SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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
May 15, 1999, is 3,167,921 shares.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (Unaudited).................................................................1
Condensed Consolidated Statements of Income (Unaudited)...........................................................2
Condensed Consolidated Statements of Shareholders' Equity (Unaudited).............................................3
Condensed Consolidated Statements of Cash Flows (Unaudited).......................................................4
Notes to Condensed Consolidated Financial Statements (Unaudited)..................................................5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION............................................................................9
</TABLE>
PART II. OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS..............................................................................14
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................14
Item 5. OTHER INFORMATION..............................................................................14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................14
</TABLE>
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
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ASSETS
CURRENT
Cash $ 1,214,542 $ 1,407,106
Accounts receivable, net of allowance for doubtful accounts of
$85,478 at March 31, 1999 and $209,000 at December 31, 1998 3,267,604 3,037,807
Inventories 6,244,418 6,157,889
Prepaid expenses and other current assets 617,793 424,164
- ----------------------------------------------------------------------------------------------------------------
Total current assets 11,344,357 11,026,966
PROPERTY AND EQUIPMENT, NET 602,632 635,667
INTANGIBLE ASSETS, NET 899,013 637,613
OTHER ASSETS 91,027 114,658
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TOTAL ASSETS $ 12,937,029 12,414,904
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes Payable $ 2,466,195 $ 2,472,895
Accounts payable and accrued expenses 2,755,904 3,538,313
Income taxes payable 686,850 425,461
Other Current Liabilities 274,569 94,380
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Total current liabilities 6,183,518 6,531,049
LONG TERM LIABILITIES 433,030 221,126
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TOTAL LIABILITIES 6,616,548 6,752,175
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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: 3,167,921 at March 31, 1999 and 3,081,715 at
December 31, 1998 3,168 3,082
Paid-in capital 9,513,816 9,363,902
Retained earnings (3,086,435) (3,569,399)
Cumulative foreign currency translation adjustment (110,068) (134,856)
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TOTAL SHAREHOLDERS' EQUITY 6,320,481 5,662,729
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,937,029 12,414,904
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
1999 1998
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NET SALES $ 6,445,688 $ 5,617,906
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OPERATING EXPENSES:
Cost of sales 3,460,656 3,047,651
Selling, general and administrative
expenses 2,291,955 2,203,968
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Total operating expenses 5,752,611 5,251,619
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INCOME FROM OPERATIONS 693,077 366,287
Other (expense):
Interest (42,366) (43,527)
Other (59,047) 1,792
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INCOME BEFORE INCOME TAXES 591,664 324,552
Provision for income taxes 108,700 80,149
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NET INCOME $ 482,964 $ 244,403
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Net income per common share $.16 $ .11
Net income per common share
- - assuming dilution $.15 $ .10
- --------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL STOCK-
COMMON PAID-IN EARNINGS COMPREHENSIVE COMPREHENSIVE HOLDERS'
STOCK CAPITAL (DEFICIT) INCOME INCOME EQUITY
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<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 - - 482,964 482,964 482,964
Shares issued in conjunction with
acquisition of CCCI 86 149,914 150,000
Foreign currency translation adjustment 24,788 24,788 24,788
------
507,752
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Balance at March 31, 1999 $ 3,168 $ 9,513,816 $(3,086,435) (110,068) $ 6,320,481
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 1998
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OPERATING ACTIVITIES:
Net income $ 482,964 $ 244,403
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for losses on accounts receivable 19,413 32,426
Depreciation and amortization 62,626 68,876
(Increase) decrease, net of business acquired, in:
Accounts receivable 336,135 (417,224)
Inventories 31,892 (467,707)
Income Tax Receivable (89,212)
Prepaid expenses and other current assets (104,417) 4,925
Deferred tax assets 28,409
Increase (decrease) in:
Other Assets (4,778) (9,914)
Accounts payable and accrued expenses (1,310,528) (155,102)
Income taxes payable 261,389 (196,206)
Other liabilities 93,884 (46,134)
DEFERRED TAX LIABILITY 26,684
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NET CASH USED IN OPERATING ACTIVITIES (165,539) (941,657)
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INVESTING ACTIVITIES:
Cash from acquisition 339,812
Additions to property and equipment (3,290) (116,306)
Acquisition of business (299,451)
