As filed with the Securities and Exchange Commission on October 30, 2000
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------------
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
Florida 3577 59-2327381
-------------------------------- ------------------------------ ------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
1810 N.E. 144th Street
North Miami, Florida 33181
(305) 944-7710
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
1810 N.E. 144th Street
North Miami, Florida 33181
(305) 944-7710
(Address of principal place of business or intended principal place of business)
Slav Stein, President and Chief Executive Officer
Advanced Electronic Support Products, Inc.
1810 N.E. 144th Street
North Miami, Florida 33181
(305) 944-7710
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-----------------
Copy to:
Philip B. Schwartz, Esq.
Akerman, Senterfitt & Eidson, P.A.
One S.E. 3rd Avenue
28th Floor
Miami, Florida 33131
(305) 374-5600
-----------------
Approximate date of commencement of proposed sale to public: From time
to time after the effective date of this Registration Statement.
<PAGE>
If any of the securities being registered on this form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
Calculation of Registration Fee
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Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to Offering Price Aggregate Offering Amount of
Registered be registered per Unit(1) Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par 2,000,000 shares $1.75 $3,500,000 $924
value per share
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</TABLE>
(1) Computed on the basis of the average of the high and low prices for the
common stock as reported on the Nasdaq SmallCap Market on October 27,
2000 in accordance with Rule 457 (c) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically state that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS
Advanced Electronic Support Products, Inc.
2,000,000 Shares
Common Stock, par value $0.001 per share
This prospectus relates to 2,000,000 shares of Advanced Electronic
Support Products, Inc. common stock that may be offered by us from time to time
in connection with certain purchases of our common stock by investors.
It is expected that the terms of transactions involving the issuance of
the shares of common stock issued hereby will be determined at the time we
determine to make offers to investors who wish to purchase our common stock and
that the shares of common stock offered hereby will be valued at negotiated
prices, which may be at a discount to the market price of our common stock. No
underwriting discounts or commissions will be paid, although finder's or agent's
fees may be paid in connection with certain transactions. Any person receiving
such fees may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, as amended, and any profit on the resale of shares of
our common stock purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act.
When we offer common stock, we will provide you with a prospectus
supplement describing the terms of the specific issue of common stock, including
the offering price of the common stock. The prospectus supplements may also add,
update or change information contained in this prospectus. You should read this
prospectus and any supplements carefully before you invest.
Our common stock and warrants are quoted on the Nasdaq SmallCap Market
under the symbols "AESP" and "AESPW," respectively. On October 27, 2000, the
closing prices of our common stock and warrants as quoted on the Nasdaq SmallCap
Market were $1.75 and $0.20 respectively.
SEE "RISK FACTORS," BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
YOU SHOULD CONSIDER BEFORE BUYING THESE SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______ __, 2000
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................4
USE OF PROCEEDS..............................................................9
MARKET PRICES OF COMMON STOCK...............................................10
DIVIDEND POLICY.............................................................10
CAPITALIZATION..............................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................12
DESCRIPTION OF BUSINESS.....................................................15
MANAGEMENT..................................................................22
PRINCIPAL STOCKHOLDERS......................................................26
CERTAIN TRANSACTIONS........................................................27
DESCRIPTION OF SECURITIES...................................................28
PLAN OF DISTRIBUTION........................................................29
LEGAL MATTERS...............................................................30
EXPERTS.....................................................................30
INDEX TO FINANCIAL STATEMENTS..............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS CONSTITUTES AN OFFER TO SELL
OR A SOLICITATION TO BUY SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OR OF ANY SALE
OF COMMON STOCK.
IN THIS PROSPECTUS, "AESP" "WE," "US" AND "OUR" REFER TO ADVANCED
ELECTRONIC SUPPORT PRODUCTS, INC. AND ITS SUBSIDIARIES.
i
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance with the Exchange Act, file
reports, proxy statements and other information with the SEC. This filed
material can be read and copied at regional offices of the Securities and
Exchange Commission located at: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048; and at the Public Reference Room of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an Internet site at http://www.sec.gov that
contains our reports, proxy and information statements and other information
about us and other companies that file electronically with the Securities and
Exchange Commission.
The information in this prospectus or any supplement to this prospectus
may not contain all of the information that may be important to you. You should
read the entire prospectus and any supplement, as well as the documents
incorporated by reference in the prospectus and any supplement, before making an
investment decision.
ii
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING STATEMENTS REGARDING OUR
EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
FORWARD-LOOKING STATEMENTS INCLUDE OUR PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS AND TRENDS AFFECTING OUR BUSINESS. ALL FORWARD-LOOKING STATEMENTS IN
THIS PROSPECTUS ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE OF THIS
PROSPECTUS, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO: (I) COMPETITION FROM OTHER MANUFACTURERS AND DISTRIBUTORS OF
CONNECTIVITY AND NETWORKING PRODUCTS BOTH NATIONALLY AND INTERNATIONALLY; (II)
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 (III) 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 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) OR ACHIEVEMENTS EXPRESS 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 RELEASE PUBLICLY THE RESULTS OF ANY FUTURE REVISIONS
WE MAY MAKE TO FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form SB-2 that
we filed with the Securities and Exchange Commission utilizing a "shelf"
registration process. Under this shelf process, we may, from time to time, sell
the common stock described in this prospectus in one or more offerings. This
prospectus provides you with a general description of the common stock we may
offer. Each time we sell common stock, we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any applicable
prospectus supplement together with additional information described above under
the heading "Where You Can Find More Information."
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
you should consider in connection with an investment in the common stock. You
should read the entire prospectus carefully, including "RISK FACTORS",
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION", the financial
statements and the notes to those financial statements.
About Advanced Electronic Support Products, Inc.
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 the facility of our subsidiary,
Communications Components Company, Inc., or CCCI. 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.
