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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-12739
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ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
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(Name of small business issuer in its charter)
FLORIDA 59-2327381
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1810 N.E. 144TH STREET, NORTH MIAMI, FLORIDA 33181
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(Address of principal executive offices) (Zip Code)
(305) 944-7710
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
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(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, 1999 were
$26,466,271.
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 May 1, 2000 of $1.875 per share,
was approximately $3,320,000. There is no non- voting stock.
The number of shares of the Company's Common Stock which were outstanding as of
May 1, 2000 was 3,382,921.
DOCUMENTS INCORPORATED BY REFERENCE
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.
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INDEX
PAGE
PART I
<S> <C> <C>
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....................................................14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................14
PART III
Item 9. Directors, Executive Officers, Promoters and Central Persons;
Compliance with Section 16(a) of the Exchange Act..............................................15
Item 10. Executive Compensation.........................................................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................20
Item 12. Certain Relationships and Related Transactions.................................................21
Item 13. Exhibits and Reports on Form 8-K...............................................................22
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants............................................F-2
Consolidated Balance Sheet at December 31, 1999 ..............................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998................................................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998................................................................F-6
Summary of Significant Accounting Policies....................................................F-8
Notes to Consolidated Financial Statements...................................................F-11
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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 OUR 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 OUR 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. WE UNDERTAKE 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
We design, manufacture, market and distribute computer
connectivity and networking products nationally and internationally. We
currently offer a broad range of products to our customers, including computer
cables, connectors, installation products, data sharing devices, and fiber optic
cables, as well as a complete selection of networking products, such as
networking interface cards, hubs, transceivers, and repeaters for different
networking topologies. We contract with various manufacturers to manufacture and
assemble our products using designs and manufacturing specifications (including
quality control) provided by us. Our products are manufactured from our own
designs as well as from standard industry designs. We also assemble a very small
percentage of our products at our North Miami facility and at our Communications
Components Company, Inc., or CCCI, Facility. Our manufacturers are located
primarily in the Far East, allowing us to obtain competitive pricing for our
products due to comparatively lower labor costs in the production of our
products. We offer our products to a broad range of both original equipment
manufacturers customers and retailers (such as computer superstores and dealers,
and mail order customers) in North America, Latin America, Eastern and Western
Europe, and Japan. We generally do not offer our products to end users.
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(b) BUSINESS OF ISSUER
HISTORY OF THE COMPANY
Advanced Electronic Support Products, Inc. is a Florida corporation
incorporated in 1983. Our headquarters are located in North Miami, Florida and
we have warehouse facilities in North Miami. Through AESP Computerzubehor GmbH,
a German company and Advanced Electronic Supports Products Computertillbehor i
Sweden Aktiebolag, a Swedish company, we established sales offices and
warehouses in Germany and Sweden in 1987 and 1988, respectively.
Until 1990, we primarily offered connectivity products for use with
Apple computers. In 1991, we expanded our product base to include PC
connectivity and general networking products. Since 1993, we have experienced
significant sales growth in the United States, and, through AESP Germany and
AESP Sweden, significant sales growth in Europe. In 1995, we began warehousing
products in Germany to accommodate our growing product line and to better
service our expanding base of European customers, including those in Eastern
Europe.
In February 1997, we completed our initial public offering and gained
the listing of our common stock on the NASDAQ SmallCap Market. We used the net
proceeds of the IPO to repay indebtedness, for product development and design,
to increase our inventory to support customer requirements, to increase our
sales force, to implement the "ISO 9002" standard, for advertising and
marketing, for acquisitions and for working capital. Since the IPO, we have
completed four acquisitions.
In September, 1997, we acquired the assets of the networking division
of Focus Enhancements, Inc. We now sell our networking products under the "Focus
Networking" tradename to retail customers, primarily in the United States and
Europe. We also have a supply agreement with Focus pursuant to which Focus
purchases certain original equipment manufacturer connectivity components from
us. In November, 1997, we acquired Dataholding AS (now called Jotec/AESP
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AS), a distributor of connectivity and computer products headquartered in Oslo,
Norway. During the fourth quarter of 1998, we acquired AESP Ukraine, a
distributor of our products located in the Ukraine. In March 1999, we completed
the acquisition of the net assets of Communications Components Company, Inc.
(CCCI), which manufactures a line of network connectivity products and systems.
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 us, and our strategic objective is to
become a leading manufacturer 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. Our strategy is
to market our products 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
$1 billion to independent or 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 original equipment
manufacturers and end-user customers for connectivity hardware.
The networking and computer connectivity industry is characterized by
rapid technological change. To maintain and enhance its competitive position, we
must adapt to technological change, constantly upgrade and expand our product
line, and eliminate obsolete products within that line. Thus, purchasing and
inventory management are important determinants of our 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 our profitability in the face of constantly shrinking gross margins,
our strategy is to seek out low cost producers without sacrificing quality and
to seek to develop and maintain efficient internal operations allowing us to
control our internal costs and expenses.
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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 us.
PRODUCTS AND SERVICES
Our product line consists of two categories: networking and computer
connectivity products.
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, Firewire 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 us. However, we believe 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.
We are constantly expanding and changing our product line within the
aforementioned categories to expand the total number of products we can offer
customers, to attract new customers, to penetrate new geographic and vertical
markets and to increase gross sales. By expanding our product line to include
products for different voltages, frequencies and connection configurations, and
warehousing these products near potential customers, we have successfully
expanded our sales activities into a number of Western and Eastern European
countries.
In order to provide assistance to our customers and to be competitive
with other companies in our industry, we offer our customers several services.
These services include: price protection (where the customer is entitled to
receive a lower price if we publish a lower price to a 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
us on which product or design specification is appropriate for a particular
situation); assembly support (where customers rely on us to assemble the
component parts the customer traditionally had done itself); training (where the
customer receives training from us on the different capabilities and
applications of our products); merchandising/display programs and quality
control.
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MANUFACTURING AND SUPPLIERS
All our products have been manufactured to our specifications. Those
specifications are derived either from specifications provided to us by our
original equipment manufacturer customers or from industry standard
specifications. Products we sell to our original equipment manufacturer
customers are typically manufactured to the customer's unique specifications.
Products we sell to our networking and connectivity customers are typically
manufactured to industry standard specifications.
We contract with manufacturers using two methodologies. Under the first
methodology, typically used for the manufacture of custom designed products, we
contract with a primary manufacturer (a/k/a an "assembler") and then direct that
manufacturer to various component manufacturers with whom we also have
contracted. The component manufacturers then supply components to the assembler,
who is responsible for final manufacturing of the finished product. The value of
this methodology to the manufacturing of custom designed products is that we can
enforce our 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, we contract only with
the primary manufacturer, which makes its own arrangements with component
suppliers. We enforce our specifications on the primary manufacturer, which is
responsible for the enforcement of our 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 we sell are manufactured
outside the United States in such countries as Taiwan, the Peoples' Republic of
China and Hong Kong. We utilize the services of an unaffiliated trading company
in Taiwan which assists us in working with our suppliers in the Far East. We
also assemble a small percentage of our products at our North Miami, Florida
facility. Additionally, as a result of our recent acquisition of CCCI, we now
manufacture connectivity products at its Broomall, Pennsylvania manufacturing
facility.
For the production of each specific type of product, we usually
maintain an on-going relationship with several suppliers to insure against the
possibility of problems with one supplier adversely impacting our business. For
the production of original manufacturer products, we usually use 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 our control. However, we may not be able to
easily replace a sole source of supply if required. In an effort to produce
defect-free products and maintain good working relationships with our suppliers,
we keep in contact with our suppliers, regularly inspecting the manufacturing
facilities of the suppliers and implementing quality assurance programs in the
supplier's factories.
