix of OEM and retail sales
will therefore impact from period to period the overall gross profit margin of
the Company's sales. A large portion of the Company's operating expenses are
relatively fixed. Since the Company typically does not obtain long-term purchase
orders from retail customers or commitments from its customers, it must
anticipate its future volume of orders based upon the historic purchasing
practices of its customers and upon discussions with its customers as to their
future requirements. Cancellations, reductions or delays in orders by a customer
or group of customers could have a material adverse effect on the Company's
business, financial condition and results of operation.
The majority of the Company's suppliers of components, manufacturers,
and assemblers are foreign, and although all price quotations and payments with
those entities are made in U.S. dollars, fluctuations in exchange rates could
alter the price charged by these foreign suppliers, manufacturers and
assemblers, and depending on the level of such exchange rate fluctuations, such
price fluctuations could adversely affect the Company's performance. In that
regard, a majority of the Company's sales are made to customers outside of the
United States. Although many price quotations and payments from customers are
made in U.S. dollars, the same risks of adverse exchange rate fluctuations which
are present with suppliers, manufacturers and assemblers (as set forth above)
are also present in transactions with customers. The Company does not have a
formal exchange risk management program, nor does the Company engage in hedging
activities with respect to exchange rate fluctuations because all price
quotations and payments are made in U.S. dollars, which the Company believes
helps reduce (but does not eliminate) the risk attendant to fluctuations in
exchange rates.
Although the Company monitors its inventory on a regular basis, the
Company needs to maintain a significant inventory in order to ensure prompt
response to orders and to avoid backlogs. The Company may need to hold inventory
during periods of low sales activity. The capital necessary to hold inventory
restricts the funds available for other corporate purposes. The Company does not
provide allowances for anticipated product returns. Although the Company
endeavors to reduce product returns through its quality control program, and
although historically product returns have been relatively insubstantial, there
can be no assurance that product returns will not increase in the future.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated net sales for the fiscal year ended December 31, 1998 were
$21,968,955, an increase of approximately $783,000 or 3.7% compared to
consolidated net sales of $21,185,911 for the fiscal year ended December 31,
1997. The Company's sales mix changed slightly, to approximately 89% Retail and
11% OEM in 1998 from 90% Retail and 10% OEM in 1997. The 1998 sales mix reflects
primarily the decrease in international Retail sales described below. Although
13
<PAGE>
total OEM sales for 1998 were basically flat, approximately 50% of those sales
occurred during the fourth quarter of 1998, reflecting the fact that the
Company's protracted marketing efforts have recently produced a significant
order from one new OEM customer and the addition of another major OEM customer
from whom the Company expects significant recurring business in 1999. In
addition, in May, 1998, the Company received ISO 9000 certification, which was
an absolute necessity to the Company's efforts to increase its OEM business.
Sales to customers outside the US increased by approximately 2.3% in
1998, to approximately $13.2 million from approximately $12.9 million. An
overall increase in foreign business was offset by the cessation of sales by the
Company's exclusive distributor in Russia. This distributor was the Company's
largest single customer at the time of cessation, accounting for more than 9% of
the Company's year to date 1998 sales.
The Company incurred the write down of its Russian related inventory
and receivables (approximately $2,100,000) due to the serious problems which
arose in Russia during the third quarter of 1998, which made the Company's
products very expensive to sell in Russia and made it, due to the currency
devaluation which occurred in Russia during this period, impossible for the
Company's Russian distributor to make payments to the Company of the amounts
which they owed. The Company also incurred a writeoff of approximately $530,000
during the fourth quarter of 1998 relating to the writeoff of receivables due
from the Company's Ukrainian distributor (prior to its acquisition by the
Company). The writedown was required due to the devaluation of the assets of
that subsidiary arising as a result of the economic conditions which are
currently being experienced in the Ukraine, which are similar to the economic
conditions which are currently being encountered in Russia.
In spite of this cessation, for the full fiscal year ended December 31,
1998, the sales mix was 59.9% to customers outside the US and 40.1% to US
customers, virtually identical to the 1997 sales mix of 59.9% to customers
outside the US and 40.1% to domestic customers.
Gross profits as a percentage of net sales decreased to 37.8% in 1998,
from 43.0% in 1997. The principal cause of this decrease was an increase in cost
of goods sold, reflecting the writedown of approximately $700,000 of inventory
which was held for sale to the Company's Russian distributor. Another cause of
the increase in cost of goods sold was the writedown at year-end of inventory
comprise of obsolete and/or slow turning SKUs. The Company constantly monitors
its SKUs in an effort to eliminate obsolete or slow turning SKUs. Such writeoffs
approximated $60,000 and $81,000, respectively, for 1997 and 1998.
Selling, general and administrative expenses ("SG&A") were
approximately $11,696,753 for the fiscal year ended December 31, 1998, an
increase of $3,691,551 or 46.1% over SG&A of $8,005,202 for the fiscal year
ended December 31, 1997. As a percentage of net sales, SG&A increased to 53.2%
in 1998, from 37.8% in 1997. These increases reflect primarily increases in
marketing expenses attributable to the Company's retail and international sales
efforts, combined with expenses related to the Company's activities to improve
its computer and operations capabilities. The Company expects these efforts to
yield improved operating efficiencies in 1999 and subsequent years.
14
<PAGE>
As a result of the aforementioned factors, the Company incurred a loss
from operations of $3,374,254 for the fiscal year ended December 31, 1998,
compared to income from operations of $1,111,958 for the fiscal year ended
December 31, 1997.
Other expenses, net was $1,163,607 for the fiscal year ended December
31, 1998, an increase of $961,169 or 475% over other expenses, net, of $202,438
for the fiscal year ended December 31, 1997. The principal cause of this
increase was a significant increase in interest expense, primarily as a result
of larger borrowings from period to period and also due to interest payable for
a full year on the Company's outstanding convertible notes due to related
parties. Additionally, the Company incurred a one time charge of $852,000
relating to the conversion of its convertible notes at December 31, 1998 into
799,514 shares of the Company's common stock. See Item 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS. There was no similar charge in 1997.
Foreign exchange gains were $143,000 in 1998, an increase of $210,000
or 300% from foreign exchange losses of approximately $67,000 in 1997. This
increase reflects primarily the combination of the increase in the Company's
international business volume and the extreme devaluation, during the second
half of 1998, of certain currencies in countries in which the Company did
business in 1998 (principally Russia and the Ukraine).
As a result of the aforementioned factors, the Company incurred a net
loss of approximately $4,804,812 ($1.99 per share) for the fiscal year ended
December 31, 1998, compared to net income of $649,183 ($.30 per diluted share)
for the fiscal year ended December 31, 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily with
cash flow from operations and with borrowings under its available credit lines.
In addition, in 1997, the Company realized approximately $4 million from the net
proceeds of its IPO.
For the fiscal year ended December 31, 1998, cash required for
operations was $1,058,519, compared to cash required for operation of $1,573,179
for the fiscal year ended December 31, 1997. The principal cause of the negative
cash flow in 1998 was the net loss of $4,804,812, which included non-cash
charges to income aggregating approximately $4,234,000. These non-cash charges
to income included approximately $1,952,000 in write-offs of accounts receivable
due from the Company's Russian and Ukrainian distributors, approximately
$852,000 representing the value of additional shares issued by the Company in
conjunction with the conversion of the Company's convertible notes and
approximately $659,000 in write-off of inventory held for sale to the Company's
Russian distributor. For 1998, cash was used primarily for increases of
approximately $691,000 in inventory and approximately $592,000 in accounts
receivable. Cash was generated primarily through increases of approximately
$436,000 in accounts payable and approximately $190,000 in income taxes payable,
plus a decrease of approximately $233,000 in prepaid expenses.
Cash used for investing activities were approximately $300,000 for the
fiscal year ended December 31, 1998, compared to approximately $156,000 for the
fiscal year ended December 31, 1997. During 1998, cash for investing activities
was used almost exclusively for the acquisition of property and equipment, net
of disposals.
Net cash provided by financing activities was approximately $2,379,000
for the fiscal year ended December 31, 1998, compared to approximately
$1,617,000 for the fiscal year ended December 31, 1997. Cash provided by
financing activities consisted primarily of borrowings under the Company's line
of credit with a financial institution.
Working capital was approximately $4.5 million, as compared to working
capital of $8.1 million as of December 31, 1997. The primary reasons for the
decrease in working capital were the aforementioned write-offs of approximately
$2.5 million in receivables and inventory pertaining to Russia and the Ukraine.
Increases of approximately $400,000 and $190,000 to accounts payable and income
taxes payable, respectively, plus a decrease of approximately $233,000 in
prepaid expenses.
15
<PAGE>
During 1999, the Company renegotiated its revolving line of credit with
a financial institution, which decreased the Company's credit facility to $3.5
million from $4.5 million. Borrowings under the line of credit bear interest at
the rate of prime plus .75% over prime. The amount of the line available for
borrowing by the Company is based on specific percentages of the Company's US
based receivables and inventories. The line of credit is secured by a lien not
only on the Company's U.S. accounts receivable and inventories, but also on all
the Company's other assets. As of December 31, 1998, approximately $2,370,000
was outstanding under the line of credit and as of April 1, 1999, approximately
$2,374,000 was outstanding under the credit line and approximately $328,000 was
available for borrowing under the line of credit based on the applicable
borrowing base formulas.
Subsequent to December 31, 1998, the Company negotiated an extension in
the maturity date of its line of credit with the financial institution, to June
1, 1999. Under the terms of this extension, borrowings by the Company became
secured not only by the accounts receivable, inventories and other assets of the
Company, but also by the personal guarantees of two officers of the Company who
are also the largest shareholders of the Company. Under the terms of its loan
agreement with the financial institution, the Company is required to comply with
certain affirmative and negative covenants, including but not limited to further
borrowings and the payment of dividends. The Company is also required to
maintain certain financial benchmarks and ratios, including but not limited to a
benchmark related to the Company's adjusted tangible net worth as defined in the
loan agreement, the ratio of the Company's senior liabilities to its
subordinated liabilities and adjusted tangible net worth and the ratio of the
Company's cash flow to debt service requirements.
As of December 31, 1998, and reflecting primarily the impact of its
operating loss for 1998, the Company was not in compliance with any of the
aforementioned benchmark and ratios, and as such, was technically in default
under the terms of the loan agreement. In conjunction with the extension of the
maturity of the line of credit, the Company received a waiver of all the
requirements in which the Company was in default. However, in its waiver letter,
the financial institution indicated that it intended to enforce these
requirements going forward. There can be no assurance that the Company will be
able to comply with these requirements going forward.
The Company believes that its current cash position, internally
operated cash flow and its line of credit will be sufficient to satisfy the
Company's anticipated operating needs for at least the ensuing twelve months.
However, as of December 31, 1998 the Company's current liabilities included
$2,370,000 under its line of credit, all of which is due and payable on June 1,
1999. At December 31, 1998, the Company did not have sufficient resources, and
currently does not have sufficient resources, to pay off the line of credit when
it matures, and it is likely that the Company cannot generate such cash from its
operations between now and the date the line of credit becomes due. Although the
Company is seeking to refinance or restructure the line of credit and believes
it will be able to do so prior to the maturity date, no assurance can be given
that it will be successful in these efforts. If the Company is unable to
refinance or restructure its line of credit, the Company's business may be
materially and adversely affected.
The Company is actively seeking one or more additional financial
institutions, in an effort to secure new borrowing facilities to replace its
current credit facility and to finance its anticipated growth and expansion,
both in the US and abroad. While the Company has not yet received any firm
commitments from any new financial institution and there can be no assurance,
the Company believes that its efforts to locate one or more such institutions
will be successful.
The Company believes that a timely return to operating profitability,
combined with the securing of new borrowing facilities, will be sufficient to
meet the Company's financing requirements
16
<PAGE>
in 1999. However, any combination of continued operating losses and or the
inability of the company to either maintain its current borrowing facility or
secure new and replacement borrowing facilities could have a materially adverse
effect on the Company's ability to continue as a going concern.
The Company does not believe that inflation has had a material effect
on its financial condition or operating results for the last several years, and
the Company has historically been able to pass along any increased costs in the
form of adjustments to the prices it charges to its customers.
The Company has substantially completed its assessment of the potential
impact of year 2000 related problems on its operations, including its
information technology systems (such as its computer systems) and its
non-information technology systems ( such as its plant and equipment and its
manufacturing and assembly processes). With respect to its information
technology systems, the Company believes that its present computer systems are
presently year 2000 compliant. The Company is currently completing an update of
its computer system, in order to have computer systems capable of handling the
projected growth and diversification of the Company's present and acquired
businesses. The Company has been assured by its installation consultant that its
updated computer system is also year 2000 compliant. Beyond the above described
remediation effort by the Company in connection with its information technology
systems, the Company does not anticipate any material remediation programs with
respect to its non-information technology systems. The Company expects that the
costs of its new systems will be approximately $160,000. Consequently, the
Company, having substantially completed its assessment and remediation efforts,
has a reasonable belief that it no longer has any material exposure to the
so-called year 2000 problem.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 7 is attached to this Report
following Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CENTRAL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 9 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1999, under the caption, "Election of Directors", to
be filed by the Registrant.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1999, under the caption, "Executive Compensation",
to be filed by the Registrant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1999, under the caption, "Security Ownership of
Management and Principal Stockholders", to be filed by the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1999, under the caption "Certain Transactions", to
be filed by the Registrant.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company(1)
3.2 Bylaws of the Company(2)
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation(2)
3.4 Second Amended and Restated Bylaws of the Company(2)
4.1 Form of Common Stock Certificate(2)
4.2 Warrant Agreement and Warrant Certificate(2)
10.1 Lease Agreement between the Company and RSB Holdings, Inc.,
dated July 15, 1996(2)
10.2 Promissory Note between the Company and U.S. Advantage, dated
July 15, 1996(2)
18
<PAGE>
10.3 Form of 1996 Stock Option Plan(2)
10.4 Form of Employment Agreement between the Company and Slav
Stein(2)
10.5 Form of Employment Agreement between the Company and Roman
Briskin(2)
10.6 Form of Convertible Subordinated Promissory Note from the
Company to Messrs. Stein and Briskin(2)
10.7 Form of Stock Option Agreements between the Company and Messrs.
Stein and Briskin(2)
10.8 Form of Mahoney Consulting Agreement(2)
10.9 Form of Financial Advisory Agreement(2)
10.10 Form of Contingent Stock Option Agreement between the Company
and Messrs. Stein and Briskin(2)
10.11 Form of Lock-Up Agreement(2)
10.12 Loan Agreement between the Company and SunTrust Bank/Miami, N.A.,
dated March 25, 1999*
10.13 Master Purchase Agreement between the Company and Focus
Enhancements, Inc., dated September 29, 1997(4)
10.14 Amendment to Master Purchase Agreement between the Company and
Focus*
10.15 Asset Purchase Agreement between the Company and Focus
Enhancements, Inc., dated September 30, 1997(4)
10.16 Share Exchange Agreement between the Company, Dataholding AS,
and selling shareholders of Dataholding AS, dated November 12,
1997(5)
10.17 Stock Purchase Agreement among the Company, CCCI and Donald Y.
Daily, Jr.*
21.1 List of Subsidiaries*
27.1 Financial Data Schedule*
- -----------------
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement
on Form 8-A (SEC File No. 000-21889) filed with the SEC on December 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement
on Form SB-2, and amendments thereto (SEC File No. 333-15967), declared
effective February 13, 1997.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997.
(4) Incorporated by reference to the Company's Current Reports on Form
8-K filed October 15, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997.
19
<PAGE>
(b) REPORTS ON FORM 8-K
1. Form 8-K filed on October 19, 1998 under Item 5 reporting the
writedown of receivables and inventory relating to the Company's Russian
distributor.
2. Form 8-K filed in January 22, 1999 under Item 5 reporting the
conversion of $1,439,135 in convertible notes into 799,514 shares of common
stock.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REGISTRANT:
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
April 15, 1999 By /s/ Slav Stein
-----------------------------------
Slav Stein, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Slav Stein
- -------------------------- President, Chief Executive April 15, 1999
Slav Stein Officer and Director
/s/ Roman Briskin
- -------------------------- Executive Vice President, April 15, 1999
Roman Briskin Secretary and Director
/s/ George Baldwin
- -------------------------- Vice President, Chief Financial April 15, 1999
George Baldwin and Accounting Officer and Treasurer
- -------------------------- Director April __, 1999
Terrence R. Daidone
/s/ William B. Coldrick
- -------------------------- Director April 15, 1999
William B. Coldrick
/s/ L. Phillips Reames
- -------------------------- Director April 15, 1999
L. Phillips Reames
</TABLE>
21
<PAGE>
ADVANCED ELECTRONIC
SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONTENTS
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONTENTS
PAGE
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at December 31, 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 F-6
Summary of Significant Accounting Policies F-7
Notes to Consolidated Financial Statements F-12
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Advanced Electronic Support Products, Inc.
North Miami, Florida
We have audited the accompanying consolidated balance sheet of Advanced
Electronic Support Products, Inc., and subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Electronic
Support Products, Inc., and subsidiaries as of December 31, 1998, and the
results of their operations and their cash flows for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Miami, Florida
April 9, 1999
F-2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
- ----------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Note 4)
CURRENT ASSETS
Cash $ 1,407,106
Accounts receivable, net of $209,000 allowance for doubtful accounts 3,037,807
Inventories 6,157,889
Income taxes receivable 308,852
Prepaid expenses and other current assets 115,312
- ----------------------------------------------------------------------------------------------------
Total current assets 11,026,966
Property and equipment, net (Note 3) 635,667
Intangible assets 637,613
Deferred tax asset (Note 12) 34,150
Other assets 80,508
- ----------------------------------------------------------------------------------------------------
$ 12,414,904
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 67,632
Current portion long-term debt (Note 4) 2,405,263
Accounts payable and accrued expenses 3,538,313
Income taxes 425,461
Other 94,380
- ----------------------------------------------------------------------------------------------------
Total current liabilities 6,531,049
Deferred tax liability (Note 12) 84,939
Long-term debt (Note 4) 136,187
- ----------------------------------------------------------------------------------------------------
Total liabilities 6,752,175
- ----------------------------------------------------------------------------------------------------
Commitments (Notes 1, 10 and 11)
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 1, 13 and 14 ):
Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued -
Common stock, $ .001 par value; 20,000,000 shares authorized;
3,081,715 shares issued and outstanding 3,082
Additional paid-in capital 9,363,902
(Deficit) (3,569,399)
Cumulative foreign currency translation adjustment (134,856)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 5,662,729
- ----------------------------------------------------------------------------------------------------
$ 12,414,904
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES (Notes 6 and 8) $ 21,968,955 $ 21,185,911
OPERATING EXPENSES:
Cost of sales (Notes 5) 13,646,496 12,068,751
Selling, general and administrative (Notes 5, 10, and 11) 11,696,753 8,005,202
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 25,343,249 20,073,953
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (3,374,294) 1,111,958
OTHER EXPENSES:
Interest, net (150,675) (49,113)
Interest - shareholders (Note 1) (988,902) (102,600)
Other (23,990) (50,725)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,537,861) 909,520
Provision for income taxes (Note 12) 266,951 260,337
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,804,812) $ 649,183
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ (1.99) $ .32
Earnings (loss) per common share - assuming dilution (1.99) .30
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ADDITIONAL RETAINED COMPREHEN- COMPREHEN- SHARE-
COMMON PAID-IN EARNINGS SIVE SIVE HOLDERS'
STOCK CAPITAL (DEFICIT) INCOME INCOME EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 1,173 $ 427,813 $ 4,418,471 $ (4,891) - $ 4,842,566
Distributions - 107,855 (2,798,321) - - (2,690,466)
Net proceeds from issuance of
common stock and warrants 920 4,373,976 - - - 4,374,896
Reclassification of cumulative
undistributed earnings
applicable to the Company's S
corporation status - 1,033,920 (1,033,920) - - -
Issuance of common stock for
acquisition of net assets 190 699,810 - - - 700,000
Options issued in connection with
consulting services - 200,000 - - - 200,000
Net income - - 649,183 - 649,183 649,183
Other comprehensive income
Foreign currency translation
adjustment - - - (92,188) (92,188) (92,188)
-------------
556,995
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,283 6,843,374 1,235,413 (97,079) - 7,983,991
Conversion of convertible debt
(Note 1) 799 2,290,528 - - - 2,291,327
Options issued in connection with
consulting services - 230,000 - - - 230,000
Net loss - - (4,804,812) - (4,804,812) (4,804,812)
Other comprehensive income
Foreign currency translation
adjustment - - - (37,777) (37,777) (37,777)
-------------
(4,842,589)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 3,082 $ 9,363,902 $ (3,569,399) (134,856) $ 5,662,729
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (4,804,812) $ 649,183
Adjustments to reconcile net income to net cash (used) in operating
activities, net of effect of acquisition:
Provision for losses on accounts receivable 185,441 144,434
Depreciation and amortization 166,348 152,094
Write-off of Russian and Ukraine receivable 1,952,389 -
Write-off of Russian inventory 659,085 -
Amortization of goodwill 126,804 27,526
Options granted in lieu of consulting fees 230,000 200,000
Charge related to conversion of convertible debt 852,202 -
Deferred income taxes 247,798 (193,723)
(Increase) decrease in:
Accounts receivable (592,201) (1,687,967)
Inventories (691,020) (457,395)
Prepaid expenses and other current assets 233,050 (27,394)
Other assets (8,926) 212,824
Income tax receivable (308,852)
Increase (decrease) in:
Accounts payable and accrued expenses 436,205 (657,980)
Income taxes payable 189,936 65,219
Other 68,034 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used) in operating activities (1,058,519) (1,573,179)
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Cash from acquisition 18,701 (88,729)
Reduction in investments - 102,072
Additions to property and equipment (318,323) (169,069)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used) in investing activities (299,622) (155,726)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Overdraft 67,632 -
Net proceeds from (payments on) borrowings 2,311,356 (1,648,750)
Payment of notes payable to shareholders - (300,000)
Net proceeds from issuance of common stock and warrants - 4,637,085
Repayment of loan from affiliate - (120,000)
Shareholder distributions - (951,341)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,378,988 1,616,994
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,020,847 (111,911)
Effect of exchange rate changes on cash (37,777) (92,188)
Cash, at beginning of year 424,036 628,135
- ---------------------------------------------------------------------------------------------------------------------
CASH, AT END OF YEAR $ 1,407,106 $ 424,036
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest $ 280,078 $ 70,688
Taxes 77,016 330,361
- ---------------------------------------------------------------------------------------------------------------------
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 $ - $ 1,033,920
Deferred offering costs charged against paid-in capital in connection
with initial public offering $ - $ 262,189
Issuance of common stock for acquisition of net assets $ - $ 700,000
Acquisition of Ukraine $ 489,831 $ -
Conversion of convertible debt into common stock $ 1,439,125 $ -
Non-cash charge associated with the conversion of convertible debt $ 852,202 $ -
Options granted in lieu of consulting fees $ 230,000 $ 200,000
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Advanced Electronic Support Products, Inc., (AESP) is primarily a wholesaler of
computer cables and accessories whose customers are computer dealers and
retailers located in the U.S. and foreign markets. The Company grants credit to
customers without collateral.
