SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12739
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2327381
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1810 N.E. 144TH STREET
NORTH MIAMI, FLORIDA 33181
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (305) 944-7710
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, as of
June 30, 1999, is 3,167,921 shares.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at December 31, 1998 and
June 30, 1999 (unaudited)............................................3
Condensed Consolidated Statements of Income for the
three months and six months ended June 30, 1999 and 1998 (unaudited).4
Condensed Consolidated Statements of Shareholders' Equity
for the six months ended June 30, 1999 (unaudited)...................5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (unaudited)..................6
Notes to Condensed Consolidated Financial Statements.................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION................................................10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS...................................................15
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................15
Item 3. DEFAULTS UPON SENIOR SECURITIES.....................................15
Item 4. SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS.................................................15
Item 5. OTHER INFORMATION...................................................15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................................15
2
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<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 804,999 $ 1,407,106
Accounts receivable, net of allowance for doubtful accounts of
$209,000 at December 31, 1998 and $92,264 at June 30, 1999 2,920,787 3,037,807
Inventories 6,742,083 6,157,889
Prepaid expenses and other current assets 591,217 424,164
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,059,086 11,026,966
PROPERTY AND EQUIPMENT, NET 588,963 635,667
INTANGIBLE ASSETS 872,197 637,613
OTHER ASSETS 103,538 114,658
- ----------------------------------------------------------------------------------------------------------------
$ 12,623,784 12,414,904
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes payable $ 2,374,000 $ 2,472,895
Accounts payable and accrued expenses 2,813,866 3,538,313
Income taxes payable 340,276 425,461
Other current liabilities 84,830 94,380
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,612,972 6,531,049
LONG TERM LIABILITIES 589,081 221,126
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,202,053 6,752,175
- ----------------------------------------------------------------------------------------------------------------
COMMITMENT AND CONTINGENCY (NOTE 4)
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
issued: 3,081,715 at December 31, 1998 and 3,167,921 at
June 30, 1999 3,168 3,082
Paid-in capital 9,513,816 9,363,902
(Deficit) (2,864,953) (3,569,399)
Cumulative foreign currency translation adjustment (230,300) (134,856)
- ----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,421,731 5,662,729
- ----------------------------------------------------------------------------------------------------------------
$ 12,623,784 12,414,904
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 6,229,449 $ 5,144,232 $ 12,675,137 $ 10,762,138
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of sales 3,720,746 2,929,115 7,181,402 5,976,766
Selling, general and administrative
expenses 2,371,040 2,073,392 4,662,995 4,277,360
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,091,786 5,002,507 11,844,397 10,254,126
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 137,663 141,725 830,740 508,012
Other income (expense):
Interest (68,386) (82,088) (110,752) (125,615)
Other 160,856 42,056 101,809 43,848
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 230,133 101,693 821,797 426,245
Provision (benefit) for income taxes 8,651 (47,310) 117,351 32,839
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 221,482 $ 149,003 $ 704,446 $ 393,406
====================================================================================================================
Net income per common share $ 0.07 $ 0.07 $ 0.22 $ 0.17
Net income per common share
assuming dilution $ 0.06 $ 0.06 $ 0.21 $ 0.17
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER COMPRE- TOTAL STOCK-
COMMON PAID-IN COMPREHENSIVE HENSIVE HOLDERS'
STOCK CAPITAL DEFICIT INCOME INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 3,082 $ 9,363,902 $ (3,569,399) $ (134,856) -- $ 5,662,729
NET INCOME -- -- 704,446 -- 704,446 704,446
SHARES ISSUED IN CONJUNCTION
WITH ACQUISITION OF
CCCI 86 149,914 -- -- -- 150,000
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT -- -- -- (95,444) (95,444) (95,444)
--------
$609,002
====================================================================================================================================
BALANCE AT JUNE 30, 1999 $ 3,168 $ 9,513,816 $ (2,864,953) $ (230,300) $ 6,421,731