Our Mission
We believe that current industry trends will lead to an increased
demand for the use of networking and computer connectivity products designed to
maximize and enhance the functionality of computers and create a substantial
potential market for our products. Our overriding mission is to design,
manufacture and market networking and computer connectivity products which can
integrate any computer into any network at any time. Our primary focus is to
anticipate technological advancements and consumer preference as far in advance
as possible, develop new products and improved features to meet such market
demands and transform ideas from concept to market as quickly as possible.
Our History
In February 1997, we completed our initial public offering and gained
the listing of our common stock and warrants 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 five acquisitions:
o 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;
o In November, 1997, we acquired Dataholding AS (now called Jotec/AESP
AS), a distributor of connectivity and computer products headquartered
in Oslo, Norway;
o In October 1998, we acquired AESP Ukraine, a distributor of our
products located in the Ukraine;
o In March 1999, we completed the acquisition of the net assets of CCCI,
which manufactures a line of network connectivity products and systems;
and
1
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o In June, 2000, we acquired the stock of Lanse AS located in Oslo,
Norway. Lanse manufactures and distributes networking hardware to the
network installation industry in Norway and also holds exclusive rights
in Norway for the Telesafe (TM) product line.
Our principal executive offices are located at 1810 N.E. 144th Street,
North Miami, Florida 33181, and our telephone number is (305) 944-7710.
The Offering
Common stock........................ 2,000,000 shares of common stock,
par value $0.001 per share
Common stock outstanding as of
October 27, 2000 3,681,391 shares(1)
Trading symbol
(NASDAQ SmallCap Market)........... Common Stock: "AESP"
Warrants: "AESPW"
------------------------
(1) Excludes: (i) an aggregate of 1,547,650 shares of common stock reserved
for issuance upon exercise of outstanding options and warrants, (ii)
warrants to purchase 920,000 shares of our common stock at $6.90 per
share until February 12, 2002, and (iii) warrants issued to the
underwriters of our February 1997 initial public offering to purchase
80,000 shares of common stock at an exercise price of $7.80 per share
plus 80,000 warrants exercisable through February 13, 2002 at a
purchase price of $0.165 per warrant to purchase an additional 80,000
shares of common stock for $6.90 per share.
2
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Summary Consolidated Financial Data
The following table sets forth our summary financial data. This table
does not represent all of our financial information. You should read this
information together with our financial statements and the notes to those
statements beginning on page F-1 of this prospectus and the information under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
Statement of Operations Data:
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<CAPTION>
Six Months Ended June 30,
Year Ended December 31, (unaudited)
-------------------------- --------------------------
1999 1998 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $26,466,271 $21,968,955 $13,819,994 $12,675,137
Income (loss) from operations(1) 899,346 (3,374,294) 559,711 830,740
Income (loss) before income taxes(1) 636,280 (4,537,861) 556,808 821,797
Net income (loss) 387,477 (4,804,812) 407,672 704,446
Earnings (loss) per share:
Basic .12 (2.10) .12 .22
Diluted .10 (2.10) .11 .21
Weighted average number of shares outstanding:
Basic 3,173,699 2,284,201 3,377,109 3,140,144
Diluted 4,026,798 2,284,201 3,872,981 3,376,831
</TABLE>
----------------------------
(1) During 1998, we recorded a pre-tax charge of $2.1 million relating
to our Russian inventory and receivables.
Balance Sheet Data:
------------------
As of
As of June 30, 2000
December 31, 1999 (unaudited)
------------------ -----------------
Working capital $ 4,653,422 $ 5,016,777
Total assets 12,488,166 15,252,122
Long term liabilities 228,758 178,738
Total liabilities 6,581,500 7,943,068
Shareholders' equity 5,906,666 7,309,054
3
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND
SHOULD ONLY BE MADE BY INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND
OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON
STOCK.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING AESP. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IN ADDITION, YOU SHOULD CAREFULLY CONSIDER THE INFORMATION INCORPORATED
BY REFERENCE, AND INFORMATION THAT WE FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC") FROM TIME TO TIME. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT. THE INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS, BUT THE INFORMATION MAY
CHANGE AFTER SUCH DATE.
Forward Looking Statements
The words "may," "will," "expect," "anticipate," "believe," "continue,"
"estimate," "project," "intend," and similar expressions used in this prospectus
are intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
made. We undertake no obligation to publicly release any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. Should any of these risks or
uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may differ materially from those included within the
forward-looking statements.
We Recently Had an Operating Loss and Sufficient Cash Flow Is Uncertain
We incurred a net loss of $4,804,812 for the year ended December 31,
1998. Although our net income for the year ended December 31, 1999 and the six
months ended June 30, 2000 was approximately $387,000 and $408,000,
respectively, we expect our expenses to increase as we seek to further grow our
business and as our business expands. We cannot assure you that our revenues
will increase as a result of our increased spending. If revenues grow more
slowly than anticipated, or if operating expenses exceed expectations, we may be
unable to sustain our recent profitability. We believe that operating cash flow
generated through existing customers and business activities, current cash and
cash equivalents and funds available from our $3.5 million line of credit, will
be sufficient to fund operating cash flow needs and capital expenditures over
the next twelve months. However, the proceeds of this offering, or other
acceptable financing, will likely be required for acquisitions. If we are unable
to generate sufficient cash flow from operations or raise capital in sufficient
amounts, our business will be materially and adversely affected.
Our Operating Results May Fluctuate
Our quarterly and annual operating results are impacted by many
factors, including the timing of orders and the availability of inventory to
meet customer requirements. A large portion of our operating expenses are
relatively fixed. Since we typically do not obtain long-term purchase orders or
commitments from our customers, we must anticipate the future volume of orders
based upon the historic purchasing patterns of our customers and upon our
discussions with our customers as to their future requirements. Cancellations,
reductions or delays in orders by a large customer or a group of customers could
have a material adverse impact on our business, financial condition and results
of operations.