SUBSIDIARIES AND BASIS OF PRESENTATION
The subsidiaries, Advanced Electronic Support Products Computertillbehor i
Sweden AB ("AESP Sweden"), AESP Computerzubehor GmbH ("AESP Germany"),
Jotec/AESP AS ("Jotec/AESP"), formerly known as Dataholding AS, and AESP-Ukraine
are based and operating in Sweden, Germany, Norway and Ukraine, respectively.
The functional and reporting currency for statutory purposes is the Swedish
Krona, German Mark, Norway Krone and Ukraine Hryvna, respectively. These
financial statements have been translated to United States Dollars (U.S. $)
using a methodology consistent with Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation. Assets and liabilities are translated to
U.S. $ at the rate prevailing on the balance sheet dates and the income
statements have been translated from the functional currency to U.S. $ using an
average exchange rate for the applicable period. Results of this translation
process are accumulated as a separate component of shareholders' equity.
Exchange gains (losses) approximately $143,000 and ($67,000) for the years ended
December 31, 1998 and 1997, respectively are included in other income in the
accompanying consolidated statements of income.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of AESP
and the subsidiaries (collectively, the "Company"). Intercompany transactions
and balances have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization is
computed by the straight line and accelerated methods based on the estimated
useful lives of the related assets. Leasehold improvements and capital leases
are amortized over the shorter of the life of the asset or the lease.
F-7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective merchandise.
INCOME TAXES
Through February 13, 1997, AESP with the consent of its shareholders, elected to
be taxed as an S Corporation. Shareholders of an S Corporation are taxed on
their proportionate share of the company's taxable income. Accordingly, no
provision for federal or state income tax is required 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 year ended December 31,
1997. This additional amount of taxation has an insignificant effect on the 1997
earnings per share calculations.
AESP Germany, AESP Sweden, Jotec/AESP and AESP Ukraine are subject to taxation
in Germany, Sweden, Norway and Ukraine, respectively, and accordingly, calculate
and report the tax charges in accordance with applicable statutory regulations.
For the purpose of these financial statements the Company has adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," for all periods presented. Under the asset and
liability method of SFAS 109, deferred taxes are recognized for differences
between financial statement and income tax bases of assets and liabilities.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from estimated
amounts.
F-8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding during each year. Diluted earnings per share
are computed on the basis of the weighted average number of common shares and
dilutive securities outstanding. Dilutive securities having an antidilutive
effect on diluted earnings per share are excluded from the calculation.
The weighted average number of common shares outstanding for all periods
presented retroactively reflects the effects of the Company's stock split (Note
1) and pooling combination with Jotec/AESP (Note 2).
PREFERRED STOCK
The Board of Directors of the Company is expressly authorized to provide for the
issuance of the shares of preferred stock in one or more series of such stock,
and by filing a certificate pursuant to applicable law of the State of Florida,
to establish or change from time to time the number of shares to be included in
each such series, and to fix the designations, powers, preferences and the
relative, participating, optional or other special rights of the shares of each
series and any qualifications, limitations and restrictions thereof.
F-9
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged assets or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginnings after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
INTANGIBLE ASSETS
Intangible assets, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses are stated at cost and are
amortized on a straight-line basis, over the estimated future periods to be
benefited (7 years). On an
F-10
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
annual basis, the Company reviews the recoverability of intangible assets, based
primarily upon an analysis of undiscounted cash flows from the acquired
businesses.
In the event the expected future net cash flows would become less than the
carrying amount of the assets, an impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses.
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
F-11
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INITIAL PUBLIC OFFERING AND REORGANIZATION
The Company completed an initial public offering in February and March 1997 of
an aggregate of 920,000 shares of $.001 par value per share common stock of the
Company at $6.00 per share plus an aggregate of 920,000 redeemable common stock
purchase warrants of the Company at $.125 per warrant, including an
over-allotment option of 120,000 shares and warrants. In this connection, the
Company received net proceeds of approximately $4,862,000 (or $4,375,000 net of
certain capitalized expenses in connection with the Company's initial public
offering) of which $1,470,000 was utilized to repay its line of credit, and
$300,000 to make a principal payment on two subordinated promissory notes to the
Company's principal shareholders.
The accompanying financial statements give effect to the recapitalization,
effected on February 13, 1997, of the Company in connection with the public
offering of its common stock, the termination of AESP's federal income status as
an S Corporation and the contribution, to AESP, of the shares of stock in AESP
Sweden and AESP Germany, whose shares of common stock were owned by the
shareholders of AESP. The contribution of shares is accounted for under the
pooling of interest method as the transaction is a combination of companies
under common control.
In connection with the initial public offering, immediately prior to the
effectiveness of the registration statement, AESP issued a stock dividend in the
form of a stock split, whereby the 66 2/3 shares of stock then outstanding
(after cancellation of the shares held in treasury), were converted into 812,500
shares of common stock. AESP increased its authorized capital from 100 shares,
$1 par value to 20,000,000 shares of common stock, $.001 par value per share and
1,000,000 shares of preferred stock, $.001 par value per share.
Upon completion of the initial public offering, the Company entered into a
financial advisory agreement with the underwriters for a period of two years,
for an aggregate fee of $47,000.
F-12
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the initial public offering, the Company (i) made a
distribution to its principal shareholders in the aggregate of $1,739,125, in
the form of two seven year, prime + 1%, convertible (at $4.00 per share)
subordinated promissory notes payable, (ii) entered into five year employment
agreements with its two principal shareholders which includes a minimum annual
compensation of $150,000 plus performance bonuses and (iii) issued options, to
each of its two principal shareholders, to purchase 180,250 shares of common
stock at the initial public offering price of $6.00 per share; such options are
considered contingent options which vest and are exercisable seven years after
the date of grant, with provision for earlier vesting based upon future earnings
per share, net income or trading prices of the Company's common stock (all as
defined). In connection with the favorable conversion price of the subordinated
promissory notes referred to above, the Company recorded a $719,560 distribution
to the principal shareholders, with a corresponding credit to paid-in capital.
Such amount is based upon the difference in the conversion price and the public
offering price times the number of shares issuable upon conversion of the notes.
On December 31, 1998, the Board of Directors negotiated a reduction in the
conversion price of the convertible debt from $4.00 to $1.80 per share in
exchange for which reduction the two principal shareholders converted the
convertible debt in the amount of $1,439,125 into 799,514 shares of common
stock.
In connection with the conversion of the debt the Company recorded interest
expense of approximately $852,000 related to the fair value of the shares
received in excess of the shares issuable pursuant to the original conversion
terms.
In April 1997, the Company made a distribution of approximately $260,000 to its
two principal shareholders, representing the income taxes due by them in
connection with the Company's S Corporation earnings through February 13, 1997.
Such amount has been charged to paid-in capital.
F-13
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aforementioned employment agreements provide for annual increases, as
defined. In the event of a change in control of the Company (as defined) the
shareholders may terminate their employment with the Company for a lump sum
payment of $750,000 each. In addition, the Company will provide them with an
automobile allowance.
2. ACQUISITIONS
On October 31, 1998, the Company acquired all the outstanding common stock of
its distributor, AESP-Ukraine. The purchase price of this acquisition was valued
at approximately $490,000, the amount equal to the outstanding amount due from
the distributor to the Company. This acquisition was accounted for under the
purchase method, whereby the purchase price was allocated to the underlying
assets and liabilities based upon their estimated fair values.
Prior to October 31, 1998, the Company wrote-off approximately $530,000 due from
AESP-Ukraine.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 22,295,017 $ 21,305,107
Net income (loss) (5,491,951) 500,771
Net income (loss) per
common share (2.40) .25
Net income (loss) per common
share - assuming dilution $ (2.40) $ .21
</TABLE>
The unaudited pro forma information assumes the elimination of intercompany
sales of approximately $792,000 for the ten months ended October 31, 1998 and
approximately $1,221,000 for the year ended December 31, 1997.
In November 1997, the Company completed a merger with Jotec/AESP by exchanging
360,000 shares of its common stock for
F-14
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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:
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Net Sales
The Company $ 16,324,304
Jotec/AESP 4,861,607
- --------------------------------------------------------------------------------
Combined 21,185,911
- --------------------------------------------------------------------------------
Net Income
The Company 290,516
Jotec/AESP 358,667
- --------------------------------------------------------------------------------
Combined $ 649,183
- --------------------------------------------------------------------------------
The results of operation of the previously separate companies for the period
before the combination were not readily available; therefore, the period for the
nine months ended September 30, 1997, prior to the combination being
consummated, is presented as follows:
F-15
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 165,201
- -------------------------------------------------------------------------------
Combined $ 483,103
- -------------------------------------------------------------------------------
In connection with the merger, the Company recorded, in the fourth quarter, a
charge to operating expenses of approximately $100,000 for direct and other
merger-related costs pertaining to the merger transaction.
Included in distributions for the year ended December 31, 1997 is $691,341
related to Jotec/AESP, including $458,581 related to a return of capital due to
a change in the Norwegian tax laws.
Effective September 30, 1997, the Company entered into an Asset Purchase
Agreement with Focus Enhancements, Inc. ("Focus"), pursuant to which the Company
acquired certain assets and inventory constituting the Network Division of
Focus, in exchange for cash of $138,000 and 189,701 shares of common stock of
the Company valued at $700,000, plus the assumption of $21,000 of liabilities.
Additionally, the Company incurred approximately $71,000 in professional fees in
conjunction with the acquisition. The assets acquired consisted of inventory,
supplier lists, customer lists, and rights to trademarks.
The Company recorded inventory in the amount of approximately $159,000 and
customer lists and trademark rights of approximately $771,000, which is being
amortized over 7 years. Additionally, in conjunction with the issuance of the
shares of common stock, the Company credited common stock and paid-in-capital
for $700,000. During 1998 and 1997, the Company recorded approximately
F-16
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$109,500 and $27,500 in amortization, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Leasehold improvements $ 275,408
Capital leases 159,011
Office equipment 384,605
Machinery and equipment 212,468
Furniture and fixtures 40,766
Vehicles 102,987
- --------------------------------------------------------------------------------
1,175,245
Less: accumulated depreciation and amortization 539,578
- --------------------------------------------------------------------------------
$ 635,667
- --------------------------------------------------------------------------------
F-17
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt, comprising notes payable and capital leases at December 31, 1998
comprise the following:
Prime + .25% (8% at December 31, 1998) line of
credit with a financial institution in the
amount of $3,500,000, due June 1, 1999,
secured by all assets; guaranteed by the
Company's principal shareholders.
$ 2,370,000
9.5% capital lease, $3,346 monthly, net of interest in
the amount of $31,874 at December 31, 1998 due April
2000. 143,502
Other 27,948
- --------------------------------------------------------------------------------
2,541,450
Less:
Current portion 2,405,263
- --------------------------------------------------------------------------------
$ 136,187
- --------------------------------------------------------------------------------
The line of credit agreement requires the Company to comply with certain
covenants. At December 31, 1998, the Company was in violation of its financial
covenants. In this connection, the lender waived the covenant violations for
1998; however, it has indicated that it will enforce such covenants
prospectively.
Although the Company is seeking to refinance or restructure the loan, and
believes it will be able to prior to the June 1, 1999 maturity date, no
assurances can be given that it will be successful in its efforts. If the
Company is unable to refinance or restructure the loan, the Company's business
may be materially and adversely affected.
5. RUSSIAN WRITE-DOWN
During the third quarter, the Company wrote-off approximately $1,400,000 related
to a receivable from its distributor located in Russia. The Company took the
write-down in the receivable as a result of the financial and economic
conditions in Russia and the impact which it expected these conditions to have
on its financial statements.
Additionally, the Company wrote-off approximately $659,000 in specific inventory
which is custom made for the Russian distributor and would have no other
markets.
F-18
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FOREIGN OPERATIONS
<TABLE>
<CAPTION>
SWEDEN
UNITED AND ELIMINA-
STATES NORWAY GERMANY UKRAINE TION TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Sales to unaffiliated customers $ 12,218,570 $ 5,309,905 $ 2,272,127 $ 2,168,393 $ - $ 21,968,995
Transfers between geographic
areas 2,625,158 - - (2,625,158) -
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 14,843,728 $ 5,309,905 $ 2,272,127 $ 2,168,393 (2,625,158) $ 21,968,995
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (4,427,728) $ 825,739 $ (38,325) $ 306,236 (40,216) $ (3,374,294)
- ----------------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (5,705,169) $ 830,917 $ 54,959 $ 255,069 26,363 $ (4,537,861)
- ----------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 9,077,534 $ 2,205,150 $ 1,065,443 $ 1,660,507 (1,593,729) $ 12,414,905
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
UNITED ELIMINA-
STATES NORWAY GERMANY SWEDEN TION TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Sales to unaffiliated customers $ 13,397,100 $ 4,861,607 $ 1,640,867 $ 1,286,337 $ - $ 21,185,911
Transfers between geographic
areas 1,574,976 - (1,574,976) -
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 14,972,076 $ 4,861,607 1,640,867 $ 1,286,337 $ (1,574,976) $ 21,185,911
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 518,586 $ 497,655 36,634 $ 177,486 $ (118,403) $ 1,111,958
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes $ 351,588 $ 502,013 (16,581) $ 190,903 $ (118,403) $ 909,520
- ----------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 10,991,802 $ 1,435,353 623,433 $ 683,184 $ (728,574) $ 13,005,198
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Identifiable assets are those assets, that are identified with the operations in
each geographic area. Foreign sales, including those of AESP, for the years
ended December 31, 1998 and 1997 approximated 59.9% of consolidated revenues.
The Company's operations, consisting of network and connectivity products, are
handled by each of its subsidiaries operating in their respective countries.
Accordingly, management has chosen to organize its segments on a country by
country basis. Segment information is presented above for each significant
country.
7. RELATED PARTY TRANSACTIONS
During 1997, the Company repaid an 8.5% note payable to an entity owned by the
principal shareholders, in the amount of $125,350, including interest.
F-19
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Jotec/AESP paid $121,795 and $25,918 to a company partially owned by its former
chairman and managing director for consulting services during 1998 and 1997,
respectively.
Jotec/AESP paid $31,752 to a company partially owned by a member of the Board of
Jotec/AESP for services provided in 1998.
Included in other current assets at December 31, 1998 is a $65,600 loan to a
member of the Board of Jotec/AESP.
8. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, one customer accounted for 15.1% of
consolidated revenues; at December 31, 1997, accounts receivable from this
customer amounted to approximately $1.8 million. There were no significant
customers in 1998.
9. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including accounts receivable,
accounts payable and short-term debt approximated fair value due to the
relatively short maturity.
10. COMMITMENTS
The Company rents office space and warehouse under non-cancelable leases. The
minimum future rental commitment for leases in effect at December 31, 1998,
including leases to related parties, approximates the following:
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
1999 $ 164,000
2000 164,000
2001 157,000
2002 155,000
2003 155,000
Thereafter -
- --------------------------------------------------------------------------------
$ 795,000
- --------------------------------------------------------------------------------
In July 1996, the Company entered into a five year lease agreement to rent
office and warehouse space from an entity owned by the principal shareholders of
the Company at $3,600 per month. The mortgage on the property has been
guaranteed by the Company. The balance outstanding on the mortgage at December
31, 1998 and
F-20
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 was approximately $217,000 and $230,000, respectively.
Rent expense in 1998 and 1997 aggregated approximately $255,000 and $373,000,
respectively, including $43,200 in each year to related parties.
The Company is liable under a patent license agreement, expiring in 2000,
whereby it is required to pay a fee (as defined) for each product sold subject
to the agreement. During 1998 and 1997, approximately $21,000 and $9,100,
respectively, of royalties were paid.
11. DEFERRED COMPENSATION PLAN
The Company has a defined contribution plan established pursuant to Section
401(k) of the Internal Revenue Code. Employees contribute to the plan a
percentage of their salaries, subject to certain dollar limitations and the
Company matches a portion of the employees' contributions. The Company's
contributions to the plan for the years ended December 31, 1998 and 1997
aggregated $21,545 and $27,883, respectively.
12. INCOME TAXES
The following are the components of income tax expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Current
Federal $ (227,833) $ 216,253
State (40,223) 38,189
Foreign 335,926 173,047
- --------------------------------------------------------------------------------
67,870 427,489
- --------------------------------------------------------------------------------
Deferred
Federal $ 180,735 $ (182,454)
State 30,938 (29,220)
Foreign (12,592) 44,562
- --------------------------------------------------------------------------------
199,081 (167,112)
- --------------------------------------------------------------------------------
Total $ 266,951 $ 260,377
- --------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company intends to invest the undistributed earnings of the foreign
subsidiaries in their respective countries. Accordingly, no provision for United
States income taxes on undistributed earnings is required.
The reconciliation of income tax computed at the United States federal statutory
tax rate of 34% to income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Tax (benefit) at the United States
statutory rate $ (1,542,872) $ 309,236
States income taxes, net of federal
benefit (207,098) 20,023
Differences in effective income tax
of other countries 64,584 (30,120)
Permanent differences, net 304,500 (12,339)
Valuation allowance adjustment 1,753,462 -
Other (105,625) (26,423)
- --------------------------------------------------------------------------------
Total $ 266,951 $ 260,377
- --------------------------------------------------------------------------------
</TABLE>
The provision for foreign income taxes relates to the Norway, Sweden, Germany
and Ukraine. The statutory tax rates in Norway, Sweden, Germany and Ukraine for
1998 and 1997 range from 28% to 45%.
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1998 are as
follows:
F-22
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts $ 78,727
Inventory reserve 261,198
Inventory capitalization 20,992
Net operating loss carryforward 1,183,890
Depreciation 29,702
Goodwill 27,976
Compensation related to options granted
for compensation 161,809
Change in accounting principal (18,815)
Other 42,138
- --------------------------------------------------------------------------------
1,787,617
Valuation allowance 1,753,467
- --------------------------------------------------------------------------------
Total deferred tax asset, net 34,150
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Untaxed Sweden reserve 84,939
- --------------------------------------------------------------------------------
Total tax liabilities $ 84,939
- --------------------------------------------------------------------------------
</TABLE>
Realization of any portion of the Company's deferred tax asset at June 30, 1998
is not considered to be more likely than not and accordingly a $1,753,467
valuation allowance has been provided.
F-23
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EARNINGS PER SHARE
The following reconciles the components of the earnings per share (EPS)
computation:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 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 (loss) available to
common shareholders $(4,537,861) 2,284,201 $(1.99) $ 649,183 2,015,712 $ .32
Effect of Dilutive Securities:
Convertible notes - - 64,080 359,781
- --------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $(4,537,861) 2,284,201 $(1.99) $ 713,263 2,375,493 $ .30
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 8-1/2% convertible stockholder notes amounting to $1,439,125 are convertible
at $4 per share and are considered dilutive for 1997.
Options to purchase 1,001,600 shares, and 90,000 shares of common stock at
$1.50, $2.13 and $3.69 per share, respectively, were outstanding during 1998,
but not included in the computation of diluted EPS as the options were
anti-dilutive. The options with expirations from 2002 to 2008 were outstanding
at December 31, 1998.
Options to purchase 200,000 shares of common stock at $6.00 per share were
outstanding, 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 December 31,
1997.
Options to purchase 360,500 shares, 36,000 shares, 23,000 shares, 40,000 shares,
120,000 shares and 70,200 shares of common stock at $6.00, $5.88, $4.00, $6.00,
$3.69 and $3.50 per share, respectively, were outstanding during 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. The options with
expirations from 2002 to 2007 were outstanding at December 31, 1997.
14. STOCK OPTIONS
At December 31, 1998, the Company has a fixed stock option plan and non-plan
options which are described below. The Company applies APB Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for employee stock options. Under APB Opinion 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation cost
is recognized.
Effective January 1, 1997, the Company entered into a consulting agreement for a
period of one year in which the consultant will be paid $16,300 per month. In
addition, the Company granted the consultant, in 1997, a seven year option to
purchase 63,000 shares of its common stock, at $4.00 a share with respect to
23,000 shares and $6.00 a share with respect to 40,000 shares. The shares were
valued at $91,000. Accordingly, in 1997, a charge in that amount has been
charged to consulting fees with a corresponding credit to additional paid in
capital. In 1998, the options were repriced to $2.13 a share and, accordingly,
the Company recorded a $104,000 charge to consulting fees with a corresponding
credit to additional paid in capital.
F-25
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During October 1997, the Company granted 120,000 options to a consultant for
services to be rendered over the term of one year. The options are exercisable
at $3.69 per share. In connection with these options the Company has recorded a
charge to consulting fees with a corresponding credit to additional paid in
capital in the amount of $109,000. Additionally, the consultant was paid a one
time fee of $20,000. During 1998, options for 30,000 shares were forfeited. In
connection with the remaining terms of the agreement, the Company recorded a
charge to consulting fees with a corresponding credit to additional paid in
capital in the amount of $54,300.
During 1998, the Company granted options to purchase 75,000 shares of its common
stock at an exercise price of $1.50 a share to its directors. Accordingly, the
Company has taken a charge in the amount of $33,500 to advisory fees and a
corresponding credit to additional paid in capital. Additionally, certain
options to directors, issued in 1997, were repriced from $5.88 to $1.50 a share.
In connection with this repricing, the Company has recorded advisory fees in the
amount of $31,440 with a corresponding credit to additional paid in capital.