====================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
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<TABLE>
<CAPTION>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(NOTE 2)
SIX MONTHS ENDED JUNE 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 704,446 $ 393,406
Adjustments to reconcile net income to net cash used in operating activities:
Provision for losses on accounts receivable 11,840 72,703
Depreciation and amortization 63,720 83,865
Deferred income taxes -- (15,041)
Amortization of goodwill 67,700 55,552
Options issued in connection with consulting services -- 25,000
(Increase) decrease, net of business segment acquired, in:
Accounts receivable 495,979 (334,011)
Inventories (465,773) (490,017)
Income tax receivable 62,205 --
Prepaid expenses and other current assets (229,258) 25,360
Deferred tax assets 34,150 --
Other assets (37,613) (12,160)
Increase (decrease) in:
Accounts payable and accrued expenses (1,058,020) (631,945)
Income taxes payable (85,185) (235,525)
Other liabilities (12,710) --
Deferred tax liability 24,082 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (424,437) (1,062,813)
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Cash acquired in CCCI 339,812 --
Additions to property and equipment (17,016) (175,692)
Purchase of CCCI (299,451) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 23,345 (175,692)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings (37,939) 1,795,907
Eliminate overdraft (67,632) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (105,571) 1,795,907
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (506,663) 557,402
Effect of exchange rate changes on cash (95,444) (12,547)
CASH, AT BEGINNING OF YEAR 1,407,106 424,036
- ----------------------------------------------------------------------------------------------------------------------------------
CASH, AT END OF PERIOD $ 804,999 $ 968,891
==================================================================================================================================
Supplemental information:
Cash paid for:
Interest $ 110,752 $ 130,485
Taxes $ 93,836 $ 363,049
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF The accompanying unaudited condensed consolidated financial
PRESENTATION statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period
ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31,
1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
2. ACQUISITIONS 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, assignment to the
seller of a CCCI receivable in the amount of $100,000, and a
$300,000 note payable with interest at 8% per annum over three
years. 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. The excess cost over net assets acquired amounted
to approximately $289,000. This amount will be amortized over
ten years.
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 then 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.
The following unaudited proforma information presents the
results of operations of the Company and its subsidiaries as
if both of these acquisitions had occurred on January 1, 1998:
SIX MONTHS ENDED JUNE 30, 1999 1998
--------------------------------------------------------------
Net sales $12,976,737 $11,622,418
Net income (loss) 726,885 97,211
Net income (loss) per common share 0.23 0.04
Net income (loss) per common share -
assuming dilution 0.21 0.04
The unaudited pro forma information assumes the amortization
of the excess cost over net asset acquired and the elimination
of intercompany sales.
7
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3. EARNINGS The following reconciles the components of the earnings per
PER SHARE share (EPS) computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Net income available to
common shares $221,482 3,167,921 $0.07 $149,003 2,282,201 $0.07
Effect of Dilutive
Securities:
Exercisable options to
purchase shares of
common stock 247,573 16,780
8 1/2% convertible notes 23,024 359,781
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders plus
assumed conversions $221,482 3,415,494 $.06 $172,027 2,658,762 $0.06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Net income available to
common shares $704,446 3,140,144 $0.22 $393,406 2,282,201 $0.17
Effect of Dilutive Securities:
Exercisable options to
purchase shares of
common stock 236,687 11,305
8 1/2% convertible notes 46,048 359,781
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders plus
assumed conversions $704,446 3,376,831 $0.21 $439,454 2,653,287 $0.17
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
The convertible stockholder notes amounting to $1,434,125 were
convertible at $4.00 per share and were considered dilutive
for the three and six months ended June 30, 1998. These notes
were converted into common shares on December 31, 1998.
Options to purchase 23,000 shares, 40,000 shares and 90,000
shares of common stock at $2.13, $2.13, and $3.69 per share,
respectively, were outstanding during 1999, 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 2006 to 2007 were
outstanding at June 30, 1999.