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We May Not Be Profitable in the Future or Pay Dividends
We can make no assurances that our future operations will be
profitable. Should our operations be profitable, it is likely that we would
retain our earnings in order to finance future growth and expansion. Therefore,
we do not presently intend to declare or pay cash dividends, and it is not
likely that any dividends will be paid in the foreseeable future.
Our Industry Experiences Rapid Technological Change
In general, the computer industry is characterized by rapidly changing
technology. We must continuously update our existing products to keep them
current with changing technology and must develop new products to take advantage
of new technologies that could render existing products obsolete. These products
must be compatible with the computers and other products with which they are
used. Our future prospects are dependent in part on our ability to develop new
products that address new technologies and achieve market acceptance. We may not
be successful in these efforts. If we were unable, due to resource constraints
or technological or other reasons, to develop and introduce such products in a
timely manner, this inability could have a material adverse effect on our
results of operations. In addition, due to the uncertainties associated with the
evolving markets which we address, we may not be able to respond effectively to
product demands, fluctuations, or to changing technologies or customer
requirements and specifications.
The Computer Industry Is Cyclical
The computer industry has been affected historically by general
economic downturns, which have had an adverse economic effect upon
manufacturers, distributors and retailers of computers and computer-related
products. General economic downturns have traditionally had adverse effects upon
the computer-related industry due to the restrictions on expenses for products
of this industry during recessionary periods. We may not be able to predict or
respond to such cycles within the industry.
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.
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.
We Are Dependent on Third Parties for Manufacturing and Assembly; There Are No
Supply Agreements
We are dependent on a number of manufacturers, both domestic and
foreign, for the manufacture and assembly of our products pursuant to our design
specifications. Although we purchase our products from several different
manufacturers, we often rely on an individual manufacturer to produce a
particular line of products. Although we have several different product lines,
and despite our efforts to minimize such reliance by having other manufacturers
available should the need arise, these manufacturers are currently not bound by
contract other than by individual purchase orders to supply us with these
products. The loss of one or more manufacturers of original equipment
manufacturer products may have a material adverse impact on our business. While
most of the connectivity products sold by us are available from multiple
sources, we may not be able to replace lost manufacturers of connectivity
products with others offering products of the same quality, with timely delivery
and/or similar terms.
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
5
<PAGE>
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 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.
We Utilize Foreign Suppliers and Manufacturers
Most of the components we utilize in the manufacture and assembly of
our products are obtained from foreign countries and a majority of our products
are manufactured or assembled in foreign countries, such as the United Kingdom,
China and Taiwan. The risks of doing business with companies in these areas
include potential adverse changes in the diplomatic relations of foreign
countries with the United States, changes in the relative purchasing power of
the United States dollar, hostility from local populations, changes in exchange
controls and the instability of foreign governments, increases in tariffs or
duties, changes in China's or other countries' most favored nation trading
status, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to import quotas on
products from foreign countries and anti-dumping legislation, any of which could
result in delays in manufacturing, assembly and shipment and our inability to
obtain supplies and finished products. Alternative sources of supply,
manufacture or assembly may be more expensive. We utilize the services of an
unaffiliated trading company in Taiwan which assists us in working with our
suppliers in the Far East. Although we have not encountered significant
difficulties in our transactions with foreign suppliers and manufacturers in the
past, we may encounter such difficulties in the future.
There May Be Fluctuation in Exchange Rates Which Could Affect Our Prices
The majority of our suppliers of components, manufacturers, and
assemblers are foreign, and although all price quotations and payments with
those entities are made in U.S. dollars, fluctuations in exchange rates could
alter the price charged by these foreign suppliers, manufacturers and
assemblers, and depending on the level of such exchange rate fluctuations, such
price fluctuations could adversely affect our performance. Although the majority
of our sales are made to customers in the United States and Europe, and although
all price quotations and payments from customers are made in U.S. dollars, the
same risks of adverse exchange rate fluctuations which are present with
suppliers, manufacturers and assemblers (as set forth above) are also present in
transactions with customers. We do not have a formal exchange risk management
program nor do we engage in hedging activities with respect to exchange rate
fluctuations because all price quotations and payments are made in U.S. dollars,
which we believe helps reduce but does not eliminate the risk attendant to
fluctuations in exchange rates.
We Are Dependent on Third Parties for Distribution
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. Internationally, our products are sold through wholesale
distributors and mail order companies, dealers, value added resellers, as well
as to original equipment manufacturer customers. Accordingly, we are dependent
on the continued viability and financial stability of our resellers. Our
resellers often offer products of several different companies, including, in
many cases, products that are competitive with our products. Our resellers may
discontinue purchasing our products or providing our products with adequate
levels of support. The loss of, or a significant reduction in sales volume to, a
significant number of our resellers could have a material adverse effect on our
results of operations.
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We Are Dependent on Significant Customers
No customer accounted for more than 10 percent of our net sales for the
years ended 1999 and 1998 and for the six months ended June 30, 2000. Our top 10
customers accounted for approximately 31%, 32% and 35%, respectively, of our net
sales for the years ended December 31, 1998 and 1999 and for the six months
ended June 30, 2000. The loss of one or more significant customers could have a
material adverse effect on our business and results of operations.
We Maintain Significant Inventory
Although we monitor our inventory on a regular basis, we need to
maintain a significant inventory in order to ensure prompt response to orders
and to avoid backlogs. We may need to hold such inventory over long periods of
time and the capital necessary to hold such inventory restricts the funds
available for other corporate purposes. Holding inventory over long periods of
time increases the risk of inventory obsolescence. A significant amount of
obsolete inventory could have a material adverse effect on our business and our
results of operations.
We Compete with Many Companies
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 we do. 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 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. Prolonged price competition 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 have a material adverse effect
on our results of operations. We may not be able to compete successfully in the
future.