Over the last five years, we have progressively expanded our supplier
base. Presently, we work with approximately 40 suppliers. We have one supplier
(located in China), which supplied 11.0% of our purchases during 1999. No other
source of supply accounted for more than 10 percent of our purchases during
1999. We do not enter into supply or requirements contracts with our suppliers.
We believe that purchase orders, as opposed to supply or requirement agreements,
provide
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us with more flexibility in responding quickly to customer demand. Nevertheless,
the loss of one or more of our suppliers could have an adverse impact on us.
QUALITY CONTROL
Our goal is to provide our customers with defect-free products. Working
with our primary manufacturers and often with the manufacturers of the component
parts, we have instituted quality control measures at five stages throughout the
manufacturing process. At the first stage, we work with our 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 control upon
shipment to us. The fifth and final stage of quality control occurs at one of
our distribution warehouses (North Miami, Ukraine, Germany, Sweden and Norway).
At this final stage of quality control, we test a certain percentage of each
shipment of the products we receive to ensure the products meet our quality
standards.
In 1998, we were certified as being in compliance with the "ISO 9002"
standard. The ISO 9002 standard is an international manufacturing standard which
is becoming more prevalent across numerous industries. Almost all of our current
suppliers are either ISO 9002 compliant or in the process of implementing ISO
9002 procedures.
CUSTOMER BASE
Our customer base is divided into two categories: original equipment
manufacturers and resale customers. Original equipment manufacturer customers
are generally manufacturers of computer-related audio-video equipment which use
our products as part of their finished products. Resale customers are local and
regional resellers, value-added resellers and distributors, educational
institutions and catalog houses. Catalog houses constitute a large share of our
U.S. retail sales. The resale mass merchandising market also represents a
significant growth area for us. We do not sell our products directly to
end-users.
Substantially all of our revenues are derived from the sale of our
products through third parties. Domestically, our products are sold to end users
primarily through original equipment manufacturer customers, wholesale
distributors, value added resellers, mail order companies, computer superstores
and dealers. In Europe, our products are sold through wholesale distributors and
mail order companies, dealers, value added resellers and web-based distributors.
Accordingly, we are dependent on the continued viability and financial stability
of our resale customers. Our resale customers often offer products of several
different companies, including, in many cases, products that are competitive
with our products. Our resale customers may not continue to purchase our
products or provide us with adequate levels of support. The loss of, or a
significant reduction in sales volume to, a significant number of our resale
customers could have a material adverse effect on our results of operations.
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Sales to our exclusive distributor in Russia, AESP-Russia, amounted to
9.2% of our net sales for 1998 and 9.4% of our net sales for 1999. However, in
August 1998, due to deteriorating economic conditions in Russia, AESP-Russia
experienced a cessation of business volume. As a consequence, we elected, during
our 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. We are currently selling products to our Russian
distributor on a paid-in-advance basis. In addition, during 1999, we recovered
approximately $200,000 of the accounts receivable due from our Russian
distributor which were written off during 1998.
Our top 10 customers (including AESP-Russia) accounted for
approximately 31% and 32% of our net sales for the years ended December 31, 1998
and 1999. No one customer accounted for more than 10% of net sales in 1999 and
1998.
We believe 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 our top ten customers from period to period reflects our
attempts to diversify our customer base and reduce our dependence on any one set
of customers. However, the loss of one or more significant customers could have
a material adverse impact on our business and results of operations.
MARKETING AND SALES
Our marketing and sales efforts are directed by our Sales and Marketing
Department. The Marketing Department is responsible for, among other things,
publishing our catalogs for each product line as well as the general company
catalog, assisting our sales group in preparing for sales shows, advertising our
products in industry publications, working with mail-order catalogs to prepare
advertising space in such catalogs, and providing designs for packaging our
products. The Sales Department is responsible for, among other things,
contacting potential customers with information and prices for our 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.
Original equipment manufacturer sales are handled by salespersons
located in our headquarters in North Miami, Florida. All original equipment
manufacturer customers receive their shipments from our North Miami warehouse.
Networking and connectivity sales are generally handled from our headquarters in
North Miami, Florida, from CCCI's facilities in Broomall, Pennsylvania, and from
the German, Swedish, Ukrainian and Norwegian offices and warehouses.
COMPETITION
We compete 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 ours. Some of these competitors also carry product
lines which we do not carry and provide services which we do not provide.
Competitive pressure from these companies may materially adversely affect our
business and financial condition in the future. In the event that more
competitors begin to carry products which
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we carry and price competition with respect to our products significantly
increases, competitive pressures could force us to reduce the prices of our
products, which would result in reduced profit margins and prolonged price
competition and would have a material adverse effect on our operating results
and financial condition. A variety of other potential actions by our
competitors, including increased promotion and accelerated introduction of new
or enhanced products, could also have a material adverse effect on our results
of operations. We may not be able to compete successfully in the future.
GROWTH STRATEGY
Our 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.
NETWORKING AND CONNECTIVITY PRODUCTS & ORIGINAL EQUIPMENT MANUFACTURER
CUSTOMER BASE
We intend to increase our revenues and income in the networking and
original equipment manufacturer markets by continuing to broaden our customer
base in existing markets and by expanding into new markets. In order to increase
national and international customer base, we intend to continue to market to
large distributor catalog companies, to increase both our product line and
inventory and to expand our sales reach in the US, Eastern and Western Europe
and in the future into Latin America. To expand our original equipment
manufacturer customer base, we intend to expand our 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 our growth strategy is to acquire other companies,
assets and/or product lines that will compliment or expand our business. We are
seeking companies which market to the networking, telecommunications, cable
audio/video and computer industries. We believe that acquisitions, mergers,
asset purchases or other strategic alliances in these categories should enable
us to achieve operating leverage on our existing resource base.
Our 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 our financial condition and the price
of our common stock. Our ability to complete acquisitions may also be limited by
certain restrictive covenants contained in our credit agreement. In addition,
acquisitions involve risks that could adversely affect our 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 our earnings and the
retention of key executives of the acquiree company. We may not be successful in
consummating acquisitions on acceptable terms.
Other than as required by the our Articles of Incorporation, By-Laws,
and applicable law, our shareholders are not entitled to vote on acquisitions,
mergers or other business combinations.
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CORPORATE ORGANIZATION
Our operations are divided into six departments: (1) the Sales and
Marketing Department, (2) the International Sales Department (including sales
offices in Sweden, Germany, Norway and Ukraine), (3) the Purchasing Department,
(4) the Operations Department (including the MIS, shipping, warehouse and
quality control and production groups), (5) the Finance/Accounting Department
and (6) manufacturing/CCCI. 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 our 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, 1999, we employed 149 people at the following
locations: Miami office- -59; Ukraine--37; Norway--20; CCCI--12; Sweden--11; and
Germany--10. Company wide--33 employees work in administration/accounting, 12
employees work in purchasing, 49 employees work in sales and marketing, and 55
work in the operations department. None of our employees is covered by
collective bargaining agreements. We believe that our relationship with our
employees is good.
GOVERNMENT REGULATION
We are not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to networking and computer
connectivity products.