------------ ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 37,071 (116,306)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings 60,932 1,564,922
Eliminate overdraft (67,632)
Increase in long-term debt (82,184)
------------ ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (88,884) 1,564,922
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (217,352) 506,959
Effect of exchange rate changes in cash 24,788 (13,339)
CASH, AT BEGINNING OF YEAR 1,407,106 424,036
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CASH, AT END OF PERIOD $ 1,214,542 $ 917,656
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Supplemental information:
Cash paid for:
Interest $ 46,194 $ 53,716
Taxes $ 00 $ 270,472
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending 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
Communication Components Company, Inc. ("CCCI"), a manufacturer of network
connectivity products and systems, for $800,000, payable $250,000 in cash,
$150,000 through the issuance of 86,206 shares of common stock of the Company,
assignment to the seller of a CCCI account receivable in the amount of $100,000
and a $300,000 note payable with interest at 8% per year 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 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 pro forma information presents the results of operations
of the Company as if these acquisition had occurred on January 1, 1998:
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1999 1998
- -------------------------------------------------------------------------------
Net sales $ 6,677,305 $ 6,027,584
Net income (loss) 505,403 139,578
Net income (loss) per
common share $ .06 $ .06
Net income (loss) per common
share - assuming dilution $ .15 $ .06
The unaudited pro forma information assumes the amortization of the excess cost
over net assets acquired and the elimination of intercompany sales.
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
3. EARNINGS PER SHARE
The following reconciles the components of the earnings per share (EPS)
computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
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INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Net income available to common
Shareholders $ 482,964 3,111,408 $ 0.16 $ 244,403 2,282,201 $ 0.11
Effect of Dilutive Securities:
Exercisable options to purchase
shares of common stock 171,031 27,111
Convertible notes 21,875 359,781
- -------------------------------------------------------------------------------------------------------------------
Net income available to common
Shareholders plus assumed
conversions $ 482,964 3,282,439 $ 0.15 $ 266,278 2,669,092 $ 0.10
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</TABLE>
The convertible stockholder notes amounting to $1,439,125 were convertible at
$4.00 per share and were considered dilutive for the three months ended March
31, 1998. These notes were converted into common shares on December 31, 1998.
For the three months ended March 31, 1999 and 1998, the average number of
exercisable options that are considered dilutive is 171,031 and 27,111,
respectively.
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 March 31,
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 March 31, 1998.
7
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
4. SUBSEQUENT EVENT
On April 12, 1999 the Board of Directors issued a total of 80,200 options to
purchase shares of the Company's common stock, at a price per share of $1.625,
to officers and employees of the Company. The options issued to officers and
employees mature in 10 years and vest over a four year period.
8
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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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. 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.
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 COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR 1998.
RESULTS OF OPERATIONS
On March 5, 1999, the Company acquired the assets of Communications
Component Company, Inc. ("CCCI") for $800,000, payable $250,000 in cash at
closing, $150,000 through the issuance of 86,206 shares of the Company's common
stock, the assignment to the Seller of a CCCI account receivable in the amount
of approximately $100,000, and a $300,000 Note, bearing interest at the rate of
8% per annum and payable over a three year period. The acquisition has been
accounted for under the purchase method of accounting and results of operations
of CCCI are included from the effective date of the acquisition.
For the three month period ended March 31, 1999, the Company had
consolidated net sales of $6.45 million, an increase of 14.7% over consolidated
net sales of $5.62 million for the same period of 1998. During the three month
period of 1999, domestic sales to customers increased $1.0 million. Of this
increase, $178,000 was attributable to sales by CCCI which the Company acquired
in March, 1999. Of the remaining $822,000 sales increase, approximately 68% was
attributable to OEM sales, reflecting continuing favorable results of marketing
efforts commenced by the Company during 1998, and
9
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the balance was attributable to an increase in retail sales. Sales to
international customers increased $543,000 or 22%. Of this increase,
approximately 275,000, or 50.6%, were new sales attributable to the Company's
Ukrainian subsidiary, which was acquired during the fourth quarter of 1998, and
the balance was attributable to increased sales from the Company's Sweden and
Norway sales offices.