Our Growth Strategy Includes Future Acquisitions: We May Not Be Able to Complete
Any Acquisitions on Suitable Terms
One element of our growth strategy involves growth through the
acquisition of other companies, assets and/or product lines that would
complement 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 grow by acquisition is
dependent upon, and may be limited by, the availability of suitable acquisition
candidates and capital, and by restrictions contained in our credit agreement,
which restrictions include maintaining certain minimum ratios of assets versus
liabilities and not permitting any indebtedness, guarantees or liens which would
materially affect our ability to repay our loan to the bank. In addition,
acquisitions involve risks that could adversely affect our operating results,
including the assimilation of the operations and personnel of acquired
companies, the possible amortization of acquired intangible assets and the
potential loss of key employees of acquired companies. We may not be able to
complete any acquisitions on suitable terms. No material commitments or binding
agreements have been entered into to date and we may not complete any
acquisitions. Other than as required by our Articles of Incorporation, By-Laws,
and applicable law, our shareholders generally will not be entitled to vote upon
such acquisitions.
Our Credit Facility Imposes Restrictions
We have a $3,500,000 credit facility with a financial institution. The
agreement governing the line of credit contains covenants that impose
limitations on us, limits our borrowings based upon a borrowing base formula
tied to the value of our accounts receivable and inventory from time to time,
and requires us to be in compliance with
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certain financial covenants. If we fail to make required payments, or if we fail
to comply with the various covenants contained in our agreement, the lender may
be able to accelerate the maturity of such indebtedness. As of December 31,
1999, and June 30, 2000, we were not in compliance with the required financial
covenants in our credit facility. We received waivers of these non-monetary
defaults. Our U.S. receivables, inventory and other assets are pledged to the
lender to secure our revolving line of credit. We may use the credit facility
along with any potential proceeds from the offering of the shares for, among
other purposes, acquisitions of other companies and/or inventories assisting in
our potential growth. However, no binding agreements have been entered into. To
the extent that there is an increase in interest rates, or present borrowing
arrangements are no longer available, our future growth could be adversely
impacted.
We Rely on Executive Officers and Key Employees
Our continued success is dependent to a significant degree upon the
services of Slav Stein and Roman Briskin and upon our ability to attract and
retain qualified personnel experienced in the various phases of our business.
Our ability to operate successfully could be jeopardized if one or more of our
executive officers were unavailable and capable successors were not found.
Our Principal Shareholders May Control Us Through the Election of the Entire
Board of Directors
Assuming no exercise of the warrants or other outstanding warrants and
options, Messrs. Stein and Briskin own 1,612,014 shares of our common stock,
representing approximately 43.8% of our outstanding common stock. Since our
Articles of Incorporation and Bylaws do not provide for cumulative voting, as a
result of their ownership of these securities, Messrs. Stein and Briskin are
effectively able to control us through the election of our entire Board of
Directors.
Our Stock May Be Subject to Great Price Volatility
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market generally, and technology-related
securities in particular, may experience extreme price and volume fluctuations
that may be unrelated or disproportionate to the operating performance of
companies. Such fluctuations, and general economic and market conditions, may
adversely affect the market price of the common stock.
Anti-takeover Provisions May Discourage Certain Transactions
Our Articles of Incorporation and Bylaws contain provisions that may
have the effect of discouraging certain transactions involving an actual or
threatened change of control of us. In addition, our Board of Directors has the
authority to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the preferences, rights and limitations of any such series
without stockholder approval. In addition, our executive officers (Messrs. Stein
and Briskin) have provisions in their employment agreements requiring us to pay
each $750,000 in the event of a change in control of our company. Furthermore,
such payments which exceed a certain level of compensation may not be deductible
by us for federal corporate income tax purposes. The ability to issue preferred
stock and the change in control payments could have the effect of discouraging
unsolicited acquisition proposals or making it more difficult for a third party
to gain control of our company, or otherwise could adversely affect the market
price of our common stock.
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USE OF PROCEEDS
This prospectus covers shares of common stock that may be issued from
time to time in the future on the completion of certain transactions in which
investors purchase shares of our common stock. The specific use of proceeds to
be received in any future purchase of our common stock will be set forth in a
supplement to this prospectus relating to such purchase by investors.
It is expected that the terms of such transactions involving the
issuance of the shares of common stock issued hereby will be determined at the
time we determine to make an offer to investors who wish to purchase our common
stock, and that the shares of common stock offered hereby will be valued at
prices negotiated with such investors, which may be at a discount to the market
price of our common stock. No underwriting discounts or commissions will be
paid, although finder's or agent's fees may be paid. Any person receiving such
fees may be deemed to be an "underwriter" within the meaning of the Securities
Act of 1933, as amended, and any profit on the resale of shares of our common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
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MARKET PRICES OF COMMON STOCK
Our common stock and warrants have been quoted in the Nasdaq SmallCap
Market under the symbols AESP and AESPW, respectively, since February 12, 1997.
The following table sets forth the high and low bid prices for the common stock
as reported by the Nasdaq SmallCap Market for the periods indicated.
<TABLE>
<CAPTION>
Common Stock Warrants
------------------ ---------------
High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C>
Fiscal Year 1999
1st Quarter 2 11/16 1 5/16 9/32 1/16
2nd Quarter 2 5/8 1 17/32 11/32 1/16
3rd Quarter 3 7/16 2 1/16 7/16 5/32
4th Quarter 2 5/8 1 17/32 3/8 1/16
Fiscal Year 2000
1st Quarter 8 3/8 1 3/4 2 7/8 9/32
2nd Quarter 3 1/4 1 3/4 1 11/32
3rd Quarter 3 5/8 1 13/16 7/8 1/4
4th Quarter (through October 27, 2000) 2 3/8 1 21/32 3/8 1/8
</TABLE>
As of October 27, 2000, the Company believes that there were
approximately 1,600 beneficial holders of its common stock.