The fair value of the foregoing options to consultants and directors was
determined based on the Black Scholes method.
Pursuant to the Plan, the Company may grant incentive stock options and
nonqualified stock options. The exercise price of options granted is required to
be at least equal to the per share fair market value of the common stock on the
date of the grant. Options granted have maximum terms of not more than 10 years
and are not transferable. Incentive stock options granted to an individual
owning more than 10 percent of the total combined voting power of all classes of
stock issued by the Company must be equal to 110 percent of the fair market
value of the shares issuable on the date of the grant; such options are not
exercisable more than five years after the grant date.
The Company may not grant options in excess of 15% of the outstanding common
stock for a period of one year from the effective date of the Company's initial
public offering.
Generally, options are exercisable one-third upon grant, one-third on the first
anniversary of such grant and the final one-third on the second anniversary of
such grant. However, options granted under the Plan shall become immediately
exercisable if the holder of such options is terminated by the Company or is no
longer a director of the Company, as the case may be, and subsequent to certain
events which are deemed to be a "change in control" of the Company.
F-26
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive stock options granted under the Plan are subject to the restriction
that the aggregate fair market value (determined as of the date of grant) of
options which first become exercisable in any calendar year cannot exceed
$100,000.
The Plan provides for adjustments in the number and type of shares covered by
the Plan and options granted thereunder in the event of any reorganization,
merger, recapitalization or certain other transactions involving the Company.
In 1998, the Company granted a total of 66,400 options to employees. These
options vest one-third upon the date of the grant and one-third each upon the
next two anniversaries of the date of the grant, which options are exercisable
at $1.50 per share. Further, during 1998, the two principal shareholders
received 200,000 options at an exercise price of $1.50.
In 1997, the Company granted a total of 36,000 options to directors. The options
vest over three years and were exercisable at $5.88. Additionally, 70,200
options were issued to employees. These options vest one-third upon the date of
grant and one-third each upon the next two anniversaries of the date of grant,
which options were exercisable at $3.50 per share. Further, during 1997, the two
principal shareholders received 360,500 contingent options (see Note 1). The
above options were repriced in 1998 to $1.50 a share.
FASB Statement 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," requires the
Company to provide pro forma information regarding net income and net income per
share as if compensation cost for the Company's employee stock options had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998: no dividend yield percent;
expected volatility of 93.2%; risk-free interest rates of approximately 6.5%,
and expected lives from 5 to 9 years for the non-plan options. The following
assumptions are used for grants in 1997: no dividend yield percent; expected
volatility of 46.5%; risk-free interest rates of 6.9% and expected lives of 5 to
9 years for the non-plan options.
F-27
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the accounting provisions of FASB Statement 123, the Company's pro forma
net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)
As reported $ (4,804,812) $ 638,143
Pro forma (5,204,504) 574,891
- --------------------------------------------------------------------------------
Net income (loss) per common share
As reported $ (1.99) $ .32
Pro forma (2.28) .29
- --------------------------------------------------------------------------------
Net income (loss) per common share - diluted:
As reported $ (1.99) $ .30
Pro forma (2.28) .27
- --------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's fixed stock option plan and non-plan
options as of December 31, 1998 and 1997, and changes during the years then
ended is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 849,700 $ 5.41 200,000 $ 6.00
Granted 341,400 1.50 649,700 5.23
Exercised - - - -
Forfeited 36,500 3.16 - -
- ------------------------------------------------------------------------------------
Outstanding at end of year 1,154,600 1.71 849,700 5.41
- ------------------------------------------------------------------------------------
Options exercisable at year-end 540,599 2.54 358,400 5.32
Weighted-average fair value of
options granted during the year $ 341,400 1.50 $ 3.14
- ------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options and
non-plan options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICE 12/31/98 LIFE PRICE 12/31/98 PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C><C> <C> <C>
$1.50-3.69 1,154,600 8 $ 1.71 540,599 $ 2.54
</TABLE>
15. SUBSEQUENT
In March 1999, the Company completed the acquisition of the assets of
Communications Components Company, Inc. ("CCCI"), a manufacturer of network
connectivity products and systems for $800,000, payable $250,000 in cash, 86,206
shares of common stock of the Company valued at $150,000 and $400,000
payable with interest at 8% a year over three years. The acquisition will be
accounted for under the purchase method of accounting.
F-30
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.12 Loan Agreement between the Company and SunTrust Bank/Miami, N.A.,
dated March 25, 1999*
10.14 Amendment to Master Purchase Agreement between the Company and
Focus*
10.17 Stock Purchase Agreement among the Company, CCCI and Donald Y.
Daily, Jr.*
21.1 List of Subsidiaries*
27.1 Financial Data Schedule*
EXHIBIT 10.12
LOAN AGREEMENT
THIS LOAN AGREEMENT IS made on this 25th day of
March, 1999, by and between SunTrust Bank Miami,
N.A., a national banking association, having an
address at 1111 Lincoln Road, Miami Beach, Florida
33139 hereafter referred to as("BANK");
and
Advanced Electronic Support Products,
Inc.,("AESP")a Florida corporation having an
address at 1810 Northeast 144th Street, Miami,
Florida 33181 hereafter referred to as("BORROWER").
RECITALS:
BORROWER has an existing Revolving Line of Credit with the BANK which line
of credit is past due.
BORROWER has requested that the existing line of credit be extended to
June 1, 1999; and BANK has agreed provided the maximum amount which can be drawn
pursuant to said line of credit be reduced to $3,500,000.00 and certain other
changes be made in the conditions of funding, all as are more particularly set
forth herein. The proceeds of the Revolving Line of Credit are to be used for
working capital of BORROWER as needed from time to time.
BORROWER has agreed to said changes because it is in BORROWER's best
interest to have the loan extended and to have credit available to it pursuant
to the conditions hereof, all of which have been determined to be mutually
satisfactory to BORROWER and BANK.
BANK is willing to grant the request of BORROWER provided that: (i) the
BORROWER pledges certain collateral to BANK, including, but not limited to,
presently existing and hereafter acquired accounts, accounts receivable,
equipment and inventory,
1
<PAGE>
including the proceeds thereof, as security for the repayment of the total
indebtedness represented by the Revolving Promissory Note executed by BORROWER
in favor of BANK of even date herewith; and (ii) BORROWER agrees to be bound by
the terms and conditions of this Agreement and all other Loan Documents executed
concurrently herewith; and (iii) the Guarantors guaranty the Loan.
NOW, THEREFORE, in consideration of the extension of credit from BANK to
BORROWER and other good and valuable consideration hereby acknowledged as
received by each party from the other, it is agreed that:
1. DEFINITIONS:
For purposes of this Loan Agreement, including any Exhibits hereto, unless
specifically excepted or the context otherwise requires:
1.01 "Adjusted Tangible Net Worth" shall mean the equity of the
Shareholders in the BORROWER plus subordinated debt to the BANK less intangible
assets.
1.02 "Adjusted Total Liabilities" shall mean all liabilities of BORROWER
less subordinated debt to the BANK.
1.03 "Annualized Cash Flow" shall mean net income plus depreciation
expense, amortization expense and interest expense less distributions to
Shareholders (other than compensation for services by such Shareholders paid
during such period in the ordinary course of business) as of the last day of
each fiscal quarter of BORROWER, for the fourth fiscal quarter period then
ending.
2
<PAGE>
Interest expense shall include the interest paid on BORROWER's aggregate
contractual debt obligations. All accounting terms used, unless otherwise
defined differently herein, shall be construed in accordance with generally
accepted accounting principles ("GAAP") and shall be based on BORROWER's
consolidated financial statements.
1.04 "Annualized Debt Service" shall mean BORROWER's contractual regularly
scheduled principal payments in relation to Borrower's aggregate contractual
debt obligations, as of the last day of each fiscal quarter of BORROWER, for the
fourth fiscal quarter period then ending plus the interest expense included in
Annualized Cash Flow. All accounting terms used, unless otherwise defined
differently herein, shall be construed in accordance with generally accepted
accounting principles ("GAAP") and shall be based on BORROWER's consolidated
financial statements.
1.05 "Available Credit" shall mean the amount of money available to
BORROWER hereunder which amount shall be calculated by subtracting the
outstanding principal balance under the Revolving Promissory Note, plus any
accrued and unpaid interest, from $3,500,000.00.
1.06 "BORROWER" shall mean Advanced Electronic Support Products, Inc., a
Florida corporation.
1.07 "Cash Flow" shall be determined in accordance with generally accepted
accounting principles and shall mean net profit
3
<PAGE>
increased by interest paid, depreciation and amortization and decreased by
dividends paid.
1.08 "Domestic Accounts Receivable" shall be accounts receivable due on
account of deliveries to be made within the United States.
1.09 "Domestic Eligible Accounts Receivable" shall mean at any date of
determination thereof (which date shall be in BANK's sole reasonable discretion)
Domestic Accounts Receivable of the BORROWER which are not Eligible Insured
Domestic Accounts Receivable and which are unpaid for a period of less than
ninety (90) days from the original date of the invoices issued to solvent going
concerns. There shall be excluded from Eligible Domestic Accounts Receivable all
receivables from subsidiaries, affiliated companies or entities related to the
BORROWER.
1.10 "Domestic Inventory" shall mean all inventory of the BORROWER which
is located in the State of Florida, United States of America, encumbered by a
UCC-1 in favor of BANK and held for sale to customers in the United States of
America. Domestic Inventory shall include only finished products.
1.11 "Eligible Domestic Inventory" shall be 90% of the Domestic Inventory
which thereby provides for a 10% inventory reserve.
1.12 "Eligible Foreign Accounts Receivable" shall mean at any date of
determination thereof (which date shall be selected in BANK's sole reasonable
discretion) all Foreign Accounts Receivable
4
<PAGE>
of AESP/MIAMI which are from Canadian sources and which are not Eligible Insured
Foreign Receivables and which are unpaid for a period of less than ninety (90)
days from the date of original invoices which are issued to solvent going
concerns. There shall be excepted from Eligible Foreign Accounts Receivable all
receivables from subsidiaries, affiliated companies, or entities related to
BORROWER.
1.13 "Eligible Insured Domestic Accounts Receivable" shall mean, at any
date of determination thereof, (which date shall be at BANK'S sole reasonable
discretion) Domestic Accounts Receivable of BORROWER which are unpaid for a
period of ninety (90) days or less and are insured in full by a policy issued by
the American Credit Indemnity Company, provided, however, that if such company
becomes unsatisfactory to BANK, in the exercise of its reasonable business
judgment, another insurance company shall be substituted.
1.14 "Eligible Insured Foreign Receivables" shall mean, at any date of
determination thereof, (which date shall be at BANK'S sole reasonable
discretion) Foreign Accounts Receivable of BORROWER which are unpaid for a
period of (90) days or less and are insured in full by a policy issued by the
American Credit Indemnity Company, provided, however, that if such company
becomes unsatisfactory to BANK, in the exercise of its reasonable business
judgment, another insurance company shall be substituted.
1.15 "Event of Default" shall have the meaning assigned thereto in Article
VII hereof.
5
<PAGE>
1.16 "Foreign Accounts Receivable" shall be accounts receivable due on
account of deliveries to be made outside of the United States.
1.17 "Guarantors" shall mean SLAV STEIN, LUCY STEIN, ROMAN BRISKIN AND
VERA BRISKIN.
1.18 "Letters of Credit" shall mean documentary letters of credit issued
by BANK for the account of BORROWER not to exceed the aggregate of any Available
Credit at the time requested.
1.19 "Loan" shall mean the extension of credit, including the issuance of
any Letter of Credit, by BANK to BORROWER as set forth herein and in the Loan
Documents.
1.20 "Loan Documents" shall mean this Loan Agreement, the Amended and
Restated Revolving Promissory Note, Security Agreement, UCC-1 Financing
Statements, Guaranty Agreements, and any and all other instruments or documents
delivered to BANK in connection with the Loan.
1.21 "Maturity Date" shall mean June 1, 1999.
1.22 "Note" shall mean the Amended and Restated Revolving Promissory Note
executed by BORROWER to evidence the Loan governed hereby.
1.23 "Person" (or "Persons") shall mean a natural person, a corporation, a
business trust, an association, a company, partnership, a joint venture, trust
or other entity or a government or any agency or political subdivision thereof.
6
<PAGE>
1.24 "Prime Rate" shall mean the interest rate (not necessarily the lowest
or best rate) charged by SunTrust Banks, Inc. in its sole discretion, as its
prime rate, calculated on a daily moving basis.
1.25 "Revolving Line of Credit" shall mean the maximum amount available to
BORROWER, or so much thereof as shall be outstanding from time to time, not in
any event, to exceed $3,500,000.00.
1.26 "Security Agreement" shall mean that certain Security Agreement
executed simultaneously herewith in which BORROWER pledges to BANK all of
BORROWER's assets including but not limited to presently owned or hereafter
acquired accounts, accounts receivable, inventory, intangibles, contract rights,
furniture, fixtures, equipment, including the proceeds, products, and offspring
thereof.
II. EXTENSION OF CREDIT:
2.01 REVOLVING CREDIT. Subject to the terms and conditions hereof and so
long as there exists no Event of Default or event which, with the lapse of time
or the giving of notice or both, would become an Event of Default, the BANK
will, from time to time, until the Maturity Date, at the request of BORROWER,
make loan advances to BORROWER which loan advances may be repaid and reborrowed
subject to each of the following conditions:
(a) BANK shall have no obligation to make any loan advances or issue
any Letters of Credit which in the aggregate exceed the principal sum of
$3,500,000.00, reduced by the aggregate
7
<PAGE>
principal amount of any and all loan advances and Letters of Credit outstanding
at the time of request, and further reduced by any outstanding accrued and
unpaid interest or other amounts owing under any of the Loan Documents.
(b) The total of all advances made hereunder from time to time shall
not exceed the sum of the following, determined at the time of each advance,
subject to the further limits of section (c) below:
i. 95% of Eligible Insured Domestic Accounts
receivable;
ii. 80% of Domestic Eligible Accounts
Receivable;
iii. 90% of Eligible Insured Foreign Receivables which are
due to AESP/Miami;
iv. 50% of Eligible Foreign Accounts
Receivable.
v. All Eligible Domestic Inventory, valued at an average
cost of 40%, up to a total advance of $2,000,000.00 on
account of such Eligible Domestic Inventory;
(c) BORROWER agrees that the proceeds of the Note will be used for
basic working capital requirements and inventory purchases including issuance of
commercial Letters of Credit for BORROWER.
2.02 TERMS OF NOTE.
(a) The obligation of the BORROWER to repay the indebtedness is
evidenced by the Note. The Note bears interest at
8
<PAGE>
a rate per annum equal to three-quarters of one percent (.75%) in excess of the
Prime Rate. All interest calculations are made on a daily moving basis, computed
on a 360-day year.
(b) Interest shall be due and payable monthly commencing April 1,
1999 and shall be billed and payable monthly thereafter. BANK may automatically
debit BORROWER's account held by the BANK when BORROWER is billed for accrued
and unpaid interest. BORROWER shall execute at closing BANK's form of automatic
debit authorization in the form attached hereto as Exhibit "B".
(c) The Note shall mature on the Maturity Date at which time the
entire outstanding principal balance together with accrued and unpaid interest
(and any fee due under Sections 4.04 and 8.03 hereof) shall be due and payable
in full immediately by the BORROWER.
2.03 OPTIONAL PREPAYMENT OF NOTE. BORROWER may prepay the obligation
evidenced by the Note in whole at any time or in part from time to time, without
premium or penalty, but only if interest accrued on the principal amount is
current or prepaid to the date of prepayment. No optional, partial prepayment of
the Note shall excuse BORROWER from the next required regular payment due
thereunder.
2.04 MANNER OF PAYMENT AND DEFAULT CLAUSE. All payments of principal and
interest are payable at the office of BANK addressed as follows: SunTrust Bank
Miami, N.A. Miami Beach Office, Attention: Commercial Loans; 1111 Lincoln Road,
Miami Beach,
9
<PAGE>
Florida 33139; or such other office of the BANK as is acceptable to the parties
hereto. Payments shall be made in lawful money of the United States of America
which shall be legal tender for debts public and private at the time of payment.
If any principal or interest payment shall not be paid on or before five (5)
days from the due date, then the entire unpaid principal balance together with
any accrued and unpaid interest on the Note shall be immediately due and payable
without notice or demand at the option of the BANK and the unpaid principal
balance and unpaid accrued interest on the Note shall bear default interest at
the maximum rate allowed by law. The BORROWER hereby confirms that the BANK may
continue to debit BORROWER's account at the BANK in order to make the payments
required hereunder.
III. REPRESENTATIONS AND WARRANTIES.
BORROWER hereby represents and warrants to BANK, in order to induce BANK
to extend the credit requested, that:
3.01 AUTHORIZATION OF LOAN, ETC. The execution, delivery, and performance
by BORROWER of this Loan Agreement, the Note, and all other Loan Documents
delivered to BANK by the BORROWER: (a) have been duly authorized by the BORROWER
through its Board of Directors and do not violate BORROWER's Articles of
Incorporation; and (b) will not violate (i) any provision of law (including,
without limitation, any applicable usury or similar law), (ii) any order of
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any court or other agency of government in any matter to which BORROWER is a
party or as a result of which it is bound, or (iii) any material indenture,
agreement or other instrument or obligation to which BORROWER is a party or
subject to, or by which the BORROWER or any of its assets are subject to, or
will be in conflict with, result in a breach of, or constitute (with notice or
lapse of time or both) a default under any such indenture, agreement instrument
or obligation.
3.02 NO ADVERSE CHANGE. There has been no material adverse change in the
business, properties, assets, operations or condition (financial or otherwise)
of BORROWER since the date of the last financial statements of BORROWER
furnished to BANK. As of the date hereof, there are no material unrealized or
anticipated losses in connection with any loans, advances and other commitments
of the BORROWER. BORROWER further represents that there will be no change of
ownership of its controlling shareholders, Slav Stein and Roman Briskin, or of
the management of BORROWER at the date of this Agreement, through the Maturity
Date. BORROWER shall give BANK thirty (30) days written notice of any proposed
change in management, including any officers and directors of the Borrower. BANK
shall not unreasonably withhold its consent to a change in management. Any
transfer of ownership by the Company's controlling shareholder, or any change in
management not approved by BANK, shall constitute an Event of Default under
Article VII herein.
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3.03 LITIGATION. There are no actions, suits, or proceedings (whether or
not purportedly on behalf of BORROWER) pending or affecting BORROWER at law or
in equity or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which involves or affects the extension of credit herein contemplated
or the possibility of any judgment or liability which if determined adversely to
BORROWER would result in any material adverse change in the business,
operations, properties or assets or in the condition (financial or otherwise) of
BORROWER. BORROWER is not in default with respect to any final judgment, writ,
injunction, decree, rule or regulation of any court or federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which would have a materially adverse
effect on BORROWER.
3.04 PAYMENT OF TAXES. BORROWER has filed all federal, state and local tax
returns required to be filed (or has obtained proper extensions of such filing
dates). Borrower has paid any and all import or export duties, fees, taxes,
licenses or other mandatory charge which may result in a material adverse effect
on BORROWER's financial condition or affect in any way the Collateral given BANK
hereunder if not so filed or paid with respect to the operations of BORROWER
which are required to be filed or paid for the present fiscal year, and all
prior fiscal years or as are otherwise due. BORROWER has paid or caused to be
paid to any respective taxing or
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licensing authority all taxes as shown on said returns or on any assessment or
deficiency received by any of them to the extent that such taxes have become
due, except amounts being contested in good faith in an appropriate proceeding
being diligently pursued as permitted under Section 5.02 of this Agreement and
except for amounts which are not material to the financial condition of the
Borrower.
3.05 AGREEMENTS. BORROWER is not in material default in the performance,
observation, or fulfillment of any of the obligations, covenants, or conditions
contained in any material agreement, instrument or obligation to which the
BORROWER is a party. This Loan Agreement is not prohibited by the terms or
affected by any other agreement or instrument referred to hereinabove.
3.06 COMPLIANCE WITH APPLICABLE LAWS. BORROWER is in compliance with all
laws, ordinances, rules, regulations, and all other legal requirements, the
violation of which would have a material effect on the business, properties,
assets, operations or condition of BORROWER.
3.07 LOCATION OF BORROWER'S ASSETS. All inventory and other assets of
BORROWER are located in properties specified in the UCC- 1. Landlord waivers
from the owners/landlords of such properties, other than the property located at
3455 N.W. 54th Street, Miami, Florida, have been delivered to the Bank.
3.08 BROKERS. There is no broker entitled to a commission on account of
the loan.
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3.09 FINANCIAL SOLVENCY. BORROWER is not insolvent, has paid all of its
debts as they have become due, and there is no cause now nor is there any event
which, with the passage of time, would be cause for any petition to be filed or
any case, proceeding or other action commenced against BORROWER seeking to have
a Order for Relief entered against it as debtor or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts or other relief under any law relating to bankruptcy, insolvency,
arrangement, reorganization, receivership or other debt or relief under any law
of statute of any jurisdiction, nor is there any cause for any court having
jurisdiction to enter an order for relief against BORROWER, as debtor, or an
order, judgment or decree appointing, with or without consent of the BORROWER, a
receiver, trustee, custodian or similar officer for the BORROWER or for any
substantial part of any of the BORROWER's properties.
IV. CONDITIONS OF LENDING.
The obligation of the BANK to make the Loan hereunder and any advances
subsequent to the execution of this Agreement is, and hereafter through the
Maturity Date, will be subject to the following conditions:
4.01 REPRESENTATIONS AND WARRANTIES. As of the date hereof and at the time
of every advance made under the Note, the representations and warranties set
forth in Article III hereof shall be true and correct. Should any material
change occur which
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affects the representations and warranties set forth in Article III above,
BORROWER agrees to immediately notify BANK in writing of such changes.
4.02 NO DEFAULT. At the time of each advance hereunder and after giving
effect thereto, BORROWER shall be in compliance with all of the terms and
provisions set forth herein on its part to be observed or performed, and no
Event of Default specified in Article VII or otherwise herein, nor any event
which upon notice or lapse of time or both would constitute such an Event of
Default, shall have occurred and be continuing. On the date of each advance
hereunder, at BANK's request BORROWER shall deliver to the BANK a certificate,
dated as of the date of such loan and signed by the appropriate corporate
officer(s) of the BORROWER, confirming such compliance as aforesaid and with the
condition precedent set forth in Section 4.01 hereof; whether or not BANK
requests such a certificate, BORROWER's request for an advance shall be deemed
to be a representation by BORROWER that the conditions of this Section 4.02 have
been satisfied.