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ITEM 2. DESCRIPTION OF PROPERTY
The table set forth below identifies the principal properties we
currently utilize. All properties are leased, are in good condition and are
maintained on a regular basis and are adequate for our present requirements. RSB
Holdings, Inc., a related party, owns the corporate headquarters, product
assembly and central warehouse, and leases such properties to us. Under the
terms of our credit agreement, RSB Holdings has executed landlord waivers,
permitting the lender the priority right to enter our premises and seize
collateral in the event of a default under the credit agreement. See Note 8 of
Notes to Consolidated Financial Statements for information regarding the
financial terms of our 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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We also utilize a bonded warehouse in Rotterdam, Netherlands and a
third party warehouse in Miami, Florida. We pay rent for both of these
warehouses based upon the number of pallets which we store in these facilities
from time to time.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Form 10-KSB, we were 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 1999 fiscal year or during the first quarter of
the 2000 fiscal year.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 our two most recent fiscal years, as reported by NASDAQ, are set
forth below:
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COMMON STOCK WARRANTS
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HIGH LOW HIGH LOW
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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
1999
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First Quarter 2 11/16 1 5/16 9/32 1/16
Second Quarter 2 5/8 1 17/32 11/32 1/16
Third Quarter 3 7/16 2 1/16 7/16 5/32
Fourth Quarter 2 5/8 1 17/32 3/8 1/16
2000
- ----
First Quarter 8 3/8 1 3/4 2 7/8 9/32
Second Quarter (to 4/28/00) 3 1/4 1 3/4 1 3/8
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At May 1, 2000, the number of holders of record of our common stock was
28. However, our transfer agent estimates (based upon available information)
that there are approximately 800 beneficial holders of our common stock.
We have not paid any dividends during the last two fiscal years and we
do not intend to pay any cash dividends on common stock for the foreseeable
future. We intend to reinvest our earnings, if any, in the growth and expansion
of its business. Other than our credit facility, there are no restrictions that
limit our ability to pay dividends or that are likely to do so in the future.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, we had net sales of $26.5
million, an increase of $4.5 million, or 20.5% over net sales of $22.0 million
for the year ended December 31, 1998. The increase in sales primarily resulted
from increases in domestic sales for both original equipment manufacturer and
retail products. Original equipment manufacturer sales were up $1.5 million or
61.1%, for the 1999 fiscal year compared to the 1998 fiscal year. Similarly,
domestic networking sales increased by $0.9 million, or 14.2%, for 1999 compared
to 1998. Our 1999 sales also benefited from sales by CCCI of $1.0 million.
International sales increased $1.8 million, or 18.7%, from 1998 to 1999. Sales
during 1999 and 1998 to our Russian distributor aggregated 9.4% and 9.2%,
respectively, of net sales. Sales by the Company's Ukranian Operation were $1.3
million for 1999, compared to $200,000 for 1998. This business was acquired by
the Company in October 1998 and therefore 1998 sales only included two months of
operations.
Our gross profit margin was 38.4% for the year ended December 31, 1999,
compared to 37.9% for 1998. The primary reason for this change was the increase
in domestic retail sales and international networking sales from period to
period, partially offset by an increase in OEM sales. As we have previously
stated, the mix of original equipment manufacturer and networking business in
any particular period will impact (positively or negatively) the gross profit
margin in that particular period. Generally, original equipment manufacturer
business generates a lower margin than our networking or international business,
but has considerably less overhead corresponding to the sale. The gross profit
margin for 1998 was also negatively impacted by write-offs of approximately
$659,000 of inventory which was custom made for the Company's Russian
distributor. The gross profit margin was positively impacted during 1999 by
sales of a substantial portion of this inventory to the Company's Russian
distributor. The Company believes that this inventory was sold for less than its
original cost.
Selling, general, and administrative (SG&A) expenses decreased $2.4
million, or 20.8%, for 1999 compared to 1998. SG&A for 1998 included a one time
write-off of $1.4 million of Russian receivables and $.5 million of receivables
from the Company's Ukrainian distributor prior to the acquisition of such
distributor in October 1998. No such write-off occurred in 1999. As a percentage
of net sales, SG&A for the twelve months ended December 31, 1999 was 35.0%.
Comparatively, selling, general, and administrative expenses for 1998 was 53.2%
(44.6% without the write-offs).
As a result of the aforementioned factors, income from operations for
1999 was $900,000, compared to a loss of $3.4 million for 1998. The Company had
a loss from operations during the fourth quarter of 1999 of $244,000.
Interest expense (other than on shareholders' convertible notes)
increased by $39,000 from period to period. Exchange rates losses were $131,000
for 1999, compared with $143,000 exchange rate gain in 1998. Taxes for 1998
benefited from net operating loss carry backs arising as a result of our 1998
losses.
Diluted earnings per share for the 1999 fiscal year were $0.10 per
share, compared to a loss of $2.10 per diluted share for the 1998 fiscal year.
Weighted average diluted shares outstanding were 4,026,796 for 1999, compared to
2,284,201 for 1998. Weighted average shares outstanding for 1999 compared to
1998 includes the 799,514 shares issued at December 31, 1998 in connection with
the
12
<PAGE>
conversion of outstanding convertible debt. See Note 11 of Notes to
Consolidated Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily with cash flow
from operations and with the proceeds from our available credit lines. Cash
provided by operating activities for the year ended December 31, 1999 was $1.4
million, compared to cash used in operations of $1.1 million for 1998. The
change from period to period results from the 1998 losses.
Cash used in investing activities was $750,000 for 1999, compared to
$300,000 for 1998. Included in investing activities for 1999 are loans to
related parties of $449,000. These loans were made to various employees and
former stockholders of the Company's Norwegian subsidiary. The current balance
of the loans is approximately $257,000 and the loans are payable on December 31,
2000 with interest of 7% per annum.
Cash provided by financing activities for the year ended December 31,
1998 was $2.4 million (primarily borrowings under the Company's line of credit),
compared to cash used in financing activities during 1999 of $92,000.
Working capital was $4.7 million at December 31, 1999, compared to $4.5
million at December 31, 1998. Accounts receivable were $3.1 million at December
31, 1999, compared to $3.0 million at December 31, 1998, reflecting better
collection efforts during 1999. Inventory was $5.7 million at December 31, 1999,
compared to $6.2 million at December 31, 1998. The decrease in inventory of
$469,000 from period to period, despite substantially increased sales during
1999, reflects the results of our efforts to use our inventory more efficiently.
The number turns of the inventory increased from 2.3 times in 1998 to 2.8 times
in 1999.
We have a $3.5 million dollar revolving line of credit with an
institutional lender, the material terms of which are set forth below.
Borrowings under this line of credit bear interest at the rate of prime plus
0.25% per annum. Available borrowings under the line are based upon specific
percentages of eligible accounts receivable and inventories. The line of credit
is secured by a lien on our accounts receivable, inventory and all of our other
assets. As of December 31, 1999, approximately $ 2.4 million was outstanding
under this credit facility. The line of credit is guaranteed by our principal
shareholders.
In connection with our credit facility agreement, we are required to
comply with certain affirmative and negative covenants, including limitations on
further borrowings and dividend payments. Further, we are obligated to remain in
compliance with certain financial ratios during the term of the agreement. As of
December 31, 1999, we were not in compliance with one of the covenants under our
agreement with our lender; HOWEVER, our lender has waived this violation at
December 31, 1999. We believe that we are currently in compliance with
applicable covenants under our agreement.
We may borrow funds from our credit facility to fund our future growth.
We may not be in a position to borrow funds under our credit line at such time
as they are required. Additionally, the credit facility will mature on September
2, 2000. While we expect that we will be able to renew the facility, we may not
be able to renew the credit facility or even renew it on its current terms.
13
<PAGE>
We expect that our cash flow from operations, along with our currently
available bank line of credit, will be sufficient to meet our financing
requirements over the next twelve months. This is a projection, however, our
cash flow from operations and from our available line of credit may not be
available to meet our cash requirements over the next twelve months.
We do not believe that inflation has had a significant effect on our
operations during the last several years. We believe we have historically been
able to pass on increased costs of production to the price charged for our
products. However given the labor-intensive nature of our products and the fact
that the majority of our production occurs in the Far East, we may not continue
to be able to pass on such increased costs in the future.
YEAR 2000 ISSUES
We were not impacted by Year 2000 related problems in our operations,
and we believe that our present computer systems are Y2K compliant. We have
completed an update of our computer system in order to have the computer system
capable of handling the projected growth and diversification of our present and
acquired businesses.