DIVIDEND POLICY
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 our business. Other than limitations on our borrowing based upon a borrowing
base formula and other limitations imposed upon us by our credit facility, there
are no restrictions that limit our ability to pay dividends or that are likely
to do so in the future.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000.
The table should be read in conjunction with the Financial Statements and the
notes thereto included elsewhere in this prospectus.
June 30, 2000
------------
(unaudited)
Debt:
Note Payable - line of credit and current portion of
long term debt $ 2,495,378
Long term debt 178,738
-----------
2,674,116
-----------
Shareholders' equity
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued --
Common stock, $.001 par value; 20,000,000 shares
authorized; issued: 3,691,391 shares at June 30, 2000 3,691
Paid-in capital 10,655,224
Deficit (2,774,250)
Cumulative foreign currency translation adjustment (575,611)
-----------
Total shareholders' equity 7,309,054
-----------
Total Capitalization $ 9,983,170
===========
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Results of Operations
Year Ended December 31, 1999 Compared to 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 Ukrainian 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 conversion of outstanding shareholders' convertible notes. See Note 11 of
Notes to Consolidated Financial Statements.
Six months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
For the six months ended June 30, 2000, we achieved net sales of $13.8 million,
an increase of $1.1 million or 8.7% over net sales of $12.7 million for the six
months ended June 30, 1999. Contributing to the overall increase in sales were
increases in domestic OEM sales, which were up 38.1% to $2.9 million for the
first six months of 2000, from
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$2.1 million for the first six months of 1999. Similarly, networking sales
increased by 11.8% to $3.8 million for the six months of 2000, from $3.4 million
for the six months of 1999.
International sales decreased 3% to $6.9 million for the six months
ended June 30, 2000, compared to $7.1 million for the six months ended June 30,
1999. The decline in international sales were due to the decline in the value of
European currencies compared to the U.S. dollar. In addition, we benefited from
one month's sales by Lanse AS, which was acquired on May 31, 2000.
Our gross profit margin was 39.1% for the six months ended June 30
2000, compared to 43.3% for the six months ended June 30, 1999. The primary
reasons were a decline in gross margins overseas as a result of currency
exchange fluctuations from period to period and the impact of amount of domestic
OEM business during both periods, both in terms of absolute dollars and in terms
of percentage of total sales. As we have previously reported, OEM business
produces lower gross margins than either retail or international business.
However, internal costs and overhead, as reflected in its SG&A expenses, are
proportionately lower in OEM sales which offsets the intrinsically lower gross
margin. Thus, the mix from period to period of OEM sales versus networking sales
has an impact on the gross profit margin for any particular period.
SG&A expenses increased by $185,000, or 3.9%, to $4.8 million for the
six months ended June 30, 2000, from $4.7 million for the six months ended June
30, 1999. SG&A expenses as a percentage of sales for the six months ended June
30, 2000 was 35.1%, compared to 36.8%, for the six months ended June 30, 1999.
These decreases reflect continued efforts on our part to control our costs and
expenses, particularly marketing expenses, and the impact of economies of scale.
As a result of the aforementioned factors, income from operations for
the first six months of 2000 was $560,000, a decrease of 32.6% over income from
operations of $831,000 for the first six months of 1999.
Interest expense for the six months ended June 30, 2000 was $112,000,
compared to $111,000 for the first six months of 1999 due to lower borrowings
offset, in part, by interests payments at higher interest rates from period
to period.
Amortization of goodwill was $74,000 for the six months ended June 30,
2000, an increase of 8.8% over amortization of $68,000 for the six months ended
June 30, 1999. This increase is primarily attributable to amortization charges
arising as a result of our acquisition of CCCI at the end of March 1999.
Amortization is expected to increase in future periods due to the amortization
of goodwill associated with the Lanse acquisition.
Other income for the 2000 six month period primarily benefited from the
substantial changes in currency exchange rates at June 2000 compared to exchange
rates at December 31, 1999. Taxes for both 2000 and 1999 benefited from net
operating loss carryforwards and carrybacks.
As a result of the foregoing factors, we had net income of $408,000 for
the six months ended June 30, 2000, a decrease of 42% over net income of
$704,000 for the six months ended June 30, 1999.
Primary earnings per share were $.12 for the six months ended June 30,
2000, compared to primary earnings per share of $.22 for the six months ended
June 30, 1999. Fully diluted earnings per share were $.11 for the first six
months of 2000, compared to fully diluted earnings per share of $.21 for the
first six months of 1999. Earnings per share for 2000 were adversely impacted
(compared to 1999) by an increase in weighted average shares outstanding from
period to period. The increase primarily resulted from the issuance of 163,300
shares of our common stock upon exercise of stock options and our issuance in
May 2000 of an additional 294,170 shares of our common stock in connection with
our acquisition of Lanse AS.
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Financial Condition, Liquidity and Capital Resources
Historically, we have financed our operations primarily with cash flow
from operations and with borrowings under our available lines of credit.
At June 30, 2000, our working capital was $5.0 million, an increase of
7.8% over working capital of $4.7 million as of December 31, 1999. The principal
causes of the increase were increases of approximately $700,000 in accounts
receivables (22.4%), and approximately $1.3 million (22.1%) in inventories,
offset in part by approximately $1.7 million (69.7%) in accounts payable. At
June 30, 2000, cash had decreased approximately $50,000, or 3.1%, as our net
income was applied to the aforementioned increases in current assets offset by
increases in accounts payable and proceeds from sale of stock upon the exercise
of options. The aforementioned increases are in part due to the acquisition of
Lanse and thus the inclusion of their current assets and liabilities.