Options to purchase 200,000 shares, 360,500 shares, 36,000
shares, 23,000 shares, 40,000 shares and 120,000 shares of
common stock at $6.00, $6.00, $5.88, $4.00, $6.00, and $3.69
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 June 30, 1998.
4. SUBSEQUENT In August, 1999, the Company signed a non-binding letter of
EVENT intent to acquire substantially all of the assets of BICC-KD
GmbH, headquartered in Munich, Germany. Under the terms of the
letter of intent, the total purchase price is DM5.75 million.
The Company is required to make an initial payment of DM3.0
million within 90 days of the closing of the acquisition,
tentatively scheduled for September 15, 1999. The Company is
also required to make: (i) a second payment of DM1.0 million
within 180 days of the closing of the acquisition, and (ii) a
third payment of DM1.75 million on or before December 31,
2000. Consummation of the acquisition is subject to the
approval by the Company's Board of Directors and the execution
of a definitive acquisition agreement. The acquisition is
expected to be completed by the end of September 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-QSB CONTAIN FORWARD-LOOKING
STATEMENTS 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 AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB
FOR 1998 (THE "FORM 10-KSB"). THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN
AND THEREIN 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 PUBLIC 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.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE INFORMATION SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" IN THE FORM 10-KSB.
RESULTS OF OPERATIONS
For the six months ended June 30, 1999, the Company achieved net sales
of $12.7 million, an increase of $1.9 million or 17.8% over net sales of $10.8
million for the six months ended June 30, 1998. For the quarter ended June 30,
1999, the Company achieved net sales of $6.2 million, an increase of $1.1
million or 21.1% over net sales of $5.1 million for the quarter ended June 30,
1998.
Contributing to the overall increase in sales were increases in
domestic OEM sales, which were up 90.9% to $2.1 million for the first six months
of 1999, from 1. 1 million for the first six months of 1998, and up 80% to
$936,000 for the second quarter of 1999 from $520,000 for the second quarter of
1998. Similarly, retail sales increased by 25.9% to $3.4 million for the six
months of 1999, from $2.7 million for the six months of 1998, and increased
41.7% to $1.7 million for the second quarter of 1999, from $1.2 million for the
second quarter of 1998. The Company also benefitted from sales by CCCI during
the 1999 second quarter of $612,000.
Year to year international sales remained relatively constant, at $7.1
million for the six months ended June 30, 1999, compared to $7.0 million for the
six months ended June 30, 1998, and $3.5 million for the second quarter of 1999
compared to $3.3 million for the second quarter of 1998. However,
10
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the consolidated nature of these results does not reflect three distinct trends
within the Company's international business, as follows: (i) each of the
Company's offices in Western Europe showed sales gains in excess of 10%
year-to-year; (ii) these sales gains were partially caused by the strengthening
of the US dollar and the effect which such strengthening had on foreign currency
translations of international sales; and (iii) the Company's sales volume to its
Russian distributor (all sales to the Russian distributor were made on a prepaid
basis during 1999) and the volume of sales by the Company's Ukrainian office
were lower in the first half of 1999 than they were during the first half of
1998 (however, in both cases, the volume of business was higher during the first
half of 1999 than it was during the second half of 1998).
The Company's gross profit margin was 43.3% for the six months ended
June 30 1999, compared to 44.5% for the six months ended June 30, 1998, and was
40.3% for the second quarter of 1999 compared to 43.1% for the second quarter of
1998. The primary reason for these changes was the impact of amount of domestic
OEM business during both periods, both in terms of absolute dollars and in terms
of percentage of total sales. As the Company has previously reported, OEM
business produces narrower gross margins than either retail or international
business. However, in the Company's case, its internal costs and overhead, as
reflected in its SG&A expenses, are proportionately lower, to offset the
intrinsically lower gross margin. Thus, the mix from period to period of OEM
sales versus retail sales has an impact on the gross profit margin for any
particular period.