4.03 FINANCIAL AUDITS. BANK shall be entitled to conduct quarterly audits
of BORROWER's business operation in the event BANK believes the BORROWER is
experiencing material adverse changes to business operations. BANK shall charge
BORROWER's account for any audit fees subsequent to any audit actually
conducted. Failure by BANK to conduct one or more audits shall not operate as a
waiver of BANK's right to conduct any other audit.
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4.04 ADDITIONAL FINANCIAL INFORMATION. The BANK shall have the right from
time to time to demand additional financial information from the BORROWER, and
the BORROWER shall forthwith supply such additional information to the BANK. The
BANK shall also have the right to require additional covenants to be performed
by the BORROWER based upon changes in business conditions of the BORROWER.
V. AFFIRMATIVE COVENANTS.
BORROWER covenants and agrees that from the date hereof and until payment
in full of all the principal and accrued interest on the Note, unless the BANK
shall otherwise consent in writing, BORROWER will:
5.01 NOTICE. Give prompt written notice to the BANK of (a) any proceedings
instituted by or against BORROWER in any federal or state court or before any
commission or other regulatory body, federal, state or local, or of any such
proceedings threatened against BORROWER in writing by any federal, state or
other governmental agency, which, if adversely determined, would have a material
adverse effect on the businesses, properties, assets, operations or condition
(financial or otherwise) of BORROWER; and (b) any other action, event or
condition of any nature which may reasonably be expected to lead to or result in
a material adverse effect on the businesses, properties, assets, operations or
condition (financial or otherwise) of BORROWER, or which, with
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notice or lapse of time or both, would constitute an Event of Default under this
Loan Agreement or a default under any other material agreement by which BORROWER
is bound.
5.02 PAYMENT OF DEBTS, TAXES, ETC. Pay all debts and perform all
obligations promptly and in accordance with the terms thereof and pay and
discharge or cause to be paid and discharged promptly all taxes, assessments and
governmental charges or levies imposed upon BORROWER or upon its income or
receipts or upon any of its properties and assets before the same shall be in
default, as well as all lawful claims for labor, materials and supplies or
otherwise which, if unpaid, might become a lien or charge upon such properties
and assets or any part thereof; provided, however, that BORROWER shall not be
required to perform such obligations or pay such debts (except for obligations
for money borrowed), taxes, assessments, or governmental charges or levies or
claims for labor, materials, and supplies which are being contested in good
faith and by proper proceedings diligently pursued.
5.03 COMPLIANCE WITH APPLICABLE LAWS. Promptly and faithfully comply with,
conform to, and obey all present and future laws, ordinances, rules,
regulations, and all other legal requirements applicable to BORROWER, the
violation of which would have a materially adverse effect on the business,
properties, assets or operations of BORROWER.
5.04 INSURANCE POLICIES. Maintain ordinary and necessary insurance
policies in good standing and pay promptly all premiums
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when due and payable thereon. Such insurance must include, without limitation,
(a) "all risk" casualty insurance insuring all of BORROWER's real and personal
property which secures BANK's loan to BORROWER, in an amount not less than
$2,500,000.00, and (b) business interruption insurance in such amounts as are
acceptable to BANK, with all payments thereunder to be assigned to and made
directly payable to BANK.
All coverages shall include BANK as a Loss Payee with thirty (30) days
prior written notice of cancellation, modification or non-renewal BORROWER shall
deliver to BANK copies of all insurance policies and/or binders in force no
later than ten (10) days prior to the expiration of any current policy.
5.05 FINANCIAL COVENANTS. BORROWER shall comply with the following
financial covenants, all of which shall be computed based on consolidated
financial statements of BORROWER, its affiliates and subsidiaries prepared in
accordance with United States Generally Accepted Accounting Principles,
(a) BORROWER shall maintain a minimum Adjusted Tangible Net Worth of
$6,000,000.00.
(b) BORROWER shall maintain a ratio of Adjusted Total Liabilities to
Adjusted Tangible Net Worth of no more than .75. Adjusted Total Liabilities
shall mean all liabilities less subordinated debt to the BANK.
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(c) BORROWER shall maintain an Annualized Cash Flow divided by
Annualized Debt Service ratio of at least 1.25 to 1.0 at all times during the
term hereof.
On a quarterly basis, no later than forty-five (45) days after the end of
each fiscal quarter, BORROWER shall provide BANK with proof of BORROWER's
compliance with the foregoing requirements. Said proof shall be in the form of
reviewed consolidated financial statements. Such statements shall also be
certified by BORROWER to be true and correct.
5.06 FINANCIAL REPORTS. Deliver the following financial
reports to BANK:
(a) Within ninety (90) days after the end of each fiscal year of
BORROWER: (i) the audited 10-K consolidated audited financial statements of
BORROWER and its affiliates and subsidiaries for such year, together with an
unqualified opinion with respect to same from a certified public accounting firm
acceptable to the BANK in its reasonable discretion. The first such statement
shall be due on March 31, 1999 on account of the fiscal year ending December 31,
1998.
(b) BORROWER's and, for each of its subsidiaries, monthly management
prepared unconsolidated financial statements, certified by the BORROWER's chief
executive officer or chief financial officer as to their accuracy, within 45
days after the close of each fiscal month, commencing with the month ending
February 28, 1999.
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(c) Within thirty (30) days after filing with the I.R.S., a complete
copy of the BORROWER's and each of the Guarantors.
(d) On a quarterly basis, no later than forty-five (45) days after
the end of each fiscal quarter, reviewed consolidated 10-Q financial statements
of the BORROWER, prepared by a certified public accountant acceptable to the
BANK. Such statements shall also be certified by the BORROWER to be true and
correct. The first statement shall be due on account of the quarter ending March
31, 1999.
(e) On not less than a monthly basis but in any event each time a
draw request for an advance hereunder is requested, a Borrowing Base
Certificate, substantially in the form attached hereto as Exhibit "A", supported
by a current accounts receivable aging, and a compliance certificate executed by
an officer of the BORROWER, in the form attached to the Borrowing Base
Certificate. Said certificate will be provided ten (10) days after the end of
each month of the term of the Revolving Promissory Note. Said certificate shall
be certified by the BORROWER's chief executive officer or chief financial
officer as to its accuracy;
(f) No more than ten (10) days after the close of each month of the
term hereof, BORROWER's monthly accounts receivable and accounts payable aging
schedules as well as domestic inventory listing based on average cost.
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(g) No later than thirty (30) days after the close of each fiscal
quarter of BORROWER, commencing with the quarter ending March 31, 1999, a
quarterly loan covenant compliance certificate certified by the BORROWER's chief
executive officer or chief financial officer as to accuracy.
(h) On a monthly basis, the Specific Customer Endorsement of the
American Credit Indemnity Company Insurance policy.
(i) No later than thirty (30) days prior to policy expiration,
evidence of renewal of the American Credit Indemnity Company Insurance Policy.
Failure to comply with this provision shall entitle BANK to all remedies
provided in this Agreement and, in addition, shall automatically cause Section
2.01(b) to be modified by reducing 95% to 80% in section i. and by reducing 90%
to 50% in section iii. Said reductions shall be effective until the BORROWER
complies with this provision.
5.07 INVENTORY AUDIT. Provide an audit of the inventory of the BORROWER as
of the last day of each fiscal year of the BORROWER. The audit shall be prepared
by an auditor acceptable to the BANK. The audit shall identify the type and
quantity of the assets contained within the inventory and the value for same.
The audit shall be delivered no later than ninety (90) days after the end of
each fiscal year of the BORROWER.
5.08 DEPOSITORY ACCOUNTS. Maintain the depository accounts of the BORROWER
in the BANK. Said accounts shall include, but not be
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limited to, monies received from the issuance of equity offerings, pending the
use of such funds.
VI. NEGATIVE COVENANTS.
BORROWER covenants and agrees that from the date hereof until payment in
full of the principal and interest on the Note, unless the BANK shall otherwise
consent in writing, BORROWER will not (directly or indirectly):
6.01 INDEBTEDNESS, GUARANTEES AND LIENS. Incur, create, assume or permit
any type of indebtedness, guarantee or lien, which would in the BANK's sole
judgment, taken in the aggregate or individually, materially affect the
BORROWER's business, properties, assets or operations or jeopardize the
BORROWER's ability to repay the loan hereunder; provided, however, that Borrower
may incur unsecured indebtedness for trade payables, wages, taxes and other
accrued expenses incurred in the ordinary course of business. The BORROWER's
covenants include, but are not limited to, agreeing not to pledge, hypothecate,
or otherwise encumber the equipment or inventory of BORROWER. BORROWER shall not
change its business address and shall continually collect all accounts
receivable at said address. Should BORROWER propose to change its business
address or the address where accounts receivable are collected, BORROWER shall
give BANK thirty (30) days prior written notice of said change.
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6.02 LOANS TO RELATED PARTIES. Make any advances or loans to subsidiaries,
affiliates, shareholders, officers or directors of the BORROWER.
6.03 SALE OF ASSETS. Sell or convey any of its stock or assets except in
the normal and ordinary course of business. For purposes hereof, a sale of
BORROWER's stock or assets shall include a merger, consolidation or
reorganization of the BORROWER.
6.04 CHANGE OF MANAGEMENT. Change any of BORROWER's management from that
management serving at the date of this Agreement.
6.05 DISTRIBUTIONS. Declare or pay any dividends or make any other
distributions to shareholders (other than compensation for services by such
shareholders paid during such period in the ordinary course of business).
VII. EVENTS OF DEFAULT.
Each and every occurrence of one or more of the following events shall
constitute an "Event of Default" (hereinafter called "Events of Default"):
(a) any representation or warranty made herein shall prove to be
false or misleading in any material respect;
(b) any report, certificate, financial statement or other instrument
furnished in connection with this Loan Agreement or Loan Document shall prove to
be false or misleading in any material respect;
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(c) default shall be made in the payment of the principal of, or the
interest on the Note, for a period of seven (7) days from the date when said
payments are due and payable;
(d) default shall be made by BORROWER with respect to (i) any
liability for borrowed money beyond any applicable period of grace, or (ii) the
performance of any other obligation incurred in connection with any such
liability for borrowed money beyond any applicable period of grace, if, in each
case, the effect of such default is to accelerate the maturity of such liability
or cause any other material liability to become due prior to its stated
maturity;
(e) default shall be made under the terms and conditions of any of
the Loan Documents;
(f) default shall be made in the due observance or performance of
any other covenant, condition or agreement on the part of BORROWER to be
observed or performed pursuant to the terms of this Loan Agreement or the other
Loan Documents and such default shall have continued for a period of thirty (30)
days;
(g) BORROWER or any GUARANTOR shall (i) apply for or consent to the
appointment of a receiver, trustee, or liquidator of the BORROWER's business,
properties, assets or operations, (ii) admit in writing its inability to pay its
debts as they mature, (iii) make a general assignment for the benefit of
creditors, (iv) be adjudicated a bankrupt or insolvent, or (v) file a voluntary
petition in bankruptcy, or a petition or an answer seeking
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reorganization or an arrangement with creditors or take advantage of any
bankruptcy, reorganization, insolvency, readjustment of debts, dissolution or
liquidation, law or statute, or an answer admitting the material allegations of
a petition filed against it in any proceeding under any such law or statute or
if action shall be taken by BORROWER or any GUARANTOR for the purpose of
effecting any of the foregoing, or (vi) any order, judgment, decree or writ
shall be entered upon an application of a creditor of any BORROWER or GUARANTOR
by a court of competent jurisdiction which either: (1) attaches any material
portion of any BORROWER's or GUARANTOR's assets under judicial process, or (2)
approves a petition seeking an appointment of a receiver or trustee of any
material part of any BORROWER's or GUARANTOR's assets, or (vii) any order,
judgment, decree or writ shall be entered against BORROWER or any GUARANTOR for
an amount in excess of $25,000.00;
(h) an order, judgment or decree shall be entered without the
application, approval, or consent of the debtor by any court of competent
jurisdiction, approving a petition seeking reorganization of BORROWER or any
GUARANTOR or any of them or appointing a receiver, trustee or liquidator of
BORROWER or any GUARANTOR and such order, judgment, or decree shall continue
unstayed and in effect for any period of forty-five (45) consecutive days,
provided the order, judgment or decree shall have a material adverse effect on
BORROWER or any GUARANTOR;
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(i) the failure of BORROWER to keep its properties insured by
carriers acceptable to BANK and insuring against loss or damage by fire, theft
and other hazards; liability; and such other risks as BANK may require. Said
policies shall not be cancelable without at least thirty (30) days prior notice
to BANK. Not later than thirty (30) days prior to expiration of any policy
required hereunder, BORROWER shall provide BANK with a certificate evidencing
renewal of same;
(j) acquire any new business, corporation or other entity, without
prior written approval of the BANK.
During the continuance of any such event, BANK at its option
exercised by written notice from the BANK to BORROWER, may declare the Note to
be forthwith due and payable, both as to principal and interest, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived, anything herein or in the Note to the contrary
notwithstanding and the BANK may enforce any or all of the BANK's rights and
remedies set forth in the Loan Documents.
VIII. MISCELLANEOUS.
8.01 NOTICE. Any notice shall be conclusively deemed to have been received
by a party hereto and to be effective on the day on which delivered to such
party at the address set forth below (or at such other address as such party
shall specify to the other parties in writing) or if sent by registered mail, on
the third business
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day after the day on which mailed, postage prepaid, addressed to such party at
said address:
(a) If to the BANK at the following address:
SunTrust Bank Miami, National Association
Special Assets Department
777 Brickell Avenue
Miami, Florida 33131
Attention: John Thompson
(b) If to the BORROWER at the following address:
Advanced Electronic Support Products, Inc.
1810 Northeast 144th Street
Miami, Florida 33181
Attention: President
8.02 SURVIVAL OF REPRESENTATIONS. All covenants, agreements,
representations, and warranties made herein and in the certificates delivered
pursuant hereto shall survive the Maturity Date. Whenever in this Loan Agreement
reference is made to any of the parties hereto, such reference shall be deemed
to include the successors and assigns of such party; and all covenants, promises
and agreements by or on behalf of BORROWER or any GUARANTOR which are contained
in this Loan Agreement shall inure to the benefit of the successors and assigns
of the BANK.
8.03 APPLICABLE LAW. This Loan Agreement and all Loan
Documents shall be construed in accordance with and governed by
the laws of the State of Florida.
8.04 INTEREST. Nothing herein contained nor in any instrument or
transaction related hereto shall be construed or so operate as to require
Borrower or any person liable for the payment of this
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Note to pay interest in an amount or at a rate greater than the maximum allowed
by applicable laws in effect from time to time. Should any interest or other
charges in the nature of the interest paid by Borrower or any parties liable for
the payment of this Note result in the computation or earning of interest in
excess of the maximum rate of interest allowed by applicable law in effect from
time to time, then any and all such excess shall be and the same is hereby
waived by BANK, and all such excess received shall automatically be credited
against and in reduction of the Principal, and any portion of said excess which
exceeds the Principal shall be paid by BANK to Borrower or any parties liable
for the payment of this Note, it being the intent of the parties hereto that
under no circumstances shall Borrower or any parties liable for payment
hereunder be required to pay interest in excess of the maximum rate allowed by
applicable law in effect from time to time.
8.05 EXPENSES. BORROWER will pay (a) any and all documentary stamp taxes,
intangible taxes, costs and expenses applicable to the loans hereunder at,
before or after execution of any Note hereunder; (b) for all recording and
filing costs hereunder; and (c) any and all costs for preparation of loan
documents, consummation and protection of the Loan, including, but not limited
to, attorney's fees for BANK's counsel.
8.06 MODIFICATION OF AGREEMENT. No modification, amendment or waiver of
any provision of this Loan Agreement, any Loan Document,
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or of the Note, nor any consent to any departure by BORROWER therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
BANK and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on BORROWER
shall in any case entitle BORROWER to any other or further notice or demand in
the same, similar or other circumstances.
8.07 WAIVER OF RIGHTS BY BANK. Neither any failure nor any delay on the
part of the BANK in exercising any right, power, or remedy hereunder or under
the Note or Loan Documents shall operate as a waiver thereof, nor shall a single
or partial exercise thereof preclude any other or further exercise of any other
right, power, or remedy hereunder.
8.08 TIME OF PERFORMANCE AND EXTENSIONS. Time is of the essence with
regard to any required action, payment or other covenant of BORROWER hereunder
or in any other Loan Document. Failure to timely comply with any required
action, payment or covenant hereunder shall constitute an Event of Default under
Article VII herein. Should any payment of principal of or interest on the Note
become due and payable on other than a business day, the maturity thereof shall
be extended to the next succeeding business day, and, in the case of any
prepayment of principal, interest shall be payable thereon at the rate per annum
herein specified during such extension. The term "business day" shall
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mean any day not a Saturday, Sunday, or legal bank holiday in the State of
Florida.
8.09 SEVERABILITY. In case any one or more of the provisions contained in
this Loan Agreement or the Loan Documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby.
8.10 COUNTERPARTS. This Loan Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute one agreement. This Loan Agreement shall be
effective when counterparts which, when taken together, bear the signatures of
all the parties hereto, shall have been lodged with the BANK.
8.11 REPRESENTATION AND WARRANTY BY THE BANK. The BANK represents and
warrants to BORROWER that the Note evidencing this Loan is made in the ordinary
course of its commercial banking business.
8.12 HEADINGS. The headings used herein have been inserted for convenience
only and do not constitute matters to be considered in interpreting this Loan
Agreement.
8.13 WAIVER OF JULY TRIAL. THE BORROWER HEREBY KNOWINGLY VOLUNTARILY AND
INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY OF, UNDER OR IN CONNECTION
WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR
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WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE BANK ENTERING INTO THIS AGREEMENT AND THE BANK MAKING ANY LOAN ADVANCE OR
OTHER EXTENSION OF CREDIT TO BORROWER.
8.14 AMENDMENT AND RESTATEMENT. This Loan Agreement amends and restates in
its entirety that certain Loan Agreement between the parties dated August 1,
1997 (the "Prior Loan Agreement")which Prior Loan Agreement was executed
simultaneously with the corporation's acquisition of a $4,500,000.00 loan from
the BANK. This Loan Agreement sets forth the amended and restated understandings
between the parties with respect to the terms contained herein.
IN WITNESS WHEREOF, BORROWER and the BANK have caused this Loan Agreement
to be executed by their duly authorized representatives, all as of the date
first above written.
BORROWER BANK
- -------- ----
ADVANCED ELECTRONIC SUPPORT SUNTRUST BANK MIAMI, NATIONAL
PRODUCTS, INC., a Florida ASSOCIATION, a national banking
corporation association
By:/s/ ROMAN BRISKIN By:/s/
- -------------------- ---------------------------------
ROMAN BRISKIN, ______________ Vice President,
Vice President Commercial Lending Department
31
EXHIBIT 10.14
AMENDMENT
This Amendment (this "Amendment") dated as of February 18, 1999 (the
"Amendment Effective Date") will modify certain terms and conditions of the
below-described Master Purchase Agreement (the "Original Agreement") between
FOCUS Enhancements, Inc., ("Company") and Advanced Electronic Supply Products,
Inc. ("Seller"). Unless specifically noted herein, all other terms of the
Original Agreement shall remain in full force and effect, including any terms
that survive termination of the Original Agreement.
WHEREAS, Company and Seller have heretofore entered into the Original
Agreement, more particularly described as Master Purchase Agreement between
FOCUS Enhancements, Inc, and Advanced Electronics Supply Products, Inc.,
effective as of September 29, 1997;
WHEREAS, Company and Seller desire, upon terms and subject to the
conditions hereinafter set forth, to amend the Original Agreement in certain
respects;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound hereby,
agree as follows:
ARTICLE I
AMENDMENT OF AGREEMENT
SECTION 1.1 DEFINED TERMS
Except as otherwise specified herein, the terms used in this Amendment and
defined in the Original Agreement as amended hereby (as so amended, the "Amended
Agreement") shall have the meanings provided in the Original Agreement.
SECTION 1.2 AMENDMENT
Effective upon the execution of this Amendment, the provisions of the
Original Agreement referred to below are hereby amended as follows:
1. Section 1 of the Original Agreement is restated in its entirety to
read as follows:
"Seller agrees to manufacture certain items ('Seller Products'),
which are fully described in Exhibit A, attached hereto and
incorporated herein, and any additional cable, connector, AC
adaptors and cable adaptors that is later specified from time to
time in accordance with this Agreement. Such Seller Products shall
include, without limitation, cables, connectors, AC adaptors and
cable adaptors which the Company currently purchases in its
business. Purchaser agrees to purchase all of its requirements for
cables, connectors, AC adaptors and cable adaptors (which form
Seller Products) used in its business from Seller in accordance with
this Agreement. Notwithstanding the foregoing, if (i) Seller does
not or can not provide Company with a Seller Product reasonably
requested by
- 1 -
<PAGE>
Company, pursuant to Company Specification as described in Section
9.1 or, if not custom, then a Purchase Order as described in Section
3.3, to be supplied within a period specified in the Specification,
Purchase Order, or, if not specified, then a commercially reasonable
period; (ii) more than three (3%) percent of any one shipment of any
Seller Product is defective or otherwise quality impaired; or (iii)
Company provides at least three bona fide quotes for such Seller
Product obtained from a third-party vendor at arm's length and
Seller does not sell the Seller Product to Company for less than the
average of the three quotes, then Company may at its sole discretion
purchase such Seller Product from another vendor, and the total
purchase amount actually paid to the other vendor shall be fully
deductible from the minimum purchase requirements set forth in
Sections 2 and 3.5. Upon the election by Company purchase from a
third-party vendor, Company shall provide to Seller the reason for
such election, the purchase order amount, the part numbers and the
quantities ordered."