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.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
OF 1934
BOARD OF DIRECTORS
Our Articles of Incorporation and By-laws provide for one class of
Board of Directors. At the date of this Proxy Statement, the members of the
Board and the length of service as Directors were as follows:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR POSITIONS SINCE
- ---- --- ------------------ -----
<S> <C> <C> <C>
Slav Stein(1)................................. 55 President, Chief Executive 1983
Officer and Director
Roman Briskin(1).............................. 50 Executive Vice President,
Secretary/Treasurer and Director 1984
Terrence R. Daidone(1)(2)(3).................. 40 Director 1997
William B. Coldrick(2)(3)..................... 58 Director 1997
Leonard Sokolow............................... 43 Director 1999
</TABLE>
- ---------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
BUSINESS EXPERIENCE
The principal occupations for at least the past five years of each of
our Directors are as follows:
Mr. Stein is one of our founders and has been employed by us in a
senior executive capacity and has been one of our Directors since our formation
in 1983. Mr. Stein has been the President, Chief Executive Officer and a
Director of our company since our IPO. Mr. Stein is also one of our principal
shareholders.
Mr. Briskin has been one of our senior executive officers since 1984, a
Director since 1992 and has served as Executive Vice President,
Secretary/Treasurer and a Director of our company since the IPO. Mr. Briskin is
also one of our principal shareholders.
Mr. Daidone has served as one of our Directors since January 1997. Mr.
Daidone has been Vice President of Sales and Marketing of Fugate and Associates,
Inc./ERS Imaging Supplies, Inc.,
15
<PAGE>
a private corporation engaged in the collection and distribution of empty
printer cartridges, since January 1996. From 1993 to 1996, Mr. Daidone served as
Director of Mass Merchant Operations with Nashua Corporation, a company engaged
in the manufacturing of coated products.
Mr. Coldrick has served as one of our Directors since June 1997. Mr.
Coldrick is also a Director of Focus Enhancements, Inc., a Delaware corporation,
where he has served since 1993. See "Certain Transactions." Mr. Coldrick is
retired. Prior to his retirement, Mr. Coldrick served in various senior
capacities with Apple Computer and Unisys Corporation. Mr. Coldrick currently
acts as an investor in and a consultant to several companies.
Mr. Sokolow has been a Director of our company since November 1999.
Since November 1999, Mr. Sokolow has been CEO and Vice Chairman of vFinance.com,
Inc. which is traded over the counter. Since September 1996, Mr. Sokolow has
been the President of Union Atlantic LC, a merchant, banking and strategic
consulting firm specializing domestically and internationally in technology
industries. Union Atlantic is a wholly owned subsidiary of vFinance.com. Since
August 1993 Mr. Sokolow has been President of Genesis Partners, Inc., a private
financial business consulting firm. Mr. Sokolow was Chairman and Chief Executive
Officer of the Americas Growth Fund, Inc., a closed-end management investment
company, from August 1994 to December 1998. Mr. Sokolow presently serves as a
director of Catalina Lighting, Inc., a designer, manufacturer and distributor of
lighting fixtures and lamps traded on the New York Stock Exchange, and Ezcony
Interamerica, Inc., a distributor of major brand name consumer electronics to
Latin America. The shares of Ezcony Interamerica are traded over the counter.
EXECUTIVE OFFICERS
The following list reflects our executive officers, as of the date of
this report, the capacity in which they serve our company, and when they took
office:
<TABLE>
<CAPTION>
NAME AGE EXECUTIVE POSITION OFFICER SINCE
- ---- --- ------------------ -------------
<S> <C> <C> <C>
Slav Stein 55 President and Chief Executive Officer 1983
Roman Briskin 50 Executive Vice President, Secretary/
Treasurer 1984
</TABLE>
FAMILY RELATIONSHIPS
There are no family relationships between or among any of our directors
and executive officers.
COMPLIANCE WITH SECTION 16(A)
Based solely upon our review of Forms 3 and 4 and amendments thereto
furnished to us pursuant to Rule 16a-3(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during our fiscal year ended December 31,
1999 and any Forms 5 and amendments thereto
16
<PAGE>
furnished to us with respect to such fiscal year, and any written
representations referred to in subparagraph (b)(2)(i) of Item 405 of Regulation
S-B, except as set forth below, no person who at any time during the fiscal year
ended December 31, 1999 was a director, officer or, to our knowledge, a
beneficial owner of more than 10% of any class of our equity securities
registered pursuant to Section 12 of the Exchange Act, failed to file on a
timely basis, as disclosed in Forms 3, 4 and 5, reports required by Section
16(a) of the Exchange Act during the fiscal year ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows remuneration paid or accrued by us during the
year ended December 31, 1999 and for each of the two preceding years, to our
Chief Executive Officer and to each of our other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION AWARDS
------------------------------- ------------------
OTHER RESTRICTED ALL OTHER
SALARY BONUS ANNUAL STOCK OPTION/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) COMPENSATION AWARDS SARS(#) PAYMENTS (2)(3)
- -------------------------- ---- -------- -------- ------------ -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Slav Stein 1999 $180,000 $ 31,814 - 25,000 - - 6,000
CEO 1998 164,423 - - 100,000 - - 6,000
1997 149,723 62,516 - 180,250 - - 6,000
Roman Briskin 1999 $180,000 $ 31,814 - 25,000 - - 6,000
Executive Vice President 1998 164,423 - - 100,000 - - 6,000
1997 149,723 62,516 - 180,250 - - 6,000
</TABLE>
- ------------------
(1) Bonus is based on a percentage of pre-tax income pursuant to current
employment agreements.
(2) Does not include compensation paid to the executive in 1997 to allow
the executive to pay taxes on our income incurred while we were an S
corporation for federal income tax purposes and interest on promissory
notes due to the executive from us, which notes were converted into
shares of our common stock effective December 31, 1998.
(3) Messrs. Stein and Briskin receive an automobile allowance of $6,000 per
year pursuant to the terms of their employment agreements with us.
Table excludes value of a $500,000 term life insurance policy which the
Company purchases for the benefit of each of Messs. Stein and Briskin.
17
<PAGE>
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth information concerning options granted
during the fiscal year ended December 31, 1999 to the persons named in the
preceding summary compensation table under the caption "Executive Compensation":
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
(A) NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
GRANTED (#) FISCAL YEAR ($/SH.)* DATE
- ------------------------------------------------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Slav Stein 25,000 17.4% 2.13 11/22/2009
Roman Briskin 25,000 17.4% 2.13 11/22/2009
</TABLE>
- -----------------
AGGREGATED OPTION/SAR EXERCISED DURING LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES
The following table sets forth information concerning the value of
unexercised stock options at the end of the 1999 fiscal year for the persons
named in the preceding summary compensation table under the caption "Executive
Compensation":
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END ($)
------------------------- ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Slav Stein - - 200,000/205,250 32,000/32,840
Roman Briskin - - 200,000/205,250 32,000/32,840
</TABLE>
- ----------------
* Computed based upon the difference between the closing price of our
common stock at December 31, 1999 ($1.66) and the exercise price of
certain of the outstanding options. No value has been assigned to
options which are not in the money.
18
<PAGE>
COMPENSATION OF DIRECTORS
Those of our directors who are not our employees are annually granted
options to purchase 25,000 shares of our common stock at an option exercise
price equal to the closing price of our common stock on the date of grant. These
options vest immediately. Directors also receive $3,000 per year for service on
the Board of Directors and on committees of the Board of Directors. Directors
who are our employees receive no additional compensation for their service on
the Board of Directors. All Directors are also reimbursed for expenses incurred
in attending Board meetings.