Selling, general and administrative ("SG&A") expenses increased by
$386,000, or 9.0%, to $4.7 million for the six months ended June 30, 1999, from
$4.3 million for the six months ended June 30, 1998. For the quarter ended June
30, 1999, SG&A expenses increased by 14.4% to $2.4 million, from $2.1 million
for the comparative 1998 period. SG&A expenses as a percentage of sales for the
three and six months ended June 30, 1999 was 38.1% and 36.8%, respectively,
compared to 40.3% and 39.7%, respectively, for the three and six months ended
June 30, 1998. These decreases reflect continued efforts on the part of the
Company to control its costs and expenses, particularly marketing expenses, and
economies of scale.
As a result of the aforementioned factors, income from operations for
the three months ended June 30, 1999 was $138,000, compared to income from
operations of $142,000 for the three months ended June 30, 1998. For the first
six months of 1999, income from operations was $831,000 an increase of 63.5%
over income from operations of $508,000 for the first six months of 1998.
Interest expense for the six months ended June 30, 1999 decreased
11.8%, to $111,000, from $126,000, and for the second quarter of 1999 decreased
16.7% to $68,000 from $82,000. The decrease in interest expense for the 1999 six
month period primarily reflects conversion of the Company's subordinated
debentures at year end 1998; and secondarily slightly reduced borrowings by the
Company under its line of credit, offset in part by increased interest expense
resulting from higher interest rates from period to period. Amortization of
goodwill was $68,000 for the six months ended June 30, 1999, an increase of
21.4% over amortization of $56,000 for the six months ended June 30, 1998. This
increase is primarily attributable to amortization charges relating to the
acquisition by the Company of CCCI at the end of March 1999.
11
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Other income for the 1999 three and six month periods benefitted from
the substantial changes in currency exchange rates at June 1999 compared to
exchange rates at December 31, 1998. Taxes for both 1999 and 1998 benefited from
net operating loss carryforwards and carrybacks arising as a result of the
Company's substantial losses in 1998.
As a result of the foregoing factors, the Company had net income of
$704,000 for the six months ended June 30, 1999, an increase of 79.1 % over net
income of $393,000 for the six months ended June 30, 1998, and net income of
$221,000 for the quarter ended June 30, 1999, an increase of 48.6% over net
income of $149,000 for the second quarter of 1998.
Primary earnings per share were $.22 for the six months ended June 30,
1999, compared to primary earnings per share of $.17 for the six months ended
June 30, 1998. Fully diluted earnings per share were $.21 for the first six
months of 1999, compared to fully diluted earnings per share of $.17 for the
first six months of 1998. For the second quarter of 1999, primary earnings per
share were $.07, unchanged from primary earnings per share of $.07 for the
second quarter of 1998. Likewise, fully diluted earnings per share were $.06 for
the second quarter of 1999, unchanged from fully diluted earnings per share of
$.06 for the second quarter of 1998. Earnings per share for 1999 were adversely
impacted (compared to 1998) by a substantial increase in weighted average shares
outstanding from period to period. The increase primarily resulted from the
issuance, at year end 1998, of 799,514 shares of the Company's common stock upon
conversion of the Company's outstanding 8 1/2% subordinated debentures and the
issuance by the Company in March 1999 of an additional 86,206 shares of its
common stock in connection with its acquisition of CCCI.
LIQUIDITY & CAPITAL RESOURCES
Historically, the Company has financed its operations primarily with
cash flow from operations and with borrowings under its available lines of
credit.
At June 39, 1999, the Company's working capital was $5.4 million, an
increase of 21.1% over working capital of $4.5 million as of December 31, 1998.
The principal causes of the increase were decreases of approximately $724,000
(20.5%) in accounts payable, approximately $100,000 (4%) in notes payable and
approximately $85,000 (20%) in income taxes payable. At June 30, 1999, cash had
decreased approximately $602,000, or 42.8%, as the Company's net income was
applied to the aforementioned decreases in current liabilities, plus an increase
in inventory of approximately $584,000 or 9.5%, reflecting the increase in
domestic and international business volume described under Results of
Operations.