2. Section 2 of the Original Agreement is restated in its entirety to
read as follows:
"This Agreement shall become effective on the date on which it is
executed by both parties and, unless sooner terminated in accordance
with the provisions hereof, shall continue for an initial period of
three (3) years thereafter (the 'Initial Contract Term'). The
Contract Term shall automatically be renewed for a single one (1)
year period following the Initial Contract Tenn, unless sooner
terminated pursuant to Section 16 herein below. The Contract Tenn
shall then be automatically renewed for additional periods of one
(1) year each after the end of the prior term (the "Contract Term"
includes the Initial Contract Term and any renewals thereof) unless
either party provides written notice to the other party of its
intent not to renew the term of this Agreement on or before ninety
(90) days prior to the end of the prior Contract Term. No minimum
purchase amounts, including those set forth in Section 3.5 below,
shall apply to any renewal term following the Initial Contract Term
although there shall be no exclusivity following the first renewal
term."
3. The first sentence of Section 3.5 of the Original Agreement is
restated in its entirety to read as follows:
"During the Initial Contract Tenn, Company shall submit Purchase
Orders, which result in Seller Products that are delivered by Seller
and paid for by Company in accordance with the terms of this
Agreement, the aggregate amount of which shall not be less than Two
Million Five Hundred Thousand Dollars ($2,500,000)."
4. The first sentence of Section 4.1 of the Original Agreement is
amended to be preceded by the phrase:
"Unless reduced pursuant to Section I herein above,"
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<PAGE>
5. To the end of Section 16, please add the following new Section 16.6:
"Company may elect to terminate this Agreement for cause, forthwith
upon written notice, if (i) Company returns Seller Products pursuant
to Section 1 herein above three or more times during any six month
period; (ii) the orders returned pursuant to (i) above have ordered
quantities of at least five hundred (500) units; and (iii) Company
has complied with all lead time requirements, provided test
procedures, and/or specifications, each only if stated as required
in a written quotation from Seller to Company. Any termination by
Company under this Section 16.6 shall, without limitation, relieve
Company of any and all minimum commitment liabilities hereunder."
SECTION 2
ADDITIONAL PROVISIONS
SECTION 2.1 NO OTHER MODIFICATIONS
Except as expressly modified herein, all of the terms and conditions of
the Original Agreement will remain in full force and effect. The amendments set
forth above (a) do not constitute a waiver or modification of any term,
condition, covenant, agreement, representation or warranty of or set forth in
the Original Agreement or a waiver of a failure to perform any obligation under
the Original Agreement, other than as expressly set forth herein, and (b) shall
not prejudice any rights or remedies which FOCUS or AESP may now or hereafter
have under or in connection with the Original Agreement, as modified hereby. In
the event of any conflict between the provisions of the Original Agreement and
the provisions of this Amendment, the provisions of this Amendment shall
control.
SECTION 2.2 ENTIRE AGREEMENT
The Original Agreement as amended by this Amendment constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous representations, understandings or
agreements, whether oral or written, relating to the subject matter hereof All
prior or contemporaneous representations, understandings or agreements, whether
oral or written, that are not expressly set forth within the four corners of the
Original Agreement as amended by this Amendment are hereby deemed waived,
superseded and abandoned.
SECTION 2.3 AMENDMENTS
No amendment or modification of this Amendment will be binding on any of
the parties to this Amendment unless such amendment or modification is contained
in a written document which expresses an intention to amend this Amendment and
is executed by each of the parties.
SECTION 2.4 COUNTERPARTS
This Amendment may be executed in several counterparts all of which taken
together shall constitute one single agreement between the parties.
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<PAGE>
SECTION 2.5 TERMS CONFIDENTIAL
The terms and conditions of this Amendment are confidential and shall be
treated as such by FOCUS and AESP except to the extent that either party must
disclose for reasonable business purposes or must otherwise disclose to its
attorneys, accountants, lenders, regulators or others with a need or right to
know.
SECTION 2.6 SUCCESSORS AND ASSIGNS
This Amendment is a continuing obligation and binds, and the benefits
hereof shall inure to, FOCUS and AESP and their respective successors and
assigns. Neither this Amendment nor any rights hereunder may be assigned by
either party without the prior written consent of the other party, which consent
will not be unreasonably withheld, delayed or conditioned.
SECTION 2.7 HEADINGS
Section headings in this Amendment are included herein for convenience or
reference only and shall not constitute a part of this Amendment for any other
purpose
IN WITNESS WHEREOF, the parties have caused the signatures of their duly
authorized officers to be hereunto affixed.
FOCUS AESP
By: /s/ THOMAS L. MASSIE By: /s/ SLAV STEIN
----------------------------------- ---------------------------
(Signature-Authorized Officer) (Signature-Authorized Officer)
Name: Thomas L. Massie Name: Slav Stein
Title:President & CEO Title: President & CEO
- 4 -
EXHIBIT 10.17
STOCK PURCHASE AGREEMENT
BY AND AMONG
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.,
COMMUNICATION COMPONENTS COMPANY, INC.
AND
DONALD Y. DAILY, JR.
DATED AS OF MARCH 5, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
TABLE OF CONTENTS............................................................i
RECITALS.....................................................................1
TERMS OF AGREEMENT...........................................................1
ARTICLE I
PURCHASE AND SALE OF SHARES............................................1
1.1 Purchase and Sale................................................1
1.2 The Closing......................................................1
1.3 Purchase Price...................................................2
1.4 Wholly-Owned Subsidiary..........................................3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AESP.................................3
2.1 Corporate Status.................................................3
2.2 Corporate Power and Authority....................................3
2.3 Enforceability...................................................3
2.4 Capitalization...................................................3
2.5 No Violation; Consents and Approval..............................4
2.6 Litigation.......................................................4
2.7 Financial Statements.............................................4
2.8 Changes Since the Current Balance Sheet Date.....................4
2.9 No Commissions...................................................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE SHAREHOLDER........................................................5
3.1 Corporate Status.................................................5
3.2 Power and Authority..............................................5
3.3 Enforceability...................................................5
3.4 Capitalization...................................................5
3.5 Shareholders of the Company......................................6
3.6 No Violation; Consents and Approval..............................6
3.7 Records of the Company...........................................6
3.8 Subsidiaries.....................................................7
3.9 Financial Statements.............................................7
3.10 Changes Since the Current Balance Sheet Date.....................7
3.11 Liabilities of the Company.......................................8
3.12 Litigation.......................................................8
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3.13 Environmental Matters............................................8
3.14 Real Estate......................................................8
3.15 Good Title to and Condition of Assets............................9
3.16 Compliance with Laws.............................................9
3.17 Labor and Employment Matters....................................10
3.18 Employee Benefit Plans..........................................11
(a) Employee Benefit Plans..............................11
(b) Compliance with Law.................................11
3.19 Tax Matters.....................................................11
3.20 Insurance.......................................................12
3.21 Receivables.....................................................12
3.22 Licenses and Permits............................................12
3.23 Adequacy of the Assets; Relationships with Customers
and Suppliers; Affiliated Transactions..........................12
3.24 Intellectual Property...........................................13
3.25 Contracts.......................................................13
3.26 Customer Lists and Recurring Revenue............................14
3.27 Accuracy of Information Furnished by the Shareholder............14
3.28 Investment Intent; Accredited Investor Status; Securities
Documents.......................................................14
3.29 Bank Accounts; Business Locations...............................15
3.30 Names; Prior Acquisitions.......................................15
3.31 No Other Management.............................................15
3.32 No Commissions..................................................15
3.33 No Reliance on Forecasts........................................15
ARTICLE IV
ADDITIONAL AGREEMENTS.................................................15
4.1 Further Assurances; Compliance with Covenants...................15
4.2 Employment Agreement............................................16
4.3 Company Employees...............................................16
4.4 Cooperation.....................................................16
4.5 Other Actions...................................................16
4.6 Confidentiality; Publicity......................................16
4.7 Restrictive Covenants...........................................17
4.8 Certain Tax Matters.............................................17
4.9 Shareholder Vote................................................17
4.10 Payoff and Estoppel Letters.....................................17
4.11 Company Common Stock; Releases..................................17
ARTICLE V
CONDITIONS TO THE OBLIGATIONS OF AESP.................................17
5.1 Accuracy of Representations and Warranties and Compliance
with Obligations................................................17
5.2 Corporate Certificate...........................................18
5.3 Opinion of Counsel..............................................18
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5.4 Consents........................................................18
5.5 Company Common Stock............................................18
5.6 Employment Agreement............................................18
5.7 No Adverse Litigation...........................................19
5.8 Board Approval..................................................19
5.9 Bank Approval...................................................19
5.10 Due Diligence Review............................................19
5.11 Releases........................................................19
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF
THE COMPANY AND THE SHAREHOLDER.......................................19
6.1 Accuracy of Representations and Warranties and Compliance
with Obligations................................................19
6.2 Corporate Certificate...........................................19
6.3 Opinion of Counsel..............................................20
6.4 Consents........................................................20
6.5 Employment Agreement............................................20
6.6 No Adverse Litigation...........................................20
6.7 Board Approval..................................................20
6.8 Purchase Price..................................................20
6.9 No Order or Injunction..........................................20
REGISTRATION RIGHTS.........................................................21
7.1 Piggy-Back Registration Rights..................................21
7.2 Demand Registration Rights for AESP Shares; Filing of
Registration Statement..........................................22
7.3 Amendments and Supplements......................................22
7.4 Duration........................................................22
7.5 Further Information.............................................22
7.6 Sales Under Rule 144............................................23
7.7 Blue Sky........................................................23
7.8 Expenses........................................................23
ARTICLE VIII
INDEMNIFICATION.......................................................23
8.1 Agreement by the Shareholder to Indemnify.......................23
8.2 Agreement by AESP to Indemnify..................................23
8.3 Survival of Representations and Warranties......................24
8.4 Threshold and Maximum Indemnification Amount....................24
8.5 No Bar; Waiver..................................................24
8.6 Sole Remedy.....................................................25
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ARTICLE IX
DEFINITIONS...........................................................25
9.1 Defined Terms...................................................25
9.2 Other Definitional Provisions...................................26
ARTICLE X
GENERAL PROVISIONS....................................................27
10.1 Notices.........................................................27
10.2 Entire Agreement................................................27
10.3 Expenses........................................................27
10.4 Amendment; Waiver...............................................28
10.5 Remedies Cumulative.............................................28
10.6 Binding Effect; Assignment......................................28
10.7 Counterparts....................................................28
10.8 Interpretation..................................................28
10.9 Construction....................................................28
10.10 Governing Law; Severability.....................................29
10.11 Attorneys' Fees; Jurisdiction and Venue.........................29
10.12 Arm's Length Negotiations.......................................29
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<PAGE>
EXECUTION COPY
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and effective as
of March 5, 1999 by and among ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC., a
Florida corporation ("AESP"); COMMUNICATION COMPONENTS COMPANY, INC., a
Pennsylvania corporation (the "Company"); and DONALD Y. DAILY, JR., a resident
of the Commonwealth of Pennsylvania, who is the sole shareholder of the Company
(the "Shareholder"). Certain other capitalized terms used herein are defined in
ARTICLE IX and throughout this Agreement.
RECITALS
A. The Shareholder is the record and beneficial owner of 9,500 shares (the
"Shares") of common stock, no par value per share, of the Company (the "Common
Stock") constituting all of the issued and outstanding capital stock of the
Company.
B. The Shareholder desires to sell, and AESP desires to acquire, all of
the Shares, upon the terms and subject to the conditions set forth in this
Agreement (the "Stock Purchase").
C. The Boards of Directors of the Company and AESP, and the Shareholder,
have determined that it is in their respective best interests, for AESP to
acquire the Company upon the terms and subject to the conditions set forth in
this Agreement.
TERMS OF AGREEMENT
In consideration of the foregoing Recitals and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 PURCHASE AND SALE. Upon the terms and subject to the conditions set
forth in this Agreement, at the Closing (as defined below), the Shareholder will
sell, assign, transfer, convey and deliver to AESP, and AESP shall purchase,
acquire and accept from the Shareholder, the Shares, free and clear of any Liens
(as defined herein).
1.2 THE CLOSING. Subject to the terms and conditions of this Agreement,
the consummation of the Stock Purchase (the "Closing") shall take place as
promptly as practicable (and in any event within five (5) business days) after
satisfaction or waiver of the conditions set forth in
<PAGE>
ARTICLES V AND VI, at the offices of AESP's counsel, Akerman, Senterfitt &
Eidson, P.A., One S.E. Third Avenue, Miami, Florida 33131, unless another date,
time or place is agreed to in writing by the parties hereto. The date and time
at which the Closing occurs is referred to herein as the "Closing Date".
1.3 PURCHASE PRICE. The purchase price (the "Purchase Price") to be paid
by AESP to the Shareholder for the Shares shall be equal to $800,000.00. Unless
otherwise indicated, at the Closing and subject to performance of certain
agreements and covenants by Shareholder as set forth in SECTION 5 and the
delivery by the Shareholder of certificates representing the Shares to AESP,
AESP shall pay the Purchase Price to the Shareholder as follows:
(a) AESP shall (1) deliver a check from the Company to the
Shareholder in the amount of $233,450.57 to be drawn upon the Company's funds
and (2) deliver to the Shareholder $16,549.43 by wire transfer to an account of
the Shareholder pursuant to written wire instruction;
(b) AESP shall deliver an instruction letter to its transfer agent
(Continental Stock Transfer and Trust Co.) instructing the issuance of
certificates evidencing $150,000.00 in AESP Common Stock (as defined below) in
the name of the Shareholder (the "AESP Shares"). The $150,000.00 shall be
payable in an aggregate number of shares of common stock, $.001 par value per
share, of AESP ("AESP Common Stock") determined by dividing: (i) $150,000.00; by
(ii) the average closing price of a share of AESP Common Stock on the NASDAQ
SmallCap Market ("NASDAQ") for the twenty (20) consecutive trading days which
precede the Closing Date, as reported (absent manifest error in the printing
thereof) by the Wall Street Journal (Eastern Edition);
(c) AESP shall deliver into escrow, as provided below, a
Non-Negotiable Promissory Note in the form of EXHIBIT 1.3(C) (the "$125,000
Installment Note") in the principal amount of $125,000.00 which note shall be
payable commencing 60 days from the date thereof in thirty (36) equal monthly
installments subject to any claims for indemnification under this Agreement
pursuant to the Escrow Agreement referenced below in Section 1.3(f). The
$125,000 Installment Note shall be held in escrow pursuant to SECTION 1.3(F)
below; and
(d) AESP shall deliver to the Shareholder a Non-Negotiable
Promissory Note in the form of EXHIBIT 1.3(D) (the "$175,000 Installment Note")
in the principal amount of $175,000.00 which note shall be payable commencing 60
days from the date thereof in thirty (36) equal monthly installments; and
(e) AESP shall deliver $100,000 to the Shareholder as follows: Based
upon representations by the Shareholder that the Company has received at least
$225,000 from Assessment Systems Co. ("ASC") during February 1999, AESP shall
deliver to the Shareholder $50,000 at Closing by wire transfer to an account of
the Shareholder pursuant to written wire instruction. Upon receipt by the
Company of an additional $225,000 from ASC on or before the Payment Date (as
defined below), AESP shall deliver to the Shareholder a check in the amount of
$50,000. AESP shall use commercially reasonable efforts to collect all
outstanding receivables from ASC. To the extent the full $225,000 payment are
not received from ASC on or before the Payment Date, then AESP shall deliver the
$50,000 to the Shareholder in the form of a Non-Negotiable Term Note in
substantially similar form of Exhibit 1.3(d), payable in full 36 months from the
date of this Agreement,
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which note shall bear interest at the rate of 8% per annum. For purposes of this
Section 1.3(e), the "Payment Date" shall mean the date that is six (6) months
after the Closing Date.
(f) AESP shall deliver the $125,000 Installment Note to be held in
escrow pursuant to the terms of that certain Escrow Agreement dated as of the
date hereof between AESP, the Company, the Shareholder and Akerman, Senterfitt &
Eidson, P.A., as Escrow Agent, substantially in the form of EXHIBIT 1.3(F).
1.4 WHOLLY-OWNED SUBSIDIARY. Immediately following the Closing, the
parties understand and agree that the Company shall become a wholly-owned
subsidiary of AESP. Subject to the Company's Board of Directors' control, the
Company will maintain a separate identity from AESP in the marketplace and will
use, among other intellectual property, the trade names and trademarks of the
Company. The Company will maintain its headquarters in the Philadelphia,
Pennsylvania region and initially operate in the geographic area in which the
Company operates as of the date hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AESP
As a material inducement to the Shareholder to enter into this Agreement
and to consummate the transactions contemplated hereby, AESP makes the following
representations and warranties to the Shareholder:
2.1 CORPORATE STATUS. AESP is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida. There is
no pending or threatened proceeding for the dissolution, liquidation, insolvency
or rehabilitation of AESP.
2.2 CORPORATE POWER AND AUTHORITY. AESP has the corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. AESP has taken
all corporate action necessary to authorize its execution and delivery of this
Agreement, the performance of its obligations hereunder and the consummation of
the transactions contemplated hereby.
2.3 ENFORCEABILITY. This Agreement has been duly executed and delivered by
AESP and constitutes a legal, valid and binding obligation of AESP, enforceable
against AESP in accordance with its terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and general equitable
principles regardless of whether such enforceability is considered in a
proceeding at law or in equity.
2.4 CAPITALIZATION. As of the date hereof, the authorized capital stock of
AESP consists of: 20,000,000 shares of Common Stock, $.001 par value per share,
of which 2,282,201 shares are
3
<PAGE>
issued and outstanding and (as of June 30, 1998) 265,800 shares are reserved for
issuance upon exercise of outstanding options and warrants exclusive of certain
public warrants granted but not exercised in connection with AESP's initial
public offering; and 1,000,000 shares of Preferred Stock, $.001 par value per
share, of which no shares are issued and outstanding. As of the date hereof, all
of the outstanding shares of Purchaser's Common Stock are validly issued, fully
paid and non-assessable.
2.5 NO VIOLATION; CONSENTS AND APPROVAL. The execution and delivery of
this Agreement by AESP, the performance by it of its obligations hereunder and
the consummation by it of the transactions contemplated by this Agreement will
not (i) contravene any provision of the Articles of Incorporation or Bylaws of
AESP, (ii) violate or conflict with any law, statute, ordinance, rule,
regulation, decree, writ, injunction, judgment or order of any Governmental
Authority or of any arbitration award which is either applicable to, binding
upon or enforceable against AESP, (iii) conflict with, result in any material
breach of, or constitute a material default (or an event which would, with the
passage of time or the giving of notice or both, constitute a material default)
under, or give rise to a right to terminate, amend, modify, abandon or
accelerate, any Contract which is applicable to, binding upon or enforceable
against AESP, (iv) result in or require the creation or imposition of any Lien
upon or with respect to any of the property or assets of AESP, or (v) require
the consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, any court or tribunal or any other
Person, except any SEC and other filings required to be made by AESP.
2.6 LITIGATION. To AESP's knowledge, there is no material action, suit, or
other legal or administrative proceeding or governmental investigation pending,
threatened, anticipated or contemplated against, by or affecting AESP, or any of
its properties or assets, or which questions the validity or enforceability of
this Agreement or the transactions contemplated hereby, and there is no basis
for any of the foregoing. There are no outstanding orders, decrees or
stipulations issued by any Governmental Authority in any proceeding to which
AESP is or was a party which have not been complied with in full or which
continue to impose any material obligations on AESP.
2.7 FINANCIAL STATEMENTS. AESP has delivered or made available to the
Shareholder the financial statements of AESP, which for the purposes hereof
shall be comprised of AESP's (i) Annual Report on Form 10-KSB for the year ended
December 31, 1997, and (ii) Quarterly Reports on Form 10-QSB for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998 ("AESP Financial
Statements"). Copies of such financial statements have been filed with the SEC.
The balance sheet dated as of June 30, 1998 from AESP's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998 shall be referred to herein as
the "Current Balance Sheet". AESP's Financial Statements fairly present the
financial position of AESP at the Current Balance Sheet date and for the periods
covered thereby, and have been prepared in accordance with GAAP consistently
applied throughout the periods indicated. AESP's Financial Statements reflect
all adjustments necessary for a fair presentation of the financial information
contained therein.
2.8 CHANGES SINCE THE CURRENT BALANCE SHEET DATE. Since the date of AESP's
Current Balance Sheet, there have been no material events effecting AESP which
would have been required to be reported in a Current Report on Form 8-K other
than as AESP reported on such form
4
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subsequent to September 30, 1998. AESP has no current obligation to file a
Current Report on Form 8-K.
2.9 NO COMMISSIONS. AESP has not incurred any obligation for any
finder's or broker's or agent's fees or commissions or similar compensation in
connection with the transactions contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE SHAREHOLDER
As a material inducement to AESP to enter into this Agreement and to
consummate the transactions contemplated hereby, the Company and the
Shareholder, jointly and severally, make the following representations and
warranties to AESP:
3.1 CORPORATE STATUS. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has the requisite power and authority to own or lease its properties and to
carry on its business as now being conducted. The Company is legally qualified
to transact business as a foreign corporation in each foreign jurisdiction where
failure to do so would have a Material Adverse Affect on the Company. Any
jurisdictions where the Company is so qualified are set forth in SCHEDULE 3.1.
The Company has fully complied with all of the requirements of any statute
governing the use and registration of fictitious names, and has the legal right
to use the names under which it operates its business. There is no pending or
threatened proceeding for the dissolution, liquidation, insolvency or
rehabilitation of the Company.
3.2 POWER AND AUTHORITY. The Company has the power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The Company has taken all
action necessary to authorize the execution and delivery of this Agreement, the
performance of its obligations hereunder and the consummation of the
transactions contemplated hereby. The Shareholder is an individual residing in
the Commonwealth of Pennsylvania, and has the requisite competence and authority
to execute and deliver this Agreement, to perform his obligations hereunder and
to consummate the transactions contemplated hereby.