The Company's gross margin was $2.99 million for the quarter ended
March 31, 1999, an increase of 16.1% over gross margin of $2.57 million for the
comparable period of 1998. Gross margin as a percentage of net sales was 46.3%
for the 1999 quarter, compared to a gross margin percentage of 45.8% for the
1998 quarter. The overall improvement in gross margin percentage is attributable
to gross margin percentage increases at each of the Company's foreign offices,
offset by a slightly lower gross margin percentage for the Company's domestic
sales, reflecting the strong increase in domestic OEM sales which
characteristically have a lower gross margin than retail sales.
SG&A expenses were $2.29 million for the quarter ended March 31, 1999,
an increase of 4.0% over SG&A expenses of $2.20 million for the comparable
period of 1998. This limited increase in SG&A expenses reflects the achievement
of the Company's stated objective at the end of the third quarter of 1998, which
was to implement a program of cost and expense containment in response to the
cessation of business revenues and profits from sales to the Company's Russian
distributor during that quarter.
As a result of improvement in gross margin and the containment of SG&A
expenses, the Company reported income from operations of $693,000 for the
quarter ended March 31, 1999, an increase of $327,000 or 89.2% over income from
operations of $366,000 for the comparable period of 1998.
Interest expense was $42,000 for the quarter ended March 31, 1999, a
slight decrease from interest expense of $44,000 for the comparable period of
1998. Other expenses were $59,000 for the quarter ended March 31, 1999, a
material increase over other expenses of $2,000 for the comparable period of
1998. The primary components of this increase were amortization of goodwill
pertaining to the Company's acquisition of Focus Enhancements, plus negative
foreign currency adjustments in 1999. During the same period of 1998, the
amortization of the Focus goodwill was offset by with a positive foreign
currency adjustment.
As a result of the foregoing, the Company's net income for the quarter
ended March 31, 1999 was $483,000, an increase of $239,000 or 97.9% over net
income of $244,000 for the comparable period ended March 31, 1998.
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At March 31, 1999, basic shares outstanding were 3,111,408, an increase
of 36% over basic shares outstanding at March 31, 1998 of 2,282,201. The
increase was due primarily to the issuance of 799,514 shares on December 31,
1998 in exchange for a $1,439,725 in convertible notes due from the Company,
plus the issuance on March 1, 1999 of 86,206 shares in conjunction with the
acquisition of CCCI. Average fully diluted shares outstanding increased by
22.99%, to 3,282,439 shares from 2,669,092 shares, as additional options to
purchase the Company's common stock became dilutive as a result of a repricing
of employee options at year end 1998. Reflecting these increases in average
primary and fully diluted shares, primary earnings per share increased 45.5%, to
$.16 per share for the quarter ended March 31, 1999 from $.11 per share for the
comparable period of 1998, and fully diluted earnings per share increased 50%,
to $.15 per share for the quarter ended March 31, 1999, from $.10 per share for
the comparable period in 1998.
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.
At March 31, 1999, the Company's working capital was $5.16 million, and
its current ratio was 1.83:1, compared to working capital of $4.50 million and a
current ratio of 1.69:1 at December 31, 1998. The primary reason for these
improvements in both working capital and current ratio were a decrease of $1.0
million in accounts payable and accrued expenses, combined with increases in
both inventory and prepaid expenses, which offset a slight reduction in cash.