For the six months ended June 30, 1999, $424,000 of cash was used in
operations. Net income of approximately $704,000 was applied to the
aforementioned reduction in accounts payable and increase in inventory. Net cash
gained through investing activities was $23,345, as the excess of cash acquired
from CCCI over cash paid for CCCI was applied partially to an increase in
property and equipment, principally MIS resources for the Company's Miami
office. Cash of $106,000 was used in financing activities, and applied to
payments on borrowings and to eliminate a bank overdraft. As a result of the
foregoing, the Company's cash position decreased $507,000 between December
31,1998 and June 30, 1999. That decrease, combined with a decrease of $95,000
attributable to the effects of exchange rate changes on cash, produced an
overall decrease in cash of $602,000.
12
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Intangible assets increased by $234,000 or 36.7%, reflecting additional
goodwill in conjunction with the acquisition of CCCI in March, 1999.
During June 1999, the Company obtained an extension in the maturity of
its existing line of credit with a financial institution until September 1,
1999. In conjunction with this extension, and in light of the Company's
financial results for the first quarter of 1999, the financial institution
modified the financial benchmarks and ratios required to be maintained by the
Company. The Company has been and continues to be in compliance with all of
these benchmarks and ratios.
In August, 1999, the Company entered into a commitment letter with a
new financial institution for a new borrowing facility to replace its existing
facility. Under the terms of the proposed new facility, the Company will be able
to continue to finance its domestic inventory and domestic and international
insured receivables under predetermined advance rates. Consummation of the new
borrowing facility is subject to approval of the Board of Directors of the
Company; an audit of the Company's domestic inventory and domestic and
international receivables, and the execution of definitive loan documents.
While there can be no assurance, the Company expects to close the new
financing with its new lender. However, if the Company is unable to close this
new financing (or other alternative financing), and the Company were unable to
further extend its existing line of credit beyond its September 1, 1999 maturity
date, the Company's business would likely be materially and adversely affected.
The Company believes that its internally generated cash flow from
operations, combined with its proposed new borrowing facility, will be
sufficient to fund its operations for the balance of the fiscal year ending
December 31, 1999. However, the Company has certain obligations relating to its
acquisition of CCCI and its potential acquisition of the assets of BICC-KD, GmbH
which may require additional capital. The Company expects to raise such capital
through a combination of internally generated funds and future sales of its
equity and/or debt securities. While the Company expects to be able to raise the
required funds, there can be no assurance that the Company will be successful in
that regard.
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 increased costs in the form
of adjustments to the prices it charges to its customers.
IMPACT OF YEAR 2000
The Company has 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 has completed 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 also made an examination of its non-information technology systems and has
not identified any further
13
<PAGE>
areas which it believes would be vulnerable to Y2K ramifications. Consequently,
the Company, having substantially completed its information systems remediation
efforts and evaluation of its non-information system operations, has a
reasonable belief that it no longer has any material exposure to the year 2000
problem in any aspect of its business operations or infrastructure.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
Date: August 18, 1999 By: /s/ SLAV STEIN
-------------------------------------------
Slav Stein, President and CEO
16
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 804,999
<SECURITIES> 0
<RECEIVABLES> 3,013,051
<ALLOWANCES> (92,264)
<INVENTORY> 6,742,083
<CURRENT-ASSETS> 11,059,086
<PP&E> 1,094,253
<DEPRECIATION> (505,290)
<TOTAL-ASSETS> 12,623,784
<CURRENT-LIABILITIES> 5,612,472
<BONDS> 0
0
0
<COMMON> 3,168
<OTHER-SE> 6,418,563
<TOTAL-LIABILITY-AND-EQUITY> 12,623,784
<SALES> 12,675,137
<TOTAL-REVENUES> 12,675,137
<CGS> 7,181,402
<TOTAL-COSTS> 11,844,397
<OTHER-EXPENSES> (101,809)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,752
<INCOME-PRETAX> 821,797
<INCOME-TAX> 117,351
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 704,446
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.21
</TABLE>