3.3 ENFORCEABILITY. This Agreement has been duly executed and delivered by
the Company and the Shareholder, and constitutes the legal, valid and binding
obligation of each of them, enforceable against them in accordance with its
terms, except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
3.4 CAPITALIZATION. SCHEDULE 3.4 sets forth the number of shares of each
class of the Company's capital stock, the number of shares of the Company's
capital stock issued and
5
<PAGE>
outstanding, and the number of such shares of the Company's capital stock held
in treasury. All of the issued and outstanding shares of capital stock of the
Company (i) have been duly authorized and validly issued and are fully paid and
non-assessable, (ii) were issued in compliance with all applicable state and
federal securities laws, and (iii) were not issued in violation of any
preemptive rights or rights of first refusal. No preemptive rights or rights of
first refusal exist with respect to the shares of capital stock of the Company
and no such rights arise by virtue of or in connection with the transactions
contemplated hereby. There are no outstanding or authorized rights, options,
warrants, convertible securities, subscription rights, conversion rights,
exchange rights or other agreements or commitments of any kind that could
require the Company to issue or sell any shares of its capital stock (or
securities convertible into or exchangeable for shares of its capital stock).
There are no outstanding stock appreciation, phantom stock, profit participation
or other similar rights with respect to the Company. There are no proxies,
voting rights or other agreements or understandings with respect to the voting
or transfer of the capital stock of the Company. The Company is not obligated to
redeem or otherwise acquire any of its outstanding shares of capital stock.
3.5 SHAREHOLDERS OF THE COMPANY. SCHEDULE 3.5 sets forth, with respect to
the Company, the name, address and the number of outstanding shares of each
class of its capital stock owned of record and/or beneficially by, each
shareholder of the Company as of the close of business on the date of this
Agreement. As of the date hereof, the Shareholder constitutes the sole holder of
all issued and outstanding shares of capital stock of the Company, and the
Shareholder owns such shares free and clear of all Liens, restrictions and
claims of any kind, and AESP shall receive good and marketable title to such
shares at the Closing.
3.6 NO VIOLATION; CONSENTS AND APPROVAL. Except as set forth in SCHEDULE
3.6, the execution and delivery of this Agreement by the Company and the
Shareholder, the performance by them of their respective obligations hereunder
and the consummation by them of the transactions contemplated by this Agreement
will not (i) contravene any provision of the Articles of Incorporation or Bylaws
of the Company, (ii) violate or conflict with any law, statute, ordinance, rule,
regulation, decree, writ, injunction, judgment or order of any Governmental
Authority or of any arbitration award which is either applicable to, binding
upon or enforceable against the Company or the Shareholder, (iii) conflict with,
result in any material breach of, or constitute a material default (or an event
which would, with the passage of time or the giving of notice or both,
constitute a material default) under, or give rise to a right to terminate,
amend, modify, abandon or accelerate, any Designated Contract which is
applicable to, binding upon or enforceable against the Company or the
Shareholder, (iv) result in or require the creation or imposition of any Lien
upon or with respect to any of the property or assets of the Company, or (v)
require the consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, any court or tribunal or any other
Person, except any SEC and other filings required to be made by AESP.
3.7 RECORDS OF THE COMPANY. The copies of the Articles of Incorporation
and Bylaws which have been provided to AESP as of the date hereof are true,
accurate and complete and reflect all amendments made through the date of this
Agreement. The minute books for the Company made available to AESP for review
were correct and complete in all material respects as of the date of such
review, no further entries have been made through the date of this Agreement,
such minute books contain the true signatures of the persons purporting to have
signed them, and such minute books contain an accurate record of all material
corporate actions of the shareholders and directors (and any committees thereof)
of the Company taken by written consent or at a meeting since incorporation. All
material corporate actions taken by the Company have been duly authorized or
ratified. All accounts, books and ledgers of the Company have been accurately
kept and completed in all material
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respects, and there are no material inaccuracies or discrepancies of any kind
contained therein. The stock ledgers of the Company, attached hereto as SCHEDULE
3.7, contain accurate and complete records of all issuances, transfers and
cancellations of shares of the capital stock of the Company.
3.8 SUBSIDIARIES. The Company does not own, directly or indirectly, any
outstanding voting securities of or other interests in, or control, any other
corporation, partnership, joint venture or other business entity, except as set
forth in SCHEDULE 3.8.
3.9 FINANCIAL STATEMENTS. The Shareholder has delivered to AESP the
financial statements of the Company, including the notes thereto, for the twelve
(12) month period ended December 31, 1998 compiled by the Company, copies of
which are attached to SCHEDULE 3.9 hereto (collectively, the "Financial
Statements"). The balance sheet of the Company, dated as of January 31, 1999,
included in the Financial Statements is referred to herein as the "Current
Balance Sheet." The Financial Statements fairly present the financial position
of the Company at the balance sheet date and the results of operations for the
period covered thereby, and have been prepared in accordance with the Company's
past accounting practices, consistently applied throughout the periods
indicated. There are no extraordinary or material non-recurring items of income
or expense during the periods covered by the Financial Statements which are not
reflected therein and the balance sheets included in the Financial Statements do
not reflect any writeup or revaluation increasing the book value of any assets,
except as specifically disclosed in the notes thereto. The Financial Statements
reflect all adjustments necessary for a fair presentation of the financial
information contained therein.
3.10 CHANGES SINCE THE CURRENT BALANCE SHEET DATE. Except as set forth in
SCHEDULE 3.10, since the date of the Current Balance Sheet, the Company has not
(i) issued any capital stock or other securities; (ii) made any distribution of
or with respect to its capital stock or other securities or purchased or
redeemed any of its securities; (iii) paid any bonus to or increased the rate of
compensation of any of its officers or salaried employees or amended any other
terms of employment of such persons; (iv) sold, leased or transferred any of its
properties or assets other than in the ordinary course of business consistent
with past practice; (v) made or obligated itself to make capital expenditures
greater than $10,000 in the aggregate; (vi) made any payment greater than
$10,000 in the aggregate in respect of its liabilities other than in the
ordinary course of business consistent with past practice; (vii) incurred any
obligations or liabilities (including any indebtedness) or entered into any
transaction or series of transactions involving in excess of $10,000 in the
aggregate out of the ordinary course of business, except for this Agreement and
the transactions contemplated hereby; (viii) suffered any theft, damage,
destruction or casualty loss, not covered by insurance and for which a timely
claim was filed, in excess of $10,000 in the aggregate; (ix) suffered any losses
in excess of $10,000 in the aggregate (whether or not covered by insurance); (x)
waived, canceled, compromised or released any rights having a value in excess of
$10,000 in the aggregate; (xi) made or adopted any change in its accounting
practice or policies; (xii) made any adjustment to its books and records other
than in respect of the conduct of its business activities in the ordinary course
consistent with past practice; (xiii) entered into any transaction with any
Affiliate other than intercompany transactions in the ordinary course of
business consistent with past practice; (xiv) entered into any employment
agreement; (xv) terminated, amended or modified any agreement involving an
amount in excess of $10,000 in the aggregate; (xvi) imposed any security
interest or other Lien on any of its assets other than in the ordinary course of
business consistent with past
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practice; (xvii) delayed paying any accounts payable which are due and payable
except to the extent being contested in good faith; (xviii) made or pledged any
charitable contributions in excess of $5,000 in the aggregate; (xix) entered
into any other transaction or been subject to any event which has or may have a
Material Adverse Effect on the Company; or (xx) agreed to do or authorized any
of the foregoing.
3.11 LIABILITIES OF THE COMPANY. The Company does not have any liabilities
or obligations, whether accrued, absolute, contingent or otherwise, except (a)
to the extent reflected or taken into account in the Current Balance Sheet and
not heretofore paid or discharged, (b) liabilities incurred in the ordinary
course of business consistent with past practice since the date of the Current
Balance Sheet (none of which relates to breach of contract, breach of warranty,
tort, infringement or violation of law, or which arose out of any action, suit,
claim, governmental investigation or arbitration proceeding), (c) normal
accruals, reclassifications, and audit adjustments which would be reflected on
an audited financial statement and which would not be material in the aggregate,
(d) liabilities incurred in the ordinary course of business prior to the date of
the Current Balance Sheet which, in accordance with the Company's past
accounting practices, consistently applied, were not recorded thereon.
3.12 LITIGATION. Except as set forth in SCHEDULE 3.12, there is no action,
suit, or other legal or administrative proceeding or governmental investigation
pending or threatened, or, to the best of the Company's or Shareholder's
knowledge, anticipated or contemplated against, by or affecting the Company, or
any of its properties or assets, or the Shareholder, or which questions the
validity or enforceability of this Agreement or the transactions contemplated
hereby, and there is no basis for any of the foregoing. There are no outstanding
orders, decrees or stipulations issued by any Governmental Authority in any
proceeding to which the Company is or was a party which have not been complied
with in full or which continue to impose any material obligations on the
Company.
3.13 ENVIRONMENTAL MATTERS. The Company has complied with all
environmental laws, rules and regulations applicable to its operations,
properties and assets which, if not complied with, would have a Material Adverse
Effect on the Company.
3.14 REAL ESTATE.
(a) The Company does not own any real property or any interest
therein; and
(b) SCHEDULE 3.14(B) sets forth a list of all leases, licenses or
similar agreements ("Leases") to which the Company is a party (copies of which
have previously been furnished to AESP), in each case setting forth (A) the
lessor and lessee thereof and the date and term of each of the Leases, (B) the
legal description, including street address, of each property covered thereby,
and (C) a brief description (including size and function) of the principal
improvements and buildings thereon (the "Leased Premises"). To the best of the
Company's or Shareholder's knowledge, the Leases are in full force and effect
and have not been amended, and no party thereto is in default or breach under
any such Lease. No event has occurred which, with the passage of time or the
giving of notice or both, would cause a material breach of or default under any
of such Leases. There is no breach or, to the best of the Company's or
Shareholder's knowledge, no anticipated breach by any other party to such
Leases. With respect to each such Leased Premises:
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(i) The Company is the owner of all leasehold interests
purported to be granted by such leases.
(ii) The portions of the buildings located on the Leased
Premises that are used in the business of the Company are each in good
repair and condition, normal wear and tear excepted, and are in the
aggregate sufficient to satisfy the Company's current and reasonably
anticipated normal business activities as conducted thereat;
(iii) Each of the Leased Premises (a) has direct access to
public roads or access to public roads by means of a perpetual access
easement, such access being sufficient to satisfy the current and
reasonably anticipated normal transportation requirements of the Company's
business as presently conducted at such parcel; and (b) is served by all
utilities in such quantity and quality as are sufficient to satisfy the
current normal business activities as conducted at such parcel; and
(iv) The Company has not received notice of: (a) any
condemnation proceeding with respect to any portion of the Leased Premises
or any access thereto, and to the best of the Company's or Shareholder's
knowledge, no such proceeding is contemplated by any Governmental
Authority; or (b) any special assessment which may affect any of the
Leased Premises, and to the best of the Company's or Shareholder's
knowledge, no such special assessment is contemplated by any Governmental
Authority.
3.15 GOOD TITLE TO AND CONDITION OF ASSETS.
(a) Except as set forth on SCHEDULE 3.15(A), the Company has good
and marketable title to all of its Assets (as hereinafter defined), free and
clear of any Liens or restrictions on use. For purposes of this Agreement, the
term "Assets" means all of the properties and assets of the Company, other than
the Leased Premises, whether personal or mixed, tangible or intangible, wherever
located.
(b) The Fixed Assets (as hereinafter defined) currently in use or
necessary for the business and operations of the Company are in good operating
condition, normal wear and tear excepted. For purposes of this Agreement, the
term "Fixed Assets" means all vehicles, machinery, equipment, tools, supplies,
leasehold improvements, furniture and fixtures used by or located on the
premises of the Company or set forth on the Current Balance Sheet or acquired by
the Company since the date of the Current Balance Sheet. SCHEDULE 3.15(B) lists
the vehicles owned, leased or used by the Company, setting forth the make,
model, description of body and chassis, vehicle identification number, and year
of manufacture, and for each vehicle, whether it is owned or leased, and if
owned, the name of any lienholder and the amount of the lien, and if leased, the
name of the lessor.
3.16 COMPLIANCE WITH LAWS.
(a) Except as set forth in SCHEDULE 3.16(A), the Company is and has
been in compliance with, in all material respects, all laws, regulations and
orders applicable to it, its business
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and operations (as conducted by it now and in the past), the Assets and the
Leased Premises and any other properties and assets (in each case owned or used
by it now or in the past). The Company has not been cited, fined or otherwise
notified of any asserted past or present failure to comply with any laws,
regulations or orders and no proceeding with respect to any such violation is
pending or threatened.
(b) Neither the Company, nor any of its employees or agents, has
made any payment of funds in connection with the business of the Company which
is prohibited by law, and no funds have been set aside to be used in connection
with the business of the Company for any payment prohibited by law.
(c) Except as set forth in SCHEDULE 3.16(C), the Company is and at
all times has been in full compliance with the terms and provisions of the
Immigration Reform and Control Act of 1986, as amended (the "Immigration Act").
With respect to each Employee (as defined in 8 C.F.R. 274a.1(f)) of the Company
for whom compliance with the Immigration Act is required, the Company has on
file a true, accurate and complete copy of (i) each Employee's Form I-9
(Employment Eligibility Verification Form) and (ii) all other records, documents
or other papers prepared, procured and/or retained by the Company pursuant to
the Immigration Act. The Company has not been cited, fined, served with a Notice
of Intent to Fine or with a Cease and Desist Order, nor has any action or
administrative proceeding been initiated or threatened against the Company, by
the Immigration and Naturalization Service by reason of any actual or alleged
failure to comply with the Immigration Act.
(d) The Company is not subject to any Contract, decree or injunction
to which the Company is a party which restricts the continued operation of any
business of the Company or the expansion thereof to other geographical areas,
customers and suppliers or lines of business.
3.17 LABOR AND EMPLOYMENT MATTERS. SCHEDULE 3.17 sets forth the name,
address, social security number and current rate of compensation of the
employees of the Company. The Company is not a party to or bound by any
collective bargaining agreement or any other agreement with a labor union, and,
to the best of the Company's or Shareholder's knowledge, there has been no
effort by any labor union during the twenty-four (24) months prior to the date
hereof to organize any employees of the Company into one or more collective
bargaining units. There is no pending or, to the best of the Company's or
Shareholder's knowledge, threatened labor dispute, strike or work stoppage which
affects or which may affect the business of the Company or which may interfere
with its continued operations. Neither the Company nor any agent, representative
or employee thereof has within the last twenty-four (24) months committed any
unfair labor practice as defined in the National Labor Relations Act, as
amended, and there is no pending or threatened charge or complaint against the
Company by or with the National Labor Relations Board or any representative
thereof. There has been no strike, walkout or work stoppage involving any of the
employees of the Company during the twenty-four (24) months prior to the date
hereof. The Shareholder is not aware that any executive or key employee or group
of employees has any plans to terminate his, her or their employment with the
Company as a result of the Stock Purchase or otherwise. The Company has
complied, in all material respects, with applicable laws, rules and regulations
relating to employment, civil rights and equal employment opportunities,
including but not limited to, the Civil Rights Act of 1964, the Fair Labor
Standards Act, and the Americans with Disabilities Act, as amended.
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3.18 EMPLOYEE BENEFIT PLANS.
(a) EMPLOYEE BENEFIT PLANS. SCHEDULE 3.18(A) contains a list setting
forth each employee benefit plan or arrangement of the Company, including but
not limited to any pension, medical, health or other insurance, share incentive,
share option, deferred compensation or employee profit sharing or bonus plans,
in which employees, their spouses or dependents, of the Company participate
("Employee Benefit Plans"), copies of which, together with the most recent
annual reports on Form 5500 and summary plan descriptions with respect thereto,
were furnished to AESP. To the best of the Company's or Shareholder's knowledge,
there are no qualified Employee Benefit Plans or employee welfare benefit plans
as described under Section 3(1) of ERISA.
(b) COMPLIANCE WITH LAW. With respect to each Employee Benefit Plan
(i) each has been administered in all material respects in compliance with its
terms and with all applicable laws, (ii) no actions, suits, claims or disputes
are pending, or, to the best of the Company's or Shareholder's knowledge,
threatened; (iii) no audits, inquiries, reviews, proceedings, claims, or demands
are pending with any governmental or regulatory agency; (iv) to the knowledge of
the Company, there are no facts which could give rise to any material liability
in the event of any such investigation, claim, action, suit, audit, review, or
other proceeding; and (v) all material reports, returns, and similar documents
required to be filed with any governmental agency or distributed to any plan
participant have been duly or timely filed or distributed.
3.19 TAX MATTERS. All Tax Returns required to be filed prior to the date
hereof with respect to the Company or any of its income, properties, franchises
or operations have been timely filed (including, without limitation, Tax Returns
for the year ended 1998), each such Tax Return has been prepared in compliance
with all applicable laws and regulations, and all such Tax Returns are true and
accurate in all material respects. All Taxes due and payable by or with respect
to the Company have been paid, are accrued on the Current Balance Sheet or will
be accrued on its books and records as of the Closing. Except as set forth in
SCHEDULE 3.19 hereto: (i) with respect to each taxable period of the Company,
the Company has not has been audited by the relevant taxing authority; (ii) no
deficiency or proposed adjustment which has not been settled or otherwise
resolved for any amount of Taxes has been asserted or assessed by any taxing
authority against the Company; (iii) the Company has not consented to extend the
time in which any Taxes may be assessed or collected by any taxing authority;
(iv) the Company has not requested or been granted an extension of the time for
filing any Tax Return to a date later than the Closing Date; (v) there is no
action, suit, taxing authority proceeding, or audit or claim for refund now in
progress, pending or threatened against or with respect to the Company regarding
Taxes; (vi) there are no Liens for Taxes (other than for current Taxes not yet
due and payable) upon the assets of the Company; (vii) the Company will not be
required (a) as a result of a change in method of accounting for a taxable
period ending on or prior to the Closing Date, to include any adjustment under
any provision of law in taxable income for any taxable period (or portion
thereof) beginning after the Closing or (b) as a result of any provision of law
existing as of the date hereof, to include any item of income or exclude any
item of deduction from any taxable period (or portion thereof) beginning after
the Closing; (viii) the Company has not been a member of an affiliated group or
filed or been included in a combined, consolidated or unitary income Tax Return;
(ix) the Company is not a party to or bound by any tax allocation or tax sharing
agreement or has any current or potential contractual obligation to indemnify
any other Person with respect to Taxes; (x) no claim has ever been asserted
against the Company in writing by a taxing
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authority in a jurisdiction where the Company does not file Tax Returns that the
Company is or may be subject to Taxes assessed by such jurisdiction; and (xi)
true, correct and complete copies of all income and sales Tax Returns filed by
or with respect to the Company for the years ending December 31, 1995, 1996 and
1997 have been furnished or made available to AESP.
3.20 INSURANCE. The Company is covered by the valid and enforceable
policies of insurance covering its respective properties, assets and businesses
set forth on SCHEDULE 3.20 hereto (the "Insurance Policies"). Such Insurance
Policies are in full force and effect, and all premiums due thereon have been
paid. As of the Closing Date, each of the Insurance Policies will be in full
force and effect. None of the Insurance Policies will lapse or terminate as a
result of the transactions contemplated by this Agreement. The Company has
complied in all material respects with the provisions of such Insurance
Policies. SCHEDULE 3.20 contains a brief description of each pending claim under
any of the Insurance Policies that relates to loss or damage to the properties,
assets or businesses of the Company. To the best of the Company's or
Shareholder's knowledge, the Company has not failed to give, in a timely manner,
any notice required under any of the Insurance Policies to preserve its rights
thereunder.
3.21 RECEIVABLES. All of the Receivables (as hereinafter defined) are
valid and legally binding, represent bona fide transactions and arose in the
ordinary course of business of the Company. All of the Receivables are good and
collectible receivables, and will be collected in full in accordance with the
terms of such receivables (and in any event within six (6) months following the
Closing), without setoff or counterclaims, subject to the allowance for doubtful
accounts, if any, set forth on the Current Balance Sheet as reasonably adjusted
since the date of the Current Balance Sheet in the ordinary course of business
consistent with past practice. For purposes of this Agreement, the term
"Receivables" means all receivables of the Company as of Closing Date, including
all trade account receivables (including, without limitation, receivables from
ASC) arising from the provision of services, sale of inventory and notes
receivable.
3.22 LICENSES AND PERMITS. To the best of the Company's or Shareholder's
knowledge, the Company possesses all licenses and required governmental or
official approvals, permits or authorizations (collectively, the "Permits")
which are material for its businesses and operations, and SCHEDULE 3.22 contains
a true and complete list of all such Permits. All such Permits are valid and in
full force and effect, the Company is in full compliance with the respective
requirements thereof, and no proceeding is pending or threatened to revoke or
amend any of them. None of such Permits is or will be impaired or in any way
affected by the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby.
3.23 ADEQUACY OF THE ASSETS; RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS;
AFFILIATED TRANSACTIONS. The Assets and Leased Premises constitute, in the
aggregate, all of the assets and properties necessary for the conduct of the
business of the Company in the manner in which and to the extent to which such
business is currently being conducted. To the best of the Company's or
Shareholder's knowledge, no current supplier to the Company of items essential
to the conduct of its business has threatened to terminate its business
relationship with it for any reason. The Company does not have any direct or
indirect interest in any customer, supplier or competitor of the Company, or in
any person from whom or to whom the Company leases real or personal property.
Except as set forth on SCHEDULE 3.23, no officer, director or shareholder of the
Company, nor any person related
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by blood or marriage to any such person, nor any entity in which any such person
owns any beneficial interest, is a party to any Designated Contract or
transaction with the Company or has any interest in any property used by the
Company.
3.24 INTELLECTUAL PROPERTY. Except as set forth on SCHEDULE 3.24(B), the
Company has full legal right, title and interest in and to all trademarks,
service marks, trade names, copyrights, know-how, patents, trade secrets,
proprietary computer software, data bases and compilations, licenses (including
licenses for the use of computer software programs), and other intellectual
property used in the conduct of its business (the "Intellectual Property").