EMPLOYMENT AGREEMENTS
On February 19, 1997, Messrs. Stein and Briskin each entered into an
employment agreement with us. The term of such employment agreements (subject to
earlier termination for cause) are for an initial period of five years and will
thereafter continue for successive one-year terms unless canceled by either
party. During the term of such employment agreements, Messrs. Stein and Briskin
will each receive a salary of $150,000 per year, which salary will increase
annually by 10 percent of the prior year's salary plus the increase in the
consumer price index, which annual increase may not, in any event, exceed 20
percent of the prior year's salary. In addition, Messrs. Stein and Briskin will
each be entitled to receive an annual bonus equal to five percent of our pre-tax
net income in each fiscal year. We provide each of Messrs. Stein and Briskin
with an automobile allowance of $500 per month and a term life insurance policy
in the amount of $500,000.
In the event that during the term of such employment agreements there
is a change of control of our company which has not been approved by the our
Board of Directors, Messrs. Stein and Briskin will have the option to terminate
their employment with us within three months of the change of control and
receive a lump sum payment of $750,000 each. In such event, all previously
granted stock options would become automatically vested. If the Board of
Directors approves a change of control, Messrs. Stein and Briskin may terminate
their employment, but would only be entitled to receive a payment equal to the
prior year's annual salary and to become automatically vested in a portion of
their stock option equal to their percentage completion of the term of their
employment agreement. For purposes of the employment agreements, a "change in
control" is defined as an event that: (i) would be required to be reported in
response to Item 6(e) of Schedule 14(a) of Regulation 14A under the Exchange
Act; or (ii) causes a person other than Messrs. Stein and Briskin to
beneficially own more than 30 percent of our outstanding securities. As part of
such employment agreements, each of Messrs. Stein and Briskin have agreed not to
compete against us for a 12-month period following the termination of their
employment with us for any reason other than a change in control without the
approval of the Board of Directors.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 1, 2000 we had outstanding 3,382,921 shares of our common
stock. The following table sets forth, as of May 1, 2000, certain information
regarding our common stock owned of record or beneficially by (i) each person
who owns beneficially more than 5% of our outstanding common stock; (ii) each of
our directors and named executive officers; and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK(1)
------------------------------------
NAME OF BENEFICIAL OWNER(1) SHARES PERCENT
- ----------------------------------------------------- --------------- -----------
<S> <C> <C>
Slav Stein(2)........................................ 1,006,007 28.1%
Roman Briskin(2)..................................... 1,006,007 28.1%
Terrence R. Daidone(3)............................... 65,000 1.9%
William B. Coldrick(3)............................... 62,000 1.8%
Leonard Sokolow(3)................................... 6,250 0.2%
All directors and executive officers
as a group (5 persons)(4).......................... 2,145,264 55.5%
</TABLE>
- ------------------
* Less than one percent
(1) Unless otherwise indicated, each person named in the table has the sole
voting and investment power with respect to the shares beneficially
owned. The address for each beneficial owner is c/o Advanced Electronic
Support Products, Inc., 1810 N.E. 144th Street, North Miami, Florida
33181.
(2) Includes options to purchase 200,000 shares of common stock issuable
upon the exercise of vested stock options. Excludes unvested options to
purchase 205,250 shares of common stock.
(3) Shares of common stock issuable upon the exercise of vested stock
options.
(4) Includes vested stock options to purchase an aggregate of 533,250
shares of common stock.
20
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 15, 1996, we entered into a five year lease with RSB Holdings,
Inc., a Florida corporation ("RSB Holdings"), pursuant to which we lease our
corporate headquarters and warehouse in North Miami, Florida. We make annual
payments under such lease in the amount of approximately $43,200. Messrs. Stein
and Briskin each own 50 percent of the issued and outstanding common stock of
RSB Holdings, and are its sole officers and directors.
Immediately prior to the effective date of the IPO (February 13, 1997),
Messrs. Stein and Briskin, who owned all of the outstanding stock of AESP
Computerzuberhor GmbH, a German company, and Advanced Electronic Support
Products Computertillbehor i Sweden Aktiebolag, a Swedish company, contributed
their interests in said corporations to us for no additional consideration.
In February 1997, we issued two principal shareholders' notes, each in
the amount of $869,562. The principal shareholders' notes bore interest at a
rate of one percent over the prime rate, payable monthly. Principal and accrued
but unpaid interest was due on February 19, 2005. The principal shareholders'
notes were originally convertible into our common stock at a conversion price of
$4.00 per share. In February and March 1997, we paid Messrs. Stein and Briskin
$150,000 each as a prepayment of a portion of the principal shareholders' notes.
Effective December 31, 1998, the principal shareholders' notes were
converted into an aggregate of 799,514 shares of our common stock. The
conversion price was $1.80 per share. The conversion price was determined by the
independent members of the Board, after negotiation with the principal
shareholders and represented a 31% premium over the price of our common stock on
the conversion date. The new conversion price, which amended the original
conversion price, was agreed to in order to induce the holders of the notes to
immediately convert the notes, thus saving us future interest on the notes and
immediately increasing our net worth.
In July 1995, US Advantage Corporation, a Florida corporation loaned us
$120,000, pursuant to a Demand Promissory Note, at an interest rate of 8.5
percent per annum. During 1997, we paid $125,350 to US Advantage in satisfaction
of all the principal and a portion of the interest of the Demand Promissory
Note. Messrs. Stein and Briskin each own 50 percent of the issued and
outstanding capital stock of US Advantage. Approximately $33,000 of accrued but
unpaid interest remains due and payable under this note.
In September 1997, we purchased the assets of the networking division
of Focus Enhancements, Inc. Mr. Coldrick, who serves as one of our Directors,
also serves as a director on the Board of Directors of Focus.
We believe that all the foregoing related-party transactions were on
terms, as a whole, no less favorable to us than could reasonably be obtained
from unaffiliated third parties. Since the IPO, all transactions with affiliates
have been approved by a majority of our disinterested directors and on terms no
less favorable to us than those that are generally available from unaffiliated
third parties.
21
<PAGE>
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 Loan Agreement between the Company and SunTrust Bank
Miami, N.A., dated July 26, 1996 7
10.2 Lease Agreement between the Company and RSB Holdings,
Inc., dated July 15, 1996 2
10.3 Promissory Note between the Company and U.S. Advantage,
dated July 15, 1996 2
10.4 Form of 1996 Stock Option Plan 2
10.5 Form of Employment Agreement between the Company and Slav
Stein 2
10.6 Form of Employment Agreement between the Company and Roman
Briskin 2
10.7 Form of Convertible Subordinated Promissory Note from the
Company to Messrs. Stein and Briskin 2
10.8 Form of Stock Option Agreements between the Company and
Messrs. Stein and Briskin 2
10.9 Form of Mahoney Consulting Agreement 2
10.10 Form of Financial Advisory Agreement 2
10.11 Form of Contingent Stock Option Agreement between the
Company and Messrs. Stein and Briskin 2
10.12 Form of Lock-Up Agreement 2
10.13 Amendment to 1996 Stock Option Plan 9
10.14 Loan Agreement between the Company and SunTrust
Bank/Miami, N.A., dated March 25, 1999 6
10.15 Loan Agreement between the Company and Commerce Bank,
N.A., dated September 23, 1999 8
10.16 Master Purchase Agreement between the Company and Focus
Enhancements, Inc., dated September 29, 1997 4
10.17 Amendment to Master Purchase Agreement between the Company
and Focus 6
10.18 Asset Purchase Agreement between the Company and Focus
Enhancements, Inc., dated September 30, 1997 4
10.19 Share Exchange Agreement between the Company, Dataholding
AS, and selling shareholders of Dataholding AS, dated
November 12, 1997 5
10.20 Stock Purchase Agreement among the Company, CCCI and
Donald Y. Daily, Jr. 6
21.1 List of Subsidiaries 6
27.1 Financial Data Schedule*
- -----------------
* Filed herewith.