For the six months ended June 30, 2000, $23,000 of cash was used in
operations. Net income of approximately $408,000 was applied to the
aforementioned increase in accounts receivables and inventories offset by
increases in accounts payable. Net cash used in investing activities was
$233,000, as there was repayment of related party loans applied partially to an
increase in property and equipment. Cash of $207,000 was generated in financing
activities which was used for payments on borrowings and for the Lanse
acquisition. As a result of the foregoing, our cash position decreased $50,000
between December 31, 1999 and June 30, 2000. That decrease, combined with a
decrease of $45,000 attributable to the effects of exchange rate changes on
cash, produced an overall decrease in cash of $95,000.
Intangible assets increased by $975,000 or 107.4%, reflecting
additional goodwill related to the acquisition of Lanse in May 2000.
In September 2000, we obtained a renewal of our $3.5 million line of
credit from a financial institution. Borrowings available under the line of
credit, which matures on September 23, 2001, bear interest at the rate of prime
plus one-quarter (.25) percent. Borrowings under the line of credit are based on
specific percentages of our receivables and inventories. The line of credit is
secured by a lien on our U.S. assets, including our accounts receivable and
inventories. The line of credit is also guaranteed by our principal
stockholders, who have pledged the shares of the our common stock which they own
to secure their respective guarantees. Under the terms of the loan agreement, we
are required to comply with certain affirmative and negative covenants and to
maintain certain financial benchmarks and ratios during future periods. As of
June 30, 2000, we were in compliance with all of the aforementioned benchmarks
and ratios except for the tangible net worth requirement. Due to the Lanse
acquisition, the amount of goodwill recorded caused us to be $74,000 or 1% under
our tangible net worth requirement. A waiver has been granted with respect to
our non-compliance with this requirement. As of June 30, 2000, $2,271,000 was
outstanding under the credit line and $647,000 was available for borrowing under
the line of credit, based on applicable borrowing base formulas.
We believe that our internally generated cash flow from operations,
combined with borrowings available under our line of credit, will be sufficient
to fund our operations over the next twelve months.
We do not believe that inflation has had a material effect on our
financial condition or operating results for the last several years, as we have
historically been able to pass along increased costs in the form of adjustments
to the prices we charge to our customers.
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DESCRIPTION OF BUSINESS
General
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.
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 five acquisitions.
o 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.
o In November, 1997, we acquired Dataholding AS (now called Jotec/AESP
AS), a distributor of connectivity and computer products headquartered
in Oslo, Norway.
o During October 1998, we acquired AESP Ukraine, a distributor of our
products located in the Ukraine.
o In March 1999, acquired the assets of Communications Components
Company, Inc. (CCCI), which manufactures a line of network connectivity
products and systems.
o On May 31, 2000, we acquired Lanse AS located in Oslo, Norway. Lanse
manufactures and distributes networking hardware to the network
installation industry in Norway and also holds exclusive rights in
Norway for the Telesafe (TM) product line of passive networking
products.
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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.
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 wall plates.
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
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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.
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
17
<PAGE>
into supply or requirements contracts with our suppliers. We believe that
purchase orders, as opposed to supply or requirement agreements, provide 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.
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 accounted for approximately 31%, 32% and 35%,
respectively of our net sales for the years ended December 31, 1998 and 1999,
and for the first quarter of 2000. No one customer accounted for more than 10%
of net sales in 1998, 1999 or for the second quarter of 2000.
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
18
<PAGE>
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 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
19
<PAGE>
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 our Articles of Incorporation, By-Laws, and
applicable law, our shareholders are not entitled to vote on acquisitions,
mergers or other business combinations.
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
We currently employ 149 people at the following locations: Miami office
--55; Ukraine--37; Norway--25; CCCI--12; Sweden--11; and Germany--9. 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.
Facilities
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 1999 Annual Consolidated Financial Statements for information regarding
the financial terms of our leases.
20
<PAGE>
<TABLE>
<CAPTION>
Approximate
Square
Facility Description Location Footage
---------------------------------------------- ------------------- -------------
<S> <C> <C>
Corporate Headquarters, Product Assembly North Miami, FL 10,000
and Central Warehouse
Warehouse North Miami, FL 20,000
Sales Office and Warehouse Tierp, Sweden 5,000
Sales Offices and Warehouses Oslo, Norway 18,000
Sales Office and Warehouse Munich, Germany 12,000
Bonded Warehouse Vinnitsa, Ukraine 10,000
Sales Office Kiev, Ukraine 18,500
Sales Office and Manufacturing Broomall, Pennsylvania 5,085
</TABLE>
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.
Legal Proceedings
We are not a party to any material legal proceedings and, to the best
of our information, knowledge and belief, none is contemplated or has been
threatened.
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<PAGE>
MANAGEMENT
Our officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Title
--------------- ----- ------
<S> <C> <C>
Slav Stein(1) 55 President, Chief Executive Officer and Director
Roman Briskin(1) 50 Executive Vice President, Secretary/Treasurer and Director
Terrence R. Daidone(1)(2)(3) 40 Director
William B. Coldrick(2)(3) 58 Director
Leonard Sokolow(2) 43 Director
Roy Rafalco 45 Chief Financial Officer
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Each of our directors currently holds office until his or her successor
is elected and qualified. At present, our By-laws provide for not less than one
director nor more than twelve directors. Currently, we have five directors. Our
By-laws permit our Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders or until his successor is
elected and qualified. Officers serve at the discretion of our Board of
Directors. There are no family relationships among any of our officers or
directors. Our officers devote their full time to our business.
The principal occupation and business experience for each of our
officers and directors for at least the last five years is 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., 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. 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 provides consulting services to us and 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 Ezcony
Interamerica, Inc., a distributor of major brand name consumer electronics to
Latin America.
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<PAGE>
Mr. Rafalco joined the Company in May 2000. Prior to joining the
Company, for more than the last five years Mr. Rafalco was the Chief Financial
Officer of Top Speed Corporation, a worldwide publisher of Windows and Internet
software development tools, and during his last year with that Company, Mr.