SCHEDULE 3.24(A) sets forth all of the Company's trademarks, service marks,
trade names, patents and licenses. Except as set forth in SCHEDULE 3.24(B), to
the best of the Company's or Shareholder's knowledge, the business of the
Company as presently conducted, and the unrestricted conduct and the
unrestricted use and exploitation of the Intellectual Property, does not
infringe or misappropriate any rights held or asserted by any Person, and no
Person is infringing on the Intellectual Property. Attachment 1 to SCHEDULE
3.24(B) is the Settlement, Release and License Agreement between the Company and
Superior Modular Products, Inc. (the "SMP License Agreement") which agreement
provides the Company with a full and final settlement and release for all claims
and damages relating to the Company's use of its Category 5 connector product
line and its alleged violation of U.S. Patent No. 5,299,956 and providing for a
license of the patented technology at a royalty not to exceed 15(cents) per
port. Except as set forth on SCHEDULE 3.24(B), no payments are required for the
continued use of the Intellectual Property. None of the Intellectual Property
has ever been declared invalid or unenforceable, or is the subject of any
pending or, to the best of the Company's or Shareholder's knowledge, threatened
action for opposition, cancellation, declaration, infringement, or invalidity,
unenforceability or misappropriation or like claim, action or proceeding.
3.25 CONTRACTS. SCHEDULE 3.25 sets forth a list of each Contract to which
the Company is a party or by which it or its properties and assets are bound and
which is material to its business, assets or properties (the "Designated
Contracts"), true and correct copies of which have been provided to AESP. The
copy of each Designated Contract furnished to AESP is a true and complete copy
of the document it purports to represent and reflects all amendments thereto
made through the date of this Agreement. The Company has not violated any of the
material terms or conditions of any Designated Contract or any term or condition
which would permit termination or material modification of any Designated
Contract, and all of the covenants to be performed by any other party thereto
have been fully performed and there are no claims for breach or indemnification
or notice of default or termination under any Designated Contract. No event has
occurred which constitutes, or after notice or the passage of time, or both,
would constitute, a default by the Company under any Designated Contract, and no
such event has occurred which constitutes or would constitute a default by any
other party. The Company is not subject to any liability or payment resulting
from renegotiation of amounts paid it under any Designated Contract. As used in
this Section, Designated Contracts shall include, without limitation, (a) loan
agreements, indentures, mortgages, pledges, hypothecations, deeds of trust,
conditional sale or title retention agreements, security agreements, equipment
financing obligations or guaranties, or other sources of contingent liability in
respect of any indebtedness or obligations to any other Person, or letters of
intent or commitment letters with respect to same; (b) contracts obligating the
Company to provide products or services for a period of one year or more; (c)
leases of real property, and leases of personal property not cancelable without
penalty on notice of sixty (60) days or less; (d) distribution, sales agency or
franchise or
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similar agreements, or agreements providing for an independent contractor's
services, or letters of intent with respect to same; (e) employment agreements,
management service agreements, consulting agreements, confidentiality
agreements, non-competition agreements, any other agreements relating to any
employee, officer or director of the Company, and all employee handbooks, policy
statements and similar plans; (f) licenses, assignments or transfers of
trademarks, trade names, service marks, patents, copyrights, trade secrets or
know how, or other agreements regarding proprietary rights or intellectual
property; (g) any Contract relating to pending capital expenditures by the
Company; and (h) other material Contracts or understandings (which for the
purposes of this section only shall mean Contracts or understandings related to
obligations of $5,000.00 or more), irrespective of subject matter and whether or
not in writing not entered into in the ordinary course of business by the
Company and not otherwise disclosed on the Schedules.
3.26 CUSTOMER LISTS AND RECURRING REVENUE. SCHEDULE 3.26 is a true,
correct and complete list of all existing customers (collectively, the
"Customers") of the Company. Other than the Customers identified as such on
SCHEDULE 3.26, no customer of the Company as of the date of this Agreement
accounts for more than 1% of the Company's annual revenue. SCHEDULE 3.26 sets
forth each Customer's name, address and account number.
3.27 ACCURACY OF INFORMATION FURNISHED BY THE SHAREHOLDER. No
representation or warranties furnished by the Shareholder pursuant to this
Agreement, and no document, certificate, schedule or exhibit furnished to AESP
pursuant to this Agreement contains or shall contain any untrue statement of a
material fact or omits or shall omit any material fact necessary to make the
information contained therein not misleading. The Shareholder has provided AESP
with true, accurate and complete copies of all documents listed or described in
the various Schedules attached hereto.
3.28 INVESTMENT INTENT; ACCREDITED INVESTOR STATUS; SECURITIES DOCUMENTS.
The Shareholder is acquiring the AESP Shares and Notes hereunder for his own
account for investment and not with a view to, or for the sale in connection
with, any distribution of any of the Notes except in compliance with applicable
state and federal securities laws. The Shareholder has had the opportunity to
discuss the transactions contemplated hereby with AESP and has had the
opportunity to obtain such information pertaining to AESP as has been requested,
including but not limited to filings made by AESP with the SEC under the
Exchange Act, including the most recent filing by AESP on Form 10-K, and any
filings on Forms 10-Q or 8-K since the end of AESP's last fiscal year end. The
Shareholder has such knowledge and experience in business or financial matters
he is capable of evaluating the merits and risks of an investment in the AESP
Shares. The certificates representing the AESP Shares shall bear the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND IN COMPLIANCE WITH
APPLICABLE SECURITIES LAWS OF ANY STATE WITH RESPECT THERETO, OR IN
ACCORDANCE WITH AN OPINION OF COUNSEL IN FORM AND
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SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
AESP may, unless a Registration Statement is in effect covering such shares,
place stop transfer orders with its transfer agents with respect to such
certificates in accordance with federal securities laws.
3.29 BANK ACCOUNTS; BUSINESS LOCATIONS. SCHEDULE 3.29 sets forth all
accounts of the Company with any bank, broker or other depository institution,
and the names of all persons authorized to withdraw funds from each such
account. As of the date hereof, the Company has no office or place of business
other than as identified on SCHEDULES 3.29 and, except for equipment leased to
customers in the ordinary course of business, all locations where the equipment,
inventory, chattel paper and books and records of the Company is located as of
the date hereof are identified on SCHEDULE 3.29.
3.30 NAMES; PRIOR ACQUISITIONS. All names under which the Company does
business as of the date hereof are specified on SCHEDULE 3.30. Except as set
forth on SCHEDULE 3.30, the Company has not changed its name or used any assumed
or fictitious name, or been the surviving entity in a merger, acquired any
business or changed its principal place of business or chief executive office,
within the past three years.
3.31 NO OTHER MANAGEMENT. The Shareholder has been the primary person who
has operated the Company during the last five (5) years and has exercised final
executive decision making authority for the Company during the last five (5)
years. Subject to AESP's Board of Directors control (which shall be the Board of
the Company after the Closing Date), on an on-going basis, AESP shall not
require any other person beyond the Shareholder to operate the Company and
achieve the results which have been communicated to AESP.
3.32 NO COMMISSIONS. Neither the Company nor the Shareholder has incurred
any obligation for any finder's or broker's or agent's fees or commissions or
similar compensation in connection with the transactions contemplated hereby.
3.33 NO RELIANCE ON FORECASTS. The Company makes no representation or
warranty regarding any projections provided by it to AESP, including those that
may contain forecasts or projections of its future operating results.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 FURTHER ASSURANCES; COMPLIANCE WITH COVENANTS. Each party shall
execute and deliver such additional instruments and other documents and shall
take such further actions as may be necessary or appropriate to effectuate,
carry out and comply with all of the terms of this Agreement and the
transactions contemplated hereby. The Shareholder shall cause the Company to
comply with all of the respective covenants of the Company under this Agreement.
At the Closing,
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the Company and the Shareholder covenant and agree to deliver to AESP the
certificates, opinions and other documents required to be delivered to AESP
pursuant to ARTICLE V, and AESP covenants and agrees to deliver to the Company
and the Shareholder the certificates and other documents required to be
delivered to the Company and the Shareholder pursuant to ARTICLE VI.
4.2 EMPLOYMENT AGREEMENT. The Shareholder shall enter into an
Employment Agreement, in the form of EXHIBIT 4.2 attached hereto with AESP as
of, and as a condition to, Closing.
4.3 COMPANY EMPLOYEES. SCHEDULE 4.3 attached hereto sets forth the annual
salaries of certain employees of the Company which AESP (through the Company)
agrees to pay to such employees while employed by the Company following the
Closing.
4.4 COOPERATION. Each of the parties agrees to cooperate with the other in
the preparation and filing of all forms, notifications, reports and information,
if any, required or reasonably deemed advisable pursuant to any law, rule or
regulation or the rules of NASDAQ (or any exchange on which the AESP Common
Stock may be listed) in connection with the transactions contemplated by this
Agreement and to use their respective best efforts to agree jointly on a method
to overcome any objections by any Governmental Authority to any such
transactions.
4.5 OTHER ACTIONS. Each of the parties hereto shall take all appropriate
actions, and do, or cause to be done, all things necessary, proper or advisable
under any applicable laws, regulations and Contracts to consummate and make
effective the transactions contemplated herein, including, without limitation,
obtaining all licenses, permits, consents, approvals, authorizations,
qualifications and orders of any Governmental Authority and parties to Contracts
with the Company as are necessary for the consummation of the transactions
contemplated hereby. Each of parties shall make on a prompt and timely basis all
governmental or regulatory notifications and filings required to be made by it
for the consummation of the transactions contemplated hereby. The parties also
agree to use best efforts to defend all lawsuits or other legal proceedings
challenging this Agreement or the consummation of the transactions contemplated
hereby and to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby.
4.6 CONFIDENTIALITY; PUBLICITY. Except as may be required by law
(including, without limitation, rules for NASDAQ) or as otherwise permitted or
expressly contemplated herein, no party hereto or their respective Affiliates,
employees, agents and representatives (including attorneys and accountants
engaged by the parties in connection with the Stock Purchase), shall disclose to
any third party this Agreement or the subject matter or terms hereof without the
prior consent of the other parties hereto. No press release or other public
announcement related to this Agreement or the transactions contemplated hereby
shall be issued by any party hereto without the prior approval of the other
parties, except that AESP may make such public disclosure which it believes in
good faith to be required by law or by the terms of any listing agreement with
or requirements of a securities exchange (in which case AESP will inform an
officer of the Company prior to making such disclosure).
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4.7 RESTRICTIVE COVENANTS. The Shareholder agrees to those covenants set
forth in the Employment Agreement which is incorporated herein by reference to
EXHIBIT 4.2.
4.8 CERTAIN TAX MATTERS. The parties agree that after the Closing, AESP
shall prepare, or cause to be prepared, and file, or cause to be filed, all Tax
Returns (including any amendments to previously filed Tax Returns) for the
Company for any period ending on or before the Closing. AESP shall provide such
Tax Returns to the Shareholder for review at least thirty (30) days prior to
their due date (including extensions where applicable). After the Closing, the
Shareholder shall provide AESP with such information and records and access to
such of its officers, directors, employees and agents as may be reasonably
requested by AESP in connection with the preparation of any tax return or any
audit or other proceeding relating to the Company.
4.9 SHAREHOLDER VOTE. The Shareholder, in executing this Agreement,
consents as a shareholder of the Company to the Stock Purchase and the
transactions contemplated hereby, and waives notice of any meeting in connection
therewith and hereby releases and waives all rights with respect to the
transactions contemplated hereby under any agreements relating to the sale,
purchase or voting of any capital stock of the Company.
4.10 PAYOFF AND ESTOPPEL LETTERS. Prior to the Closing, the Company shall
request and deliver to AESP payoff and estoppel letters from such holders of any
Indebtedness of the Company, which letters shall contain payoff amounts, per
diem interest, wire transfer instructions and an agreement to deliver to AESP,
upon full payment of any such Indebtedness, UCC-3 termination statements,
satisfactions of mortgage or other appropriate releases and any original
promissory notes or other evidences of indebtedness marked canceled.
4.11 COMPANY COMMON STOCK; RELEASES. At the Closing, the Shareholder
covenants and agrees to deliver to AESP: (i) all certificates evidencing shares
of capital stock of the Company held by him along with stock powers executed in
blank; and (ii) a release in such form as is reasonably satisfactory to AESP
releasing all claims of any nature against the Company, if any.
ARTICLE V
CONDITIONS TO THE OBLIGATIONS OF AESP
The obligations of AESP to effect the Stock Purchase shall be subject to
the fulfillment at or prior to the Closing of the following conditions, any or
all of which may be waived in whole or in part in writing by AESP:
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of the Shareholder contained in
this Agreement shall be true and correct at and as of the Closing Date with the
same force and effect as though made at and as of that time except (i) for
changes specifically permitted by or disclosed on any schedule to this
Agreement, and (ii) that those representations and warranties which address
matters only as of a particular date shall remain true and correct as of such
date. The Company and the Shareholder shall have performed and complied with all
of their respective obligations required by this Agreement to be
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performed or complied with at or prior to the Closing. The Company and the
Shareholder shall have delivered to AESP a certificate, dated as of the Closing,
duly signed (in the case of the Company, by its President), certifying that such
representations and warranties are true and correct and that all such
obligations have been complied with and performed.
5.2 CORPORATE CERTIFICATE. The Shareholder shall have delivered to AESP
(i) copies of the articles of incorporation and bylaws of the Company as in
effect immediately prior to the Closing, (ii) copies of resolutions adopted by
the Board of Directors and Shareholder of the Company authorizing the
transactions contemplated by this Agreement, and (iii) a certificate of good
standing of the Company issued by the Secretary of State of the Commonwealth of
Pennsylvania as of a date not more than ten (10) days prior to the Closing Date,
certified in the case of subsections (i) and (ii) of this Section as of the
Closing Date by the Secretary of the Company as being true, correct and
complete.
5.3 OPINION OF COUNSEL. AESP shall have received an opinion dated as of
the Closing Date from counsel for the Company and the Shareholder, in form and
substance acceptable to AESP, to the effect that:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania and is
authorized to carry on the business now conducted by it and to own or lease the
properties now owned or leased by it;
(b) The Company has obtained all necessary authorizations and
consents of its Board of Directors and the Shareholder to effect the Stock
Purchase;
(c) All issued and outstanding shares of capital stock of the
Company are owned as set forth on SCHEDULE 3.5 hereto; and
(d) This Agreement is a valid and binding obligation of the Company
and the Shareholder, and enforceable against the Company and the Shareholder in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors' rights generally or general equitable principles.
5.4 CONSENTS. The Company shall have received consents to the transactions
contemplated hereby and waivers of rights to terminate or modify any material
rights or obligations of the Company from any Person from whom such consent or
waiver is required under any Contract or instrument as of a date not more than
ten (10) days prior to the Closing Date, or who, as a result of the transactions
contemplated hereby, would have such rights to terminate or modify such
Contracts or instruments, either by the terms thereof or as a matter of law.
5.5 COMPANY COMMON STOCK. At the Closing, the Shareholder shall have
delivered to AESP all certificates evidencing the shares of capital stock of the
Company held by him, and duly executed stock powers with or other appropriate
transfer documents.
5.6 EMPLOYMENT AGREEMENT. The Shareholder shall have entered into an
employment agreement in the form of EXHIBIT 4.2 with AESP.
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5.7 NO ADVERSE LITIGATION. There shall not be pending or threatened any
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit, invalidate the Stock Purchase or collect
damages arising out of the Stock Purchase or any other transaction contemplated
hereby, and which, in the judgment of AESP, makes it inadvisable to proceed with
the Stock Purchase and other transactions contemplated hereby.
5.8 BOARD APPROVAL. The Boards of Directors of AESP and the Company
and the Shareholder shall have authorized and approved this Agreement, the Stock
Purchase and transactions contemplated hereby.
5.9 BANK APPROVAL. The institutional lenders of AESP's credit facility
shall have authorized and approved this Agreement, the Stock Purchase and
transactions contemplated hereby.
5.10 DUE DILIGENCE REVIEW. AESP shall be satisfied with the results
of its due diligence review.
5.11 RELEASES. The Shareholder shall deliver to AESP a release (the
"Release") in such form as is reasonably satisfactory to AESP releasing all
claims of any nature against the Company, if any.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF
THE COMPANY AND THE SHAREHOLDER
The obligations of the Company and the Shareholder to effect the Stock
Purchase shall be subject to the fulfillment at or prior to the Closing of the
following conditions, any or all of which may be waived in whole or in part in
writing by the Company and the Shareholder:
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of AESP contained in this
Agreement shall be true and correct at and as of the Closing Date with the same
force and effect as though made at and as of that time except (i) for changes
specifically permitted by or disclosed pursuant to this Agreement, and (ii) that
those representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date. AESP shall have
performed and complied with all of its obligations required by this Agreement to
be performed or complied with at or prior to the Closing Date. AESP shall have
delivered to the Company and the Shareholder a certificate, dated as of the
Closing Date, and signed by an officer, certifying that such representations and
warranties are true and correct and that all such obligations have been complied
with and performed.
6.2 CORPORATE CERTIFICATE. AESP shall have delivered to the Shareholder
(i) copies of the articles of incorporation and bylaws of AESP as in effect
immediately prior to the Closing Date, (ii) copies of resolutions adopted by the
Board of Directors of AESP authorizing the transactions contemplated by this
Agreement, and (iii) a certificate of good standing of the Company issued by the
Secretary of State of the State of Florida as of a date not more than ten (10)
days prior to the
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Closing Date, certified in the case of subsections (i) and (ii) of this Section
as of the Closing Date by the Secretary of AESP as being true, correct and
complete.
6.3 OPINION OF COUNSEL. The Shareholder shall have received an opinion
dated as of the Closing Date from counsel for AESP, in form and substance
acceptable to the Shareholder, to the effect that:
(a) AESP is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida and is authorized to carry
on the business now conducted by it and to own or lease the properties now owned
or leased by it;
(b) This Agreement and the transactions contemplated thereby have
been approved by all necessary corporate action; and
(c) This Agreement is a valid and legally binding instrument of and
enforceable against AESP in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' right generally or general equitable
principals.
6.4 CONSENTS. AESP shall have received consents to the transactions
contemplated hereby and waivers of rights to terminate or modify any material
rights or obligations of AESP from any Person from whom such consent or waiver
is required under any Contract or instrument as of a date not more than ten (10)
days prior to the Closing Date, or who, as a result of the transactions
contemplated hereby, would have such rights to terminate or modify such
Contracts or instruments, either by the terms thereof or as a matter of law.
6.5 EMPLOYMENT AGREEMENT. AESP shall cause the Company to enter into an
Employment Agreement with the Shareholder in the form of EXHIBIT 4.2.
6.6 NO ADVERSE LITIGATION. There shall not be pending or threatened any
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit, invalidate the Stock Purchase or collect
damages arising out of the Stock Purchase or any other transaction contemplated
hereby, and which, in the judgment of Shareholder, makes it inadvisable to
proceed with the Stock Purchase and other transactions contemplated hereby.
6.7 BOARD APPROVAL. The Board of Directors of the Company and the
Shareholder shall
have authorized and approved this Agreement, the Stock Purchase and
transactions contemplated hereby.
6.8 PURCHASE PRICE. At the Closing, AESP shall have delivered the
Purchase Price to the Shareholder in accordance with SECTION 1.3.
6.9 NO ORDER OR INJUNCTION. No court of competent jurisdiction or other
governmental body shall have issued or entered any order or injunction
restraining or prohibiting the transactions contemplated hereby, which remains
in effect at the time of the Closing.
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ARTICLE VII
REGISTRATION RIGHTS
7.1 PIGGY-BACK REGISTRATION RIGHTS. The Shareholder shall have the
following piggyback registration rights with respect to the AESP Shares issued
to him hereunder:
(a) Within twelve (12) months from the Closing Date, whenever AESP
proposes to file a Registration Statement (as defined below), it will, prior to
such filing, give written notice to the Shareholder of its intention to do so
and, upon the written request of the Shareholder given within five (5) business
days after AESP provides such notice (which request shall state the intended
method of disposition of the Registrable Shares (defined below)), AESP shall use
its best efforts to cause all such AESP Shares (the "Registrable Shares"), which
AESP has been requested by the Shareholder to register, to be registered under
the Securities Act, to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution specified in
the request of the Shareholder; PROVIDED, HOWEVER, that AESP shall have the
right to postpone or withdraw any registration effected pursuant to this Section
without any obligation to the Shareholder whatsoever, although nothing herein
shall alter Shareholder's demand registration rights set forth in SECTION 7.2.
(b) In connection with any registration under this ARTICLE VII
involving an "underwritten offering," (which for the purposes of this Agreement
shall mean an offering whereby a third party, individually or as part of a
group, purchases AESP's securities in order to effect a public distribution of
such securities) AESP shall not be required to include any Registrable Shares in
such registration unless the holder thereof accepts the terms of the
underwriting as agreed upon between AESP and the underwriters of AESP. If, in
the opinion of the managing underwriter, it is appropriate because of marketing
factors to limit the number of Registrable Shares to be included in the
offering, then AESP shall be required to include in the registration only that
number of Registrable Shares, if any, which the managing underwriter believes
should be included therein, and shall be entitled to include before such
Registrable Shares up to the number of AESP Shares to be issued by AESP in the
offering. If the number of Registrable Shares to be included in the offering in
accordance with the foregoing is less than the total number of shares which the
holder of Registrable Shares has requested to be included, then the holder of
Registrable Shares who has requested registration and other holders of
securities entitled to be included in such registration shall participate in the
registration pro rata based upon their total ownership of shares of common stock
of AESP subject to the managing underwriter's discretion.
(c) For the purposes of this Section the term "Registration
Statement" means a registration statement filed by AESP with the SEC for a
public offering and sale of Common Stock of AESP (other than a Registration
Statement on Form S-4, or its successors, or any other form for a similar
limited purpose, or any registration statement covering only securities proposed
to be issued in exchange for securities or assets of another corporation). In no
event shall AESP be liable for any sales, broker's or underwriting commissions
or other selling expenses incurred upon sale by any holder of any of the AESP
Shares.
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7.2 DEMAND REGISTRATION RIGHTS FOR AESP SHARES; FILING OF REGISTRATION
STATEMENT. At any time after the twelve (12) month period following the Closing
Date and provided AESP has not filed a Registration Statement for the AESP
Shares, then the Shareholder shall have the right once to provide written notice
to AESP demanding AESP to file with the Securities and Exchange Commission (the
"SEC") within sixty (60) days after receipt of such written notice, a
registration statement under the Securities Act for an offering to be made on a
continuous or delayed basis covering the AESP Shares, subject to the following:
(a) Upon receipt of the written demand notice from the Shareholder
to register the AESP Shares , AESP will file a Registration Statement covering
the AESP Shares and will use reasonable efforts to cause the Registration
Statement to become effective and cause the AESP Shares to become registered
under the Securities Act. Notwithstanding the foregoing, AESP may delay (but in
no event in excess of 60 days) the filing of the Registration Statement, and may
withhold efforts to cause the Registration Statement to become effective, if
AESP's Board of Directors determines in good faith that such registration might
interfere with or affect the negotiation or completion of any transaction that
is being contemplated by AESP (whether or not a final decision has been made to
undertake such transaction) at the time the right to delay is exercised.