22
<PAGE>
1 Incorporated by reference to our Registration Statement on
Form 8-A (SEC File No. 000-21889) filed with the SEC on December 18, 1996.
2 Incorporated by reference to our Registration Statement on
Form SB-2, and amendments thereto (SEC File No. 333-15967), declared effective
February 13, 1997.
3 Incorporated by reference to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997.
4 Incorporated by reference to our Current Report on Form 8-K
filed October 15, 1997.
5 Incorporated by reference to our Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997.
6 Incorporated by reference to our Annual Report on Form
10-KSB for the year ended December 31, 1998.
7 Incorporated by reference to our Registration Statement on
Form SB-2 (SEC File No.333-15967) filed with the SEC on November 12, 1996.
8 Incorporated by reference to our Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999.
9 Incorporated by reference from the Company's definitive proxy
statement, dated September 10, 1999.
(b) REPORTS ON FORM 8-K
None
23
<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.
By: /s/ Slav Stein
----------------------------
May 3, 2000 Slav Stein, President
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
- ------------------------------------------------ Officer and Director May 3, 2000
Slav Stein
Executive Vice President,
Secretary and Director May 3, 2000
/s/ Roman Briskin (Chief Financial and
- ------------------------------------------------ Accounting Officer)
Roman Briskin
/s/ Terrence R. Daidone Director May 3, 2000
- ------------------------------------------------
Terrence R. Daidone
/s/ William B. Coldrick Director May 3, 2000
- ------------------------------------------------
William B. Coldrick
/s/ Leonard Sokolow Director May 3, 2000
- ------------------------------------------------
Leonard Sokolow
</TABLE>
24
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONTENTS
================================================================================
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at December 31, 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 F-6
Summary of Significant Accounting Policies F-8
Notes to Consolidated Financial Statements F-11
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, 1999, 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, 1999, 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.
BDO SEIDMAN, LLP
Miami, Florida
April 12, 2000
F-2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
1999
===================================================================================================================
ASSETS (Note 3)
CURRENT ASSETS
<S> <C>
Cash $ 1,601,770
Accounts receivable, net of $60,000 allowance for doubtful accounts 3,058,018
Inventories 5,688,914
Income taxes receivable 38,187
Due from related parties (Note 6) 448,684
Prepaid expenses and other current assets 170,591
- -------------------------------------------------------------------------------------------------------------------
Total current assets 11,006,164
Property and equipment, net (Note 2) 492,208
Intangible assets net of $268,920 accumulated amortization (Note 1) 907,979
Deferred tax asset (Note 10) 21,380
Other assets 60,435
- -------------------------------------------------------------------------------------------------------------------
$ 12,488,166
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 3) $ 2,409,471
Accounts payable 2,382,798
Accrued expenses 778,431
Income taxes 272,661
Customer deposits and other 381,675
Current portion long-term debt (Note 3) 127,706
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,352,742
Long-term debt (Note 3) 228,758
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 6,581,500
- -------------------------------------------------------------------------------------------------------------------
Commitments (Notes 8 and 9)
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 11 and 13):
Preferred stock, $.001 par value; 1,000,000 shares authorized; -
none issued
Common stock, $ .001 par value; 20,000,000 shares authorized;
3,233,921 shares issued and outstanding 3,234
Additional paid-in capital 9,615,501
Deficit (3,181,922)
Cumulative foreign currency translation adjustment (530,147)
- -------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 5,906,666
- -------------------------------------------------------------------------------------------------------------------
$ 12,488,166
===================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-3
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES (Notes 4 and 5) $ 26,466,271 $ 21,968,955
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of sales (Note 4) 16,300,426 13,646,496
Selling, general and administrative (Notes 4, 6, 8, and 9) 9,266,499 11,696,753
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 25,566,925 25,343,249
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 899,346 (3,374,294)
OTHER EXPENSES:
Interest, net (189,508) (150,675)
Interest - shareholders (Note 11) - (988,902)
Other (73,558) (23,990)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 636,280 (4,537,861)
Provision for income taxes (Note 10) 248,803 266,951
- -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 387,477 $ (4,804,812)
=================================================================================================================
Earnings (loss) per common share (Note 12) $ .12 $ (2.10)
Earnings (loss) per common share - assuming dilution (Note 12) .10 (2.10)
=================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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, 1997 $ 2,283 $ 6,843,374 $ 1,235,413 $ (97,079) $ - $ 7,983,991
Conversion of convertible
debt (Note 11) 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
Issuance of common stock in
connection with acquisition 86 149,914 - - - 150,000
(Note 1)
Issuance of common stock in
connection with exercise of
stock options (Note 13) 66 101,685 - - - 101,751
Net income - - 387,477 - 387,477 387,477
Other comprehensive income:
Foreign currency translation
adjustment - - - (395,291) (395,291) (395,291)
-------------
(7,814)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 3,234 $ 9,615,501 $ (3,181,922) $ (530,147) $ 5,906,666
================================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 387,477 $(4,804,812)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities, net of effect of acquisition (Note 1):
Provision (recovery), net for losses on accounts receivable (145,725) 185,441
Depreciation and amortization 388,720 166,348
Write-off of Russian and Ukraine receivable - 1,952,389
Write-off of Russian inventory - 659,085
Amortization of goodwill 131,816 126,804
Options granted in lieu of consulting fees - 230,000
Charge related to conversion of convertible debt - 852,202
Deferred income taxes (72,169) 247,798
(Increase) decrease in:
Accounts receivable 514,670 (592,201)
Inventories 587,396 (691,020)
Prepaid expenses and other current assets (55,279) 233,050
Other assets 8,716 (8,926)
Income tax receivable 270,665 (308,852)
Increase (decrease) in:
Accounts payable and accrued expenses (717,509) 436,205
Income taxes payable (152,800) 189,936
Customer deposits and other 286,371 68,034
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,432,349 (1,058,519)
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Loans to related parties (448,684) -
Cash paid in acquisition, net of cash acquired (71,504) 18,701
Additions to property and equipment (230,261) (318,323)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used) in investing activities (750,449) (299,622)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Overdraft (67,632) 67,632
Net proceeds from (payments on) borrowings (126,064) 2,311,356
Net proceeds from exercise of stock options 101,751 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (91,945) 2,378,988
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 589,955 1,020,847
Effect of exchange rate changes on cash (395,291) (37,777)
Cash, at beginning of year 1,407,106 424,036
- ---------------------------------------------------------------------------------------------------------------------
CASH, AT END OF YEAR $ 1,601,770 $ 1,407,106
=====================================================================================================================
</TABLE>
F-6
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest $ 244,011 $ 280,078
Taxes 490,492 77,016
=====================================================================================================================
Non cash financing and investing activities:
Issuance of common stock for acquisition of net assets $ 150,000 $ -
Acquisition of net assets (Note 1) $ 518,114 $ 489,831
Convertion 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
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
DESCRIPTION OF Advanced Electronic Support Products, Inc.,
BUSINESS (AESP) is primarily a wholesaler of computer
cables and accessories whose customers are
computer manufacturers, dealers and
retailers located in the U.S. and foreign
markets. The Company grants credit to
customers without collateral.
SUBSIDIARIES AND The Company's subsidiaries are based and
BASIS OF operating in the United States, Sweden,
PRESENTATION Germany, Norway and Ukraine. The functional
and reporting currency for statutory
purposes is the United States Dollar,
Swedish Krona, German Mark, Norwegian Krone
and Ukraine Hryvna. The foreign 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 statements of operations 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), approximated
($131,000) and $143,000 for the years ended
December 31, 1999 and 1998, respectively,
are included in other income in the
accompanying consolidated statements of
operations.
PRINCIPLES OF The accompanying consolidated financial
CONSOLIDATION statements include the accounts of AESP and
its subsidiaries (collectively, the
"Company"). Intercompany transactions and
balances have been eliminated in
consolidation.