Rafalco also served as that Company's Chief Executive Officer.
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 $100,000:
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Awards
----------------------
Restricted
Name and Salary Bonus Stock Option/ All Other
Principal Position Year ($) ($)(1) Awards SARs(#) Payments Compensation (2)(3)
-------------------- ------- -------- --------- ----------- ----------- ---------- -------------------
<S> <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 1998 164,423 -- -- 100,000 -- 6,000
President 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 to allow the
executive in 1997 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 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 $500,000 term life insurance policy which we
purchase for the benefit of each of Messrs. Stein and Briskin.
Option Grants During Last Fiscal Year
The following table sets forth information concerning options granted
during the fiscal year ended December 31, 1999 to the persons named in the
preceding summary compensation table under the caption "Executive Compensation":
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
Number of Securities % of Total
Underlying Options/SARS Granted Exercise or
Options/SARS to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/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>
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<PAGE>
Aggregate 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>
Value of
Number of Securities Unexercised In-
Underlying Unexercised The-Money
Options/SARS at FY-End Options/SARS at
(#) FY-End ($)
----------------------- ---------------
Shares Acquired On Exercisable/
Name Exercise (#) Value Realized ($) Exercisable/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.
Director Compensation
Those of our directors who are not our employees are annually granted
options to purchase 25,000 shares of common stock at an option exercise price
equal to the closing price of the 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
employment agreements 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
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 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
24
<PAGE>
(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.
Indemnification of Directors and Officers
Pursuant to our Articles of Incorporation and By-laws, our officers and
directors shall be indemnified by us to the fullest extent allowed under Florida
law for claims brought against them in their capacities as officers and
directors. Indemnification is allowed if the officer or director acts in good
faith and, in the case of conduct in his official capacity, in a manner
reasonably believed to be in the best interests of the company, or in all other
cases, with a reasonable belief that his conduct was at least not opposed to our
best interests. In the case of criminal proceedings, an officer or director
should have no reasonable cause to believe his conduct was unlawful.
Accordingly, it is possible that indemnification may occur for liabilities
arising under the Securities Act. The underwriting agreement from our initial
public offering also contains provisions under which we and our underwriters
have agreed to indemnify each other (including officers and directors) against
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for our directors,
our officers and our controlling persons, pursuant to the foregoing provisions
or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
25
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding our common
stock owned as of October 27, 2000, by (i) each person who is known by us to own
beneficially more than five percent of our common stock; (ii) each of our
officers and directors; and (iii) all officers and directors as a group. We
cannot assure the timing of exercise of the warrants or whether all or any of
the warrants will be exercised.
Beneficial Ownership
of Common Stock (1)
Name of Beneficial Owner(1) Shares Percent
--------------------------- --------- -------
Slav Stein(2) 1,056,007 26.9%
Roman Briskin(2) 1,056,007 26.9%
Terrence R. Daidone(3) 105,000 2.8%
William B. Coldrick(3) 87,000 2.3%
Leonard Sokolow(3) 31,250 *
All directors and executive officers
as a group (6 persons)(4) 2,341,931 53.1%
--------------------
* 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 250,000 shares of common stock issuable
upon the exercise of vested stock options. Excludes unvested options to
purchase 230,250 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 729,917
shares of common stock.
26
<PAGE>
CERTAIN TRANSACTIONS
On July 15, 1996, we entered into a five year lease with RSB Holdings,
Inc., a Florida corporation, 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
Computerzubehor GmbH, a German company, and Advanced Electronic Support Products
Computertillbehor i Sweden Aktiebolag, a Swedish company, contributed their
interests in said corporations to AESP for no additional consideration.
In February 1997, we issued two principal shareholders' notes, each in
the amount of $869,562. The principal shareholders' notes bear interest at a
rate of one percent over the prime rate, payable monthly. Principal and accrued
but unpaid interest is 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 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 the 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.
Mr. Sokolow, who serves as one of our Directors, is the President of
Union Atlantic LC, a merchant banking, strategic and consulting firm
specializing domestically and internationally in technology industries. Union
Atlantic provides consulting services to us and is a wholly owned subsidiary of
vFinance.com, of which Mr. Sokolow is also CEO and Vice Chairman.
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.
27
<PAGE>
DESCRIPTION OF SECURITIES
Authorized Stock
Our authorized capital consists of 20,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred stock, par value
$.001 per share. None of the preferred stock is outstanding.
Common Stock
Of our authorized common stock, 3,681,391 shares are issued and
outstanding as of June 30, 2000. Each outstanding share of common stock is
entitled to one vote, either in person or by proxy, on all matters that may be
voted upon by the owners thereof at meetings of the shareholders.
Our shareholders (i) have equal ratable rights to dividends from funds
legally available therefore, when, as and if declared by our Board of Directors,
(ii) are entitled to share ratably in all of our assets available for
distribution to our shareholders upon liquidation, dissolution or winding up of
our affairs, (iii) do not have preemptive, subscription or conversion rights, or
redemption or sinking fund provisions applicable thereto and (iv) are entitled
to one non-cumulative vote per share on all matters on which shareholders may
vote at all meetings of shareholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any series of preferred stock that may be issued in the future, including
voting, dividend, and liquidation rights.
Our shareholders do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares, voting for the election
of directors, can elect all of our directors if they so choose and, in such
event, the holders of the remaining shares will not be able to elect any of our
directors.