At March 31, 1999, accounts receivable were $3.27 million, an increase
of 7.5% over accounts receivable of $3.04 million at December 31, 1998. This
increase was primarily attributable to a reduction in allowance for bad debts,
reflecting the Company's successful collection of receivables that were
delinquent at year end 1998 and an improvement in the quality and composition of
the company's current receivable portfolio. At March 31, 1999, accounts payable
and accrued expenses were $2.76 million, a decrease of approximately 22% from
accounts payable and accrued expenses of $3.54 million at December 31, 1998.
As of March 31, 1999, notes payable, representing borrowings from a
financial institution under the Company's line of credit, were essentially
unchanged at $2.37 million from borrowings at December 31, 1998. This reflects
the increase in inventory and receivables pertaining to business with customers
outside the United States, which are generally not financed under the Company's
line of credit.
11
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For the quarter ended March 31, 1999, net cash used in operations was
$166,000, as the Company's net income of $483,000 plus decreases in reserve for
bad debts and increases in long term debt and income tax refunds receivable were
applied primarily to a reduction in accounts payable and accrued expenses.
During the comparable period in 1998, cash used in operations was $942,000, and
was used primarily to reduce accounts payable and income taxes and increase
accounts receivable and inventory.
For the quarter ended March 31, 1999, net cash used in financing
activities was $89,000, reflecting an increase in long term debt applied to the
payment of certain short term financial obligations. During the same period, net
cash provided by investing activities was $37,000, primarily as a result of the
CCCI acquisition.
During the first quarter of 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 U.S. 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 April 30,
1999, $2,374,000 was outstanding under the credit line and $8,262 was available
for borrowing under the line of credit, based on applicable borrowing base
formulas.
Also during the first quarter of 1999, 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 March 31, 1999, the Company was not in compliance with all but
one of the aforementioned benchmarks and ratios. Subsequently, the Company
requested of and received from the financial institution a modification of these
benchmarks and ratios, so that, as of March 31, 1999, the Company was in full
compliance with the modified benchmarks and ratios. The Company has also
submitted a request to the financial institution for an extension of the
maturity date of its line of credit beyond June 1, 1999. As of the date of this
filing, the Company had been advised by its existing financial institution that,
in light of the Company's improved operating results and strengthened financial
position, a 90 day extension of the maturity date is under favorable
consideration. The
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Company has not, however, received a written confirmation of any such maturity
extension.
The Company is actively negotiating with several 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 U.S. and abroad. The Company believes its efforts to locate one or more
new financial institutions will be successful. However, there can be no
assurance that it will receive financing from a new financial institution. If
the Company cannot negotiate a further extension of its existing line of credit
beyond its June 1, 1999 maturity date, and is unable to locate one or more new
financial institutions, the Company's business may be materially and adversely
affected.
The Company believes that the combination of its current working
capital position, internally generated cash flow and its existing or a new line
of credit will be sufficient to fund the Company's operations for the balance of
its fiscal year ending December 31, 1999.
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 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 current business and
future acquiree entities. The Company has been assured by the company that
designed the system 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 payments to date and final
costs of its new systems will aggregate 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 year 2000 problem.
13
<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
The Company filed a Current Report on Form 8-K under
Item 5 on January 11, 1999
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
Date: May 17, 1999 By: /s/ George Baldwin
-------------------------------------------
George Baldwin, Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,214,542
<SECURITIES> 0
<RECEIVABLES> 3,353,082
<ALLOWANCES> (85,478)
<INVENTORY> 6,244,418
<CURRENT-ASSETS> 11,344,357
<PP&E> 602,632<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,937,029
<CURRENT-LIABILITIES> 6,183,518
<BONDS> 0
0
0
<COMMON> 3,166
<OTHER-SE> 6,317,315
<TOTAL-LIABILITY-AND-EQUITY> 12,937,029
<SALES> 6,445,688
<TOTAL-REVENUES> 6,445,688
<CGS> 3,460,656
<TOTAL-COSTS> 5,752,611
<OTHER-EXPENSES> (59,047)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (42,366)
<INCOME-PRETAX> 591,664
<INCOME-TAX> 108,700
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 482,964
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
<FN>
(1) Net of depreciation.
</FN>
</TABLE>