INVENTORIES Inventories consist of finished goods
available for sale and are stated at the
lower of cost or market using the first-in,
first-out method.
PROPERTY Property and equipment is recorded at cost.
AND EQUIPMENT Depreciation and amortization is computed by
the straight line and accelerated methods
based on the estimated useful lives of the
related assets of 3 to 10 years. Leasehold
improvements and capital leases are
amortized over the shorter of the life of
the asset or the lease.
REVENUE Revenues are recognized at the time of
RECOGNITION shipment of the respective merchandise.
F-8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
INCOME TAXES The Company is subject to taxation in
the United States, Germany, Sweden, Norway
and Ukraine, and accordingly, calculates and
reports 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.
EARNINGS PER SHARE Basic earnings per share is computed on the
basis of the weighted average number of
common shares outstanding during each year.
Diluted earnings per share is 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.
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.
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
(7-15 years). On an annual basis, the
Company reviews the recoverability of
intangible
F-9
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
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.
FUTURE ACCOUNTING In June 1999, the Financial Accounting
PRONOUNCEMENTS 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 beginning
after June 15, 2000.
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,
2001 to affect its financial statements.
RECLASSIFICATIONS Certain 1998 amounts have been reclassified
to conform with the 1999 presentation.
F-10
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ACQUISITIONS On October 31, 1998, the Company acquired
all the outstanding common stock of its
Ukraine distributor. 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. Prior to October 31, 1998,
the Company wrote-off approximately $530,000
due from it.
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. The purchase price of
$800,000 excluding acquisition costs of
approximately $18,000, and the assumption of
$341,000 accounts payable and accrued
expenses, was payable $350,000 in cash at
closing, 86,206 shares of common stock of
the Company (valued at $150,000, or $1.74
per share) and $300,000 payable with
interest at 8% in annual installments over
three years. In connection with the
acquisition of CCCI, the Company recorded
goodwill of approximately $391,000, which is
being amortized over 15 years. The balance
of the purchase price was allocated as
follows:
Cash $261,000
Accounts receivable 389,000
Inventory 118,000
----------------------------------
$768,000
==================================
These acquisitions were each accounted for
under the purchase method, whereby the
purchase prices were allocated to the
underlying assets and liabilities based upon
their estimated fair values. The
accompanying statements of operations
include the results of the businesses
acquired from their respective dates of
acquisition.
The following unaudited pro forma
information presents the results of
operations of the Company as if the
acquisitions had occurred on January 1,
1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 26,564,118 $ 23,859,570
Net income (loss) 398,764 (5,514,017)
Net income (loss) per
common share .12 (2.32)
Net income (loss) per common
share - assuming dilution $ .10 $ (2.32)
</TABLE>
The unaudited pro forma information assumes
the elimination of intercompany sales with
the Ukraine distributor of approximately
$792,000 for 1998.
F-11
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND EQUIPMENT Property and equipment consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 281,670
Capital leases 159,011
Office equipment 475,524
Machinery and equipment 142,812
Furniture and fixtures 19,550
Vehicles 104,937
-----------------------------------------------------------------------------
1,183,504
Less: accumulated depreciation and amortization 691,296
-----------------------------------------------------------------------------
$ 492,208
=============================================================================
</TABLE>
3. LONG-TERM DEBT Long-term debt, comprising a line of credit,
notes payable and capital leases, at
December 31, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
Prime + .25% (9% at December 31, 1999) line
of credit with a financial institution in
the amount of $3,500,000, due September
2000, secured by all U.S. assets; guaranteed
by the Company's principal shareholders. $ 2,409,471
9.5% capital lease, $3,346 monthly, net of
interest in the amount of $31,874 at
December 31, 1999 due April 2003. 117,072
Note payable to shareholder of CCCI,
interest at 8% a year, due April 2002 239,392
--------------------------------------------------------------------
2,765,935
Less current portion 2,537,177
--------------------------------------------------------------------
$ 228,758
====================================================================
</TABLE>
The line of credit agreement requires the
Company to comply with certain covenants
including limitations on further borrowings
and dividend payments. At December 31, 1999,
the Company was in violation of certain of
its annual financial covenants. In this
connection, the lender waived the covenant
violation for 1999.
F-12
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. RUSSIAN WRITE- During the third quarter of 1998, the
DOWN 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. In 1999, approximately $200,000
of previously written off receivables was
recovered from this distributor and is
included as a reduction of selling general
and administrative expenses.
Additionally, the Company wrote-off
approximately $659,000 in specific inventory
which is used predominantly by the Russian
distributor. In 1999, a substantial amount
of this inventory was sold which in
management's estimate was, in the aggregate,
less than original cost.
5. FOREIGN OPERATIONS
<TABLE>
<CAPTION>
UNITED WESTERN EASTERN ELIMINA-
STATES EUROPE EUROPE TION TOTAL
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Sales to unaffiliated customers $ 14,895,055 $ 10,255,537 $ 1,315,679 $ - $ 26,466,271
Transfers between geographic areas 4,574,920 - $ - (4,574,920) -
---------------------------------------------------------------------------------------------------------------
Total $ 19,469,975 $ 10,255,537 $ 1,315,679 $(4,574,920) $ 26,466,271
---------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (100,149) $ 949,255 $ 132,822 $ (82,582) $899,346
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (327,719) $ 1,090,513 $ 144,224 $ (270,738) $ 636,280
---------------------------------------------------------------------------------------------------------------
Identifiable assets $ 9,418,737 $ 4,683,933 $ 295,507 $(1,910,011) $ 12,488,166
===============================================================================================================
<CAPTION>
UNITED WESTERN EASTERN ELIMINA-
STATES EUROPE EUROPE TION TOTAL
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Sales to unaffiliated customers $ 12,218,570 $ 9,549,328 $ 201,097 $ - $ 21,968,995
Transfers between geographic areas 2,625,158 - - (2,625,158)
---------------------------------------------------------------------------------------------------------------
Total $ 14,843,728 $ 9,549,328 $ 201,097 $(2,625,158) $ 21,968,995
---------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (4,427,728) $ 1,043,437 $ 50,213 $ (40,216) $ (3,374,294)
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (5,705,169) $ 1,095,322 $ 45,623 $ 26,363 $ (4,537,861)
---------------------------------------------------------------------------------------------------------------
Identifiable assets $ 9,077,534 $ 4,332,965 $ 598,135 $(1,593,730) $ 12,414,904
===============================================================================================================
</TABLE>
F-13
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Identifiable assets are those assets, that
are identified with the operations based in
each geographic area. Foreign sales,
including those of AESP, for the years ended
December 31, 1999 and 1998 approximated 56%
and 60%, respectively, 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
geographic by geographic basis, whereby
sales and related data is attributed to the
AESP entity that generates such revenues.
Segment information is presented above for
each significant geographic region.
The Company has one supplier located in
China which supplied approximately 11% of
1999 purchases and 10% of 1998 purchases.
6. RELATED PARTY During 1998, the Company repaid an 8.5% note
TRANSACTIONS payable to an entity owned by the principal
shareholders, in the amount of $125,350,
including interest.
The Company incurred fees of $121,795 to a
company partially owned by the former
chairman and managing director of the
Company's Norwegian subsidiary for
consulting services during 1998. No such
fees were incurred in 1999 as the agreement
was terminated as of January 1, 1999.
The Company incurred fees of $31,752 to a
company partially owned by a member of the
Board of the Company's Norwegian subsidiary
for services provided in 1998.
Due from related parties at December 31,
1999 comprises (i) $224,475 notes receivable
from related parties of the Company's
Norwegian subsidiary, due December 31, 2000
with interest at 7% a year and (ii) $224,209
due from the former chairman and managing
director of the Company's Norwegian
subsidiary, of which $ 192,052 was repaid in
February 2000.