Notwithstanding the foregoing to the contrary, in no event may AESP delay the
filing of the Registration Statement with the SEC for more than 120 days from
the date of Shareholder's written demand notice as set forth above in this
Section 7.2.
(b) In no event shall AESP be liable for any sales, broker's or
underwriting commissions or other selling expenses incurred upon sale by any
holder of any of the AESP Shares."
7.3 AMENDMENTS AND SUPPLEMENTS. AESP shall prepare and promptly file with
the SEC, and promptly notify the Shareholder of such amendments or supplements
to the Registration Statement or prospectuses contained therein as may be
necessary to correct any statements or omissions if, at the time when a
prospectus relating to the AESP Shares is required to be delivered under the
Securities Act, any event shall have occurred as a result of which any such
prospectus or any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. AESP shall also advise the Shareholder promptly after
it shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the SEC suspending the effectiveness of the Registration Statement or
the initiation or threatening of any proceeding for that purpose and promptly
use its reasonable best efforts to prevent the issuance of any stop order or to
obtain its withdrawal if such stop order should be issued. If, after a
Registration Statement becomes effective, AESP advises the Shareholder that AESP
considers it appropriate that the Registration Statement be amended, the
Shareholder shall suspend any further sales of the AESP Shares until AESP
advises the Shareholder that the Registration Statement has been amended.
7.4 DURATION. AESP shall maintain the effectiveness of the Registration
Statement until the earlier of: (i) the date when all of the AESP Shares have
been sold, or (ii) two (2) years after the Closing Date.
7.5 FURTHER INFORMATION. If AESP Shares owned by the Shareholder are
included in any registration, the Shareholder shall furnish Purchaser such
information regarding himself as AESP may
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reasonably request and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
7.6 SALES UNDER RULE 144. Following the Closing, and for so long as
reasonably necessary in order to permit the Shareholder to sell the AESP Shares
pursuant to Rule 144 under the Securities Act, to the extent applicable, AESP
will use its best efforts to file on a timely basis all reports require to be
filed by it pursuant to Section 13 of the Exchange Act, and take all other
action which is reasonable and customary to permit the Shareholder to sell his
AESP Shares pursuant to the applicable provisions of Rule 144 to the extent not
registered by this ARTICLE VII.
7.7 BLUE SKY. At such time as AESP shall file a Registration Statement
AESP agrees to use reasonable efforts to register or qualify the AESP Shares
covered by the Registration Statement under the Blue Sky laws of New York to
permit the Shareholder to sell or otherwise dispose of any and all AESP Shares
in such state.
7.8 EXPENSES. AESP shall pay all expenses (except sales, broker's or
underwriting commissions or other selling expenses in connection with the sale
of the AESP Shares) incurred by AESP in connection with the preparation, filing
and execution of the Registration Statement and the New York State Blue Sky
filing.
ARTICLE VIII
INDEMNIFICATION
8.1 AGREEMENT BY THE SHAREHOLDER TO INDEMNIFY. Subject to the limitations
set forth in SECTIONS 8.3 AND 8.4, the Shareholder agrees to protect, defend,
indemnify and hold AESP, its shareholders, directors, officers, employees,
agents, representatives, consultants, attorneys and affiliates (the "AESP
Entities") harmless from and against the aggregate of all expenses, losses,
costs, deficiencies, liabilities and damages (including, without limitation,
related counsel and paralegal fees and expenses) incurred or suffered by any of
the AESP Entities arising out of or resulting from (i) any breach of a
representation or warranty made by the Company and/or Shareholder in or pursuant
to this Agreement, (ii) any breach of the covenants or agreements made by the
Company and/or Shareholder in or pursuant to this Agreement or (iii) any
inaccuracy in any certificate delivered by the Company and/or Shareholder
pursuant to this Agreement (collectively, "Indemnifiable Damages"). Without
limiting the generality of the foregoing, with respect to the measurement of
Indemnifiable Damages, AESP shall have the right to be put in the same pre-tax
consolidated financial position as it would have been in had each of the
representations and warranties of the Shareholder hereunder been true and
correct and had the covenants and agreements of the Company and the Shareholder
hereunder been performed in full.
8.2 AGREEMENT BY AESP TO INDEMNIFY. Subject to the limitations set forth
in SECTION 8.3, AESP agrees to protect, defend, indemnify and hold the
Shareholder, his agents, representatives, consultants, and attorneys (the
"Shareholder Entities") harmless from and against the aggregate of all expenses,
losses, costs, deficiencies, liabilities and damages (including, without
limitations, related counsel and paralegal fees and expenses) incurred or
suffered by any of the Shareholder Entities arising out of or resulting from (1)
any breach of a representation or warranty made by AESP in or
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pursuant to this Agreement, (ii) any breach of the covenants or agreements made
by AESP in or pursuant to this Agreement, or (iii) any inaccuracy in any
certificate delivered by AESP pursuant to this Agreement (collectively,
"Indemnifiable Damages"). Without limiting the generality of the foregoing, with
respect to the measurement of Indemnifiable Damages, the Shareholder shall have
the right to be put in the same pre-tax consolidated financial position as it
would have been in had each of the representations and warranties of AESP
hereunder been true and correct and had the covenants and agreements of AESP
hereunder been performed in full.
8.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the
representations, and warranties made by the Shareholder and AESP in this
Agreement or pursuant hereto shall survive for a period of thirty (30) months
after the date hereof. Notwithstanding any knowledge of facts determined or
determinable by any party by investigation, each party shall have the right to
fully rely on the representations, warranties, covenants and agreements of the
other parties contained in this Agreement or in any other documents or papers
delivered in connection herewith. No claim for the recovery of Indemnifiable
Damages may be asserted by either party against the other party after such
representations and warranties shall thus expire, PROVIDED, HOWEVER, that any
claims for Indemnifiable Damages first asserted within the applicable period
shall not thereafter be barred. Each of the representations and warranties made
by the Company shall expire at the Closing. Each representation, warranty,
covenant and agreement of the parties contained in this Agreement is independent
of each other representation, warranty, covenant and agreement.
8.4 THRESHOLD AND MAXIMUM INDEMNIFICATION AMOUNT. Notwithstanding anything
to the contrary contained in this Agreement (i) the party indemnifying the other
party under this ARTICLE 8 (the "Indemnifying Party") shall not be liable for
any amounts for which party entitled to indemnification under ARTICLE 8 (the
"Indemnified Party") is otherwise entitled to indemnification until the
aggregate amount of the Indemnifiable Damages for which the Indemnifying Party
may be liable hereunder exceeds the Threshold Indemnification Amount (as defined
below); provided, however, that once the aggregate amount of Indemnifiable
Damages exceeds the Threshold Indemnification Amount, the Indemnified Party
shall be entitled to indemnity for all such amounts of such claims (including
the first $12,500 of the Threshold Indemnification Amount), and (ii) the
Indemnifying Party shall not be liable for any amounts for which the Indemnified
Party is otherwise entitled to indemnification to the extent the aggregate
amount of Indemnifiable Damages for which the Indemnifying Party is otherwise
liable on account of Indemnifiable Damages hereunder would exceed an amount
equal to the Maximum Indemnification Amount (as defined below). For the purposes
hereof "Threshold Indemnification Amount" shall mean $12,500 and "Maximum
Indemnification Amount" shall mean $500,000. The parties agree and acknowledge
that each of the Threshold Indemnification and the Maximum Indemnification
Amounts shall be applied on an aggregate basis and not on a per claims basis.
8.5 NO BAR; WAIVER. If the amount evidenced by the Note held in escrow
hereunder is insufficient to set off any claim for Indemnifiable Damages made
hereunder (or has been delivered to the Shareholder prior to the making or
resolution of such claim), then AESP may take any action or exercise any remedy
available to it by appropriate legal proceedings to collect the Indemnifiable
Damages. The Shareholder hereby waives any rights to contribution or any similar
rights it may have against the Company as a result of their agreement to
indemnify the AESP Entities under this ARTICLE VIII or otherwise.
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8.6 SOLE REMEDY. The indemnification provisions of this ARTICLE VIII,
secured in part by the Term Note and the Escrow Agreement shall constitute the
sole and exclusive remedy of the parties hereto with respect to claims for
monetary damages arising out of or related to this Agreement. Except as
aforesaid, each of the parties hereto will have and retain all other rights and
remedies existing in its favor in equity, including, without limitation, any
actions for specific performance and/or injunctive or other equitable relief to
enforce or prevent any violations of any provisions of this Agreement.
ARTICLE IX
DEFINITIONS
9.1 DEFINED TERMS. As used herein, the following terms shall have
the following meanings:
"Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act, as in effect on
the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended, and
treasury regulations promulgated thereunder.
"Contract" means any agreement, contract, lease, note, mortgage,
indenture, loan agreement, franchise agreement, covenant, employment
agreement, license, instrument, purchase and sales order, commitment,
undertaking, obligation, whether written or oral, express or implied.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles in effect in
the United States of America from time to time.
"Governmental Authority" means any nation or government, any state,
regional, local or other political subdivision thereof, and any entity or
official exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, but not limited to, any conditional
sale or other title retention agreement, any lease in the nature thereof,
and the filing of or agreement to give any financing statement under the
Uniform Commercial Code or comparable law or any jurisdiction in
connection with such mortgage, pledge, security interest, encumbrance,
lien or charge).
"Litigation Costs" shall mean any and all expenses, costs, damages,
liabilities, or obligations (including, without limitation, fees and
expenses of counsel) incurred in connection with any action, suit, or
other legal or administrative proceeding or
25
<PAGE>
governmental investigation against the Shareholder and/or the Company
arising as a result of events occurring or facts or circumstances arising
or existing on or prior to the date hereof (whether or not in the ordinary
course of business).
"Material Adverse Change (or Effect)" means a change (or effect), in
the condition (financial or otherwise), properties, assets, liabilities,
rights, obligations, operations, business or prospects which change (or
effect) individually or in the aggregate, is materially adverse to such
condition, properties, assets, liabilities, rights, obligations,
operations, business or prospects.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, estate, trust, unincorporated association,
joint venture, Governmental Authority or other entity, of whatever nature.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Tax Return" means any tax return, filing or information statement
required to be filed in connection with or with respect to any Taxes; and
"Taxes" means all taxes, fees or other assessments, including, but
not limited to, income, excise, property, sales, franchise, intangible,
withholding, social security and unemployment taxes imposed by any
federal, state, local or foreign governmental agency, and any interest or
penalties related thereto.
9.2 OTHER DEFINITIONAL PROVISIONS.
(a) All terms defined in this Agreement shall have the defined
meanings when used in any certificates, reports or other documents made or
delivered pursuant hereto or thereto, unless the context otherwise requires.
(b) Terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
(c) All matters of an accounting nature in connection with this
Agreement and the transactions contemplated hereby shall be determined in
accordance with GAAP applied on a basis consistent with prior periods, where
applicable.
(d) As used herein, the neuter gender shall also denote the
masculine and feminine, and the masculine gender shall also denote the neuter
and feminine, where the context so permits.
26
<PAGE>
ARTICLE X
GENERAL PROVISIONS
10.1 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing and shall be delivered by certified
or registered mail (first class postage pre-paid), guaranteed overnight
delivery, or facsimile transmission if such transmission is confirmed by
delivery by certified or registered mail (first class postage pre-paid) or
guaranteed overnight delivery, to the following addresses and telecopy numbers
(or to such other addresses or telecopy numbers which such party shall designate
in writing to the other party):
IF TO AESP: WITH A COPY TO:
Advanced Electronic Support Products, Inc. Akerman, Senterfitt & Eidson, P.A.
1810 N.E. 144th Street One S.E. 3rd Avenue
North Miami, Florida 33181 27th Floor
Attn: Slav Stein Miami, Florida 33131
Telecopy: (305) 652-8489 Attn: Philip B. Schwartz, Esq.
Telecopy: (305) 374-5095
IF TO THE COMPANY AND/OR THE SHAREHOLDER TO: WITH A COPY TO:
Communication Components Co., Inc. McCausland, Keen & Buckman
Lawrence Industrial Park Radnor Court, Suite 160
1005 Sussex Boulevard 259 Radnor-Chester Road
Broomall, PA 19008 Radnor, PA 19087-5240
Attn: Donald Daily, President Attn: Ellen Pulver Flatt, Esq.
Telecopy: ____________________ Telecopy: 610-341-1099
Notice shall be deemed given on the date sent if sent by facsimile
transmission and on the date delivered (or the date of refusal of delivery) if
sent by overnight delivery or certified or registered mail.
10.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules attached hereto) and other documents delivered at the Closing pursuant
hereto, contains the entire understanding of the parties in respect of its
subject matter and supersedes all prior agreements and understandings (oral or
written) between or among the parties with respect to such subject matter. The
parties agree that prior drafts of this Agreement shall not be deemed to provide
any evidence as to the meaning of any provision hereof or the intent of the
parties with respect thereto. The Exhibits and Schedules constitute a part
hereof as though set forth in full above.
10.3 EXPENSES. Except as otherwise provided herein, the parties shall pay
their own fees and expenses for those expenses incurred prior to October 30,
1998 and the Buyer shall pay all expenses incurred after October 30, 1998,
including counsel fees, incurred in connection with this Agreement or
transaction contemplated hereby. The Shareholder shall pay all transaction costs
incurred by the Company in connection with the transactions contemplated by this
Agreement.
27
<PAGE>
10.4 AMENDMENT; WAIVER. This Agreement may not be modified, amended,
supplemented, canceled or discharged, except by written instrument executed by
all parties. No failure to exercise, and no delay in exercising, any right,
power or privilege under this Agreement shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege hereunder preclude
the exercise of any other right, power or privilege. No waiver of any breach of
any provision shall be deemed to be a waiver of any preceding or succeeding
breach of the same or any other provision, nor shall any waiver be implied from
any course of dealing between the parties. No extension of time for performance
of any obligations or other acts hereunder or under any other agreement shall be
deemed to be an extension of the time for performance of any other obligations
or any other acts. The rights and remedies of the parties under this Agreement
are in addition to all other rights and remedies, at law or equity, that they
may have against each other.
10.5 REMEDIES CUMULATIVE. The remedies provided in this Agreement shall be
cumulative and shall not preclude AESP or any of its shareholders from asserting
any other right, or seeking any other remedies or against the Shareholder.
10.6 BINDING EFFECT; ASSIGNMENT. The rights and obligations of this
Agreement shall bind and inure to the benefit of the parties and their
respective successors and assigns. Nothing expressed or implied herein shall be
construed to give any other person any legal or equitable rights hereunder. The
rights and obligations of this Agreement may be assigned by AESP to any
successor. Except as expressly provided herein, the rights and obligations of
this Agreement may not be assigned by the Company or the Shareholder without the
prior written consent of AESP.
10.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one and the same instrument. A telecopy signature of any party shall
be considered to have the same binding legal effect as an original signature.
10.8 INTERPRETATION. When a reference is made in this Agreement to an
article, section, paragraph, clause, schedule or exhibit, such reference shall
be deemed to be to this Agreement unless otherwise indicated. The headings
contained herein and on the schedules are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement or the
schedules. Time shall be of the essence in this Agreement.
10.9 CONSTRUCTION. The parties agree and acknowledge that they have
jointly participated in the negotiation and drafting of this Agreement. In the
event of an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties and no
presumptions or burdens of proof shall arise favoring any party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local, or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context requires
otherwise. If any party has breached any representation, warranty, or covenant
contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the party has not
breached shall not detract from or mitigate the fact that the party is in breach
of the first representation, warranty, or covenant. The mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty
28
<PAGE>
made herein (unless the representation or warranty relates solely to the
existence of the document or other items itself).
10.10 GOVERNING LAW; SEVERABILITY. This Agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of
Florida applicable to contracts executed and to be wholly performed within such
State. If any word, phrase, sentence, clause, section, subsection or provision
of this Agreement as applied to any party or to any circumstance is adjudged by
a court to be invalid or unenforceable, the same will in no way affect any other
circumstance or the validity or enforceability of any other word, phrase,
sentence, clause, section, subsection or provision of this Agreement. If any
provision of this Agreement, or any part thereof, is held to be unenforceable
because of the duration of such provision or the area covered thereby, the
parties agree that the court making such determination shall have the power to
reduce the duration and/or area of such provision, and/or to delete specific
words or phrases, and in its reduced form, such provision shall then be
enforceable and shall be enforced.
10.11 ATTORNEYS' FEES; JURISDICTION AND VENUE. Should it become necessary
for any party to institute legal action to enforce the terms and conditions of
this Agreement, the successful party will be awarded reasonable attorneys' fees
at all trial and appellate levels, expenses and costs. Any suit, action or
proceeding with respect to this Agreement shall be brought in the courts of Dade
County in the State of Florida or in the U.S. District Court for the Southern
District of Florida. The parties hereto hereby accept the exclusive jurisdiction
of those courts for the purpose of any such suit, action or proceeding. Venue
for any such action, in addition to any other venue permitted by statute, will
be Dade County, Florida. The parties hereto hereby irrevocably waive, to the
fullest extent permitted by law, any objection that any of them may now or
hereafter have to delaying of venue of any suit, action or proceeding arising
out of or relating to this Agreement or any judgment entered by any court in
respect thereof brought in Dade County, Florida, and hereby further irrevocably
waive any claim that any such suit, action or proceeding brought in Dade County,
Florida has been brought in an inconvenient forum.
10.12 ARM'S LENGTH NEGOTIATIONS. Each party herein expressly represents
and warrants to all other parties hereto that (a) before executing this
Agreement, said party has fully informed itself of the terms, contents,
conditions and effects of this Agreement; (b) said party has relied solely and
completely upon its own judgment in executing this Agreement; (c) said party has
had the opportunity to seek and has obtained the advice of counsel before
executing this Agreement; (d) said party has acted voluntarily and of its own
free will in executing this Agreement; (e) said party is not acting under
duress, whether economic or physical, in executing this Agreement; and (f) this
Agreement is the result of arm's length negotiations conducted by and among the
parties and their respective counsel.
[Signatures On Following Page]
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
AESP:
ADVANCED ELECTRONIC SUPPORT PRODUCTS, Inc., a
Florida corporation
By: /s/ SLAV STEIN
--------------------------------------------
Name: S. Stein
---------------------------------------
Title: President and CEO
--------------------------------------
THE COMPANY:
COMMUNICATION COMPONENTS COMPANY INC., a
Pennsylvania corporation
By: /s/ DONALD Y. DAILY, JR.
--------------------------------------------
Name: Donald Y. Daily, Jr.
---------------------------------------
Title: President
--------------------------------------
SHAREHOLDER:
/s/ DONALD Y. DAILY, JR.
-----------------------------------------------
Donald Y. Daily, Jr., individually
30
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit 1.3(c) $125,000 Non-Negotiable Promissory Note
Exhibit 1.3(d) $175,000 Non-Negotiable Promissory Note
Exhibit 1.3(f) Escrow Agreement
Exhibit 4.2 Employment Agreement
Schedule 3.1 Jurisdictions
Schedule 3.4 Capitalization
Schedule 3.5 Shareholder
Schedule 3.6 Consents
Schedule 3.7 Stock Ledger
Schedule 3.8 Subsidiaries
Schedule 3.9 Financial Statements
Schedule 3.12 Litigation
Schedule 3.13 Environmental Matters
Schedule 3.14(b) Leased Premises
Schedule 3.15(a) Liens
Schedule 3.15(b) Vehicles
Schedule 3.16(c) Compliance with Law - Immigration
Schedule 3.17 Employees
Schedule 3.18 Employee Benefit Plans
Schedule 3.19 Tax Matters
Schedule 3.20 Insurance Matters
Schedule 3.22 Permits
Schedule 3.23 Affiliated Transactions
Schedule 3.24(a) Intellectual Property
Schedule 3.24(b) Disputes as to Intellectual Property
Schedule 3.25 Designated Contracts
Schedule 3.26 Material Customers
Schedule 3.29 Bank Accounts
Schedule 3.30 Names
Schedule 4.3 Company Employee Salaries
31
<PAGE>
EXHIBIT 1.3(C) FORM OF $125,000 NON-NEGOTIABLE PROMISSORY NOTE
(to Stock Purchase Agreement)
EXHIBIT 1.3(D) FORM OF $175,000 NON-NEGOTIABLE PROMISSORY NOTE
(to Stock Purchase Agreement)
EXHIBIT 1.3(F) FORM OF ESCROW AGREEMENT
(to Stock Purchase Agreement)
EXHIBIT 4.2 FORM OF EMPLOYMENT AGREEMENT
(to Stock Purchase Agreement)
32
EXHIBIT 21.1
LIST OF SUBSIDIARIES
AESP Computerzubehor GmbH
Advanced Electronic Support Products Computertillbehor i Sweden Aktiebolag
Jotec/AESP AS
Communications Components Company, Inc.
AESP-Ukraine
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,407,106
<SECURITIES> 0
<RECEIVABLES> 3,246,807
<ALLOWANCES> (209,000)
<INVENTORY> 6,157,889
<CURRENT-ASSETS> 11,026,966
<PP&E> 1,175,245
<DEPRECIATION> (539,578)
<TOTAL-ASSETS> 12,414,904
<CURRENT-LIABILITIES> 6,531,049
<BONDS> 0
0
0
<COMMON> 3,082
<OTHER-SE> 5,659,647
<TOTAL-LIABILITY-AND-EQUITY> 12,414,904
<SALES> 21,968,955
<TOTAL-REVENUES> 21,968,955
<CGS> 13,646,496
<TOTAL-COSTS> 25,343,249
<OTHER-EXPENSES> 23,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,139,577
<INCOME-PRETAX> (4,537,861)
<INCOME-TAX> 266,951
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,804,812)
<EPS-PRIMARY> (1.99)
<EPS-DILUTED> (1.99)
</TABLE>