7. FINANCIAL The carrying amounts of financial
INSTRUMENTS instruments including accounts receivable,
accounts payable and debt approximated fair
value due to the relatively short maturity
of each.
8. COMMITMENTS The Company has entered into employment
agreements, expiring in 2002, with its two
principal shareholders which includes
minimum annual compensation of $150,000 plus
performance bonuses. The agreements provide
for annual increases, as defined. In the
event of a change in control of the Company
(as defined) the shareholders
F-14
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
may terminate their employment with the
Company for a lump sum payment of $750,000
each. In addition, the Company provides them
with an automobile allowance.
The Company rents office space and warehouse
under non-cancelable leases. The minimum
future rental commitment for leases in
effect at December 31, 1999, including
leases to related parties, approximates the
following:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------------------
<S> <C> <C>
2000 $ 164,000
2001 164,000
2002 157,000
2003 155,000
2004 155,000
----------------------------------------------------------------------------
$ 795,000
----------------------------------------------------------------------------
</TABLE>
The Company leases, under a lease expiring
in 2001, 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, 1999 was
approximately $203,000.
Rent expense in 1999 and 1998 aggregated
approximately $295,000 and $255,000,
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 1999 and 1998, approximately $6,000
and $21,000, respectively, of royalties were
incurred.
F-15
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. DEFERRED The Company has a defined contribution plan
COMPENSATION for its U.S. employees established pursuant
PLAN 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,
1999 and 1998 aggregated $16,952 and
$21,545, respectively.
10. INCOME TAXES The following are the components of income
tax expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ (227,833)
State - (40,223)
Foreign 320,972 287,209
------------------------------------------------------------------------
320,972 19,153
------------------------------------------------------------------------
Deferred:
Federal $ - $ 180,735
State (1,104) 30,938
Foreign (71,065) 36,125
------------------------------------------------------------------------
(72,169) 247,798
------------------------------------------------------------------------
Total $ 248,803 $ 266,951
========================================================================
</TABLE>
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.
F-16
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) at the United States
statutory rate $ 216,335 $ (1,542,872)
State income tax (benefit), net of
federal benefit (729) (6,128)
Differences in effective income tax
rates of other countries (169,903) 64,584
Interest expense on convertible notes - 290,000
Other permanent differences, net 15,927 14,500
Valuation allowance adjustment 183,864 1,552,492
Other 3,309 (105,625)
----------------------------------------------------------------------------
Total $ 248,803 $ 266,951
============================================================================
</TABLE>
The provision for foreign income taxes
relates to Norway, Sweden, Germany and
Ukraine. The statutory tax rates in Norway,
Sweden, Germany and Ukraine for 1999 and 1998
range from 45% to 28%.
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, 1999 are as follows:
F-17
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred Tax Assets:
Allowance for doubtful accounts $ 22,578
Inventory 162,607
Net operating loss carryforward 1,408,022
Depreciation 46,905
Intangible assets 49,395
Foreign tax assets 21,380
Compensation related to options granted
for services 161,809
------------------------------------------------------------------------------
1,872,696
Valuation allowance (1,851,316)
------------------------------------------------------------------------------
Total deferred tax asset, net 21,380
==============================================================================
</TABLE>
Realization of any portion of the Company's
deferred tax asset at December 31, 1999 is
not considered to be more likely than not
and accordingly a $1,851,316 valuation
allowance has been provided.
11. COMMON STOCK In connection with the initial public
offering in 1997, the Company sold an
aggregate of 920,000 redeemable common stock
purchase warrants of the Company at $.125
per warrant. The warrants, which expire in
February 2002, provide for the holders of
such warrants to purchase shares of common
stock of the Company at $6.90 a share.
In addition, 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 and (ii) 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 (subsequently repriced in 1998 to
$1.50 a 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).
On December 31, 1998, the Board of Directors
approved a reduction in the conversion price
of the convertible debt from
F-18
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
$4.00 to $1.80 per share, at which time, 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.
12. EARNINGS PER SHARE The following reconciles the components of
the earnings per share (EPS) computation:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 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 (loss) available to
common shareholders $387,477 3,173,699 $.12 $(4,804,812) 2,284,201 $(2.10)
Effect of Dilutive Securities:
Stock options - 853,099 - -
- --------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders plus assumed
conversions $387,477 4,026,798 $.10 $(4,804,812) 2,284,201 $(2.10)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 90,000 shares of common
stock at $3.69 per share, respectively, were
outstanding during 1999, but not included in
the computation of diluted EPS as the
options were anti-dilutive.
Options to purchase 1,001,600 shares, 63,000
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.
F-19
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. STOCK OPTIONS At December 31, 1999, 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.
In 1997, the Company granted a consultant 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. 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.
In 1997, the Company granted 120,000
options, exercisable at $3.69 per share, to
a consultant. In 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.
F-20
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During 1999, the company granted options to
purchase 75,000 shares and 6,250 shares of
its common stock at an exercise price of
$1.63 and $2.13, respectively, a share to
its directors.
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.
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.
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.
F-21
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
In 1999, 80,200 and 13,600 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 $1.63 and $2.13,
respectively, per share. Further, during
1999, the two principal shareholders
received 50,000 options at an exercise price
of $2.13 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 1999: no dividend yield
percent; expected volatility of 54.2%;
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 1998: no
dividend yield percent; expected volatility
of 93.2%; risk-free interest rates of 6.5%
and expected lives of 5 to 9 years for the
non-plan options.
F-22
<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, 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 387,477 $ (4,804,812)
Pro forma (102,523) (5,204,504)
-----------------------------------------------------------------------------
Net income (loss) per common share
As reported $ .12 $ (2.10)
Pro forma (.03) (2.28)
-----------------------------------------------------------------------------
Net income (loss) per common share - diluted:
As reported $ .10 $ (2.10)
Pro forma (.03) (2.28)
-----------------------------------------------------------------------------
</TABLE>
A summary of the status of the Company's
fixed stock option plan and non-plan options
as of December 31, 1999 and 1998, and
changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- ---------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,154,600 $ 1.71 849,700 $ 5.41
Granted 225,050 1.78 341,400 1.50
Exercised (66,000) 1.54 - -
Forfeited (18,600) 1.61 (36,500) 3.16
------------------------------------------------------------------------------------
Outstanding at end of year 1,295,050 1.72 1,154,600 1.71
------------------------------------------------------------------------------------
Options exercisable at year-end 833,716 1.84 540,599 2.54
Weighted-average fair value of
options granted during the year 1.26 1.34
------------------------------------------------------------------------------------
</TABLE>
F-23
<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, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICE 12/31/99 LIFE PRICE 12/31/99 PRICE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.50-3.69 1,295,050 7.4 $ 1.72 833,716 $ 1.84
</TABLE>
F-24
<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
Annual Report on Form 10-KSB for the year ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,601,770
<SECURITIES> 0
<RECEIVABLES> 3,118,018
<ALLOWANCES> (60,000)
<INVENTORY> 5,688,914
<CURRENT-ASSETS> 11,006,164
<PP&E> 1,183,504
<DEPRECIATION> (691,296)
<TOTAL-ASSETS> 12,488,166
<CURRENT-LIABILITIES> 6,352,742
<BONDS> 0
0
0
<COMMON> 3,234
<OTHER-SE> 5,903,432
<TOTAL-LIABILITY-AND-EQUITY> 12,488,166
<SALES> 26,466,271
<TOTAL-REVENUES> 26,466,271
<CGS> 16,300,426
<TOTAL-COSTS> 25,566,925
<OTHER-EXPENSES> 73,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,508
<INCOME-PRETAX> 636,280
<INCOME-TAX> 248,803
<INCOME-CONTINUING> 387,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387,477
<EPS-BASIC> .12
<EPS-DILUTED> .10
</TABLE>