Warrants
Each warrant entitles the holder thereof to purchase one share of
common stock at a price equal to $6.90 (115% of the initial public offering
price of our common stock through February 12, 2002). Each warrant is redeemable
by us at a redemption price of $0.01 per warrant, at any time through February
12, 2002, upon 30 days' prior written notice to the holders thereof, if the
average closing bid price of the common stock, as reported on the principal
exchange on which the common stock is traded, equals or exceeds 175% of the
price of the common stock per share for twenty consecutive trading days ending
three days prior to the date of the notice of redemption. Pursuant to applicable
federal and state securities laws, in the event a current prospectus is not
available, the warrants may not be exercised by the holders thereof and we will
be precluded from redeeming the warrants. We may be prevented by financial or
other considerations from maintaining a current prospectus. Any warrant holder
who does not exercise prior to the redemption date, as set forth in our notice
of redemption, will forfeit the right to purchase the common stock underlying
the warrants, and after the redemption date or upon conclusion of the exercise
period any outstanding warrants will become void and be of no further force or
effect, unless extended by our Board of Directors.
The number of shares of common stock that may be purchased is subject
to adjustment upon the occurrence of certain events including a dividend
distribution to our shareholders, or a subdivision, combination or
reclassification of the outstanding shares of common stock.
We may at any time, and from time to time, extend the exercise period
of the warrants, provided that written notice of such extension is given to the
warrant holders prior to the expiration of the date then in effect. Also, we may
reduce the exercise price of the warrants for limited periods or through the end
of the exercise period in accordance with the terms of our warrant agreement
with the transfer agent if deemed appropriate by the Board of Directors.
Any extension of the term and/or reduction of the exercise price of the
warrants may be subject to compliance with Rule 13e-4 under the Exchange Act
including the filing of a Schedule 13E-4. Notice of any extension of the
exercise period and/or reduction of the exercise price will be given to the
warrant holders. Other factors which the Board of Directors may consider in
taking such action include the current market conditions, the price of the
common stock and our need for additional capital.
28
<PAGE>
Options and Convertible Securities Presently Outstanding
The following options and convertible securities are currently
outstanding: (i) options to purchase an aggregate 73,000 shares of common stock
held by consultants; (ii) options to purchase an aggregate of 960,500 shares of
common stock held by our principal shareholders; (iii) options to purchase
223,250 shares of common stock held by non-employee directors; and (iv) options
to purchase an aggregate of 363,900 shares of common stock held by current and
former employees.
Preferred Stock
Our Board of Directors has the authority to issue 1,000,000 shares of
preferred stock, $.001 par value, none of which is issued and outstanding, in
one or more series and to fix, by resolution, conditional, full, limited or no
voting powers, and such designations, preferences and relative, participating,
optional or other special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, including the number of shares in such series
(which the Board may increase or decrease as permitted by Florida law),
liquidation preferences, dividend rates, conversion or exchange rights,
redemption provisions of the shares constituting any series, and such other
special rights and protective provisions with respect to any class or series as
the Board may deem advisable without any further vote or action by the
shareholders. Any shares of preferred stock so issued would have priority over
the common stock with respect to dividend or liquidation rights or both and
could have voting and other rights of shareholders. The issuance of preferred
stock with voting or conversion rights may adversely affect the voting rights of
the holders of common stock. We have no present plans to issue shares of
preferred stock.
Transfer Agent and Registrar
Our transfer agent and registrar for our securities is Continental
Stock Transfer & Trust Company located at 2 Broadway, New York, New York 10004.
Reports to Security holders
We will furnish to our security holders annual reports containing
audited financial statements. We may issue other unaudited interim reports to
our security holders as we deem appropriate.
PLAN OF DISTRIBUTION
We may offer and sell the common stock directly to investors, or
through dealers or agents. The prospectus supplement with respect to the offered
common stock will set forth the terms of the offering, including the following:
o the name or names of any purchasers;
o the purchase price and the proceeds we will receive
from the sale and the use of such proceeds; and
o any fees and other items constituting agents' or
finders' compensation.
We will offer and sell the common stock directly to investors in
negotiated transactions at prices to be agreed upon at the time of the
transaction, which may be at a discount to the then market price of the common
stock. We may pay fees to agents and finders in connection with such sales. Any
person receiving such fees may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended, and any profit on the resale
of shares of our common stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. It is not intended that
shares will be sold "at the market" in a public offering.
Purchaser(s), finder(s) and agent(s) may be entitled, under agreements
entered into with us, to indemnification by us against some liabilities,
including liabilities under the Securities Act of 1933.
The place and time of delivery for the common stock in respect of which
this prospectus is delivered will be set forth in the applicable prospectus
supplement if appropriate.
29
<PAGE>
Agents may engage in transactions with or perform services, including
various investment banking and other services, for us and/or any of our
affiliates in the ordinary course of business.
LEGAL MATTERS
The validity of the common stock being offered hereby has been passed
on for us by Akerman, Senterfitt & Eidson, P.A., Miami, Florida.
EXPERTS
The consolidated financial statements included in the Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
30
<PAGE>
ADVANCED ELECTRONIC
SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 2000
(unaudited)...............................................................................................F-21
Condensed Consolidated Statements of Income for the Six Months Ended June 30,
2000 (unaudited) and June 30, 1999 (unaudited)............................................................F-22
Condensed Consolidated Statements of Shareholders' Equity at June 30, 2000
(unaudited).............................................................................................. F-23
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2000 (unaudited)......................................................................................F-24
Notes to Condensed Consolidated Financial Statements (unaudited)...............................................F-25
</TABLE>
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 periods then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
April 12, 2000
Miami, Florida
F-2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER
ASSETS (NOTE 3) 31, 1999
--------------
<S> <C>
CURRENT ASSETS
Cash $ 1,601,770
Accounts receivable, net of $60,000 allowance for doubtful account 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 expense 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
------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements.
F-3
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 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)
=========================================================================================================================
</TABLE>
See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements.
F-4
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
ADDITIONAL RETAINED CURRENCY COMPREHEN- SHARE-
COMMON PAID-IN EARNINGS TRANSLATION SIVE HOLDERS
STOCK CAPITAL (DEFICIT) ADJUSTMENT INCOME EQUITY
---------- ------------- ------------ --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, $ 2,283 $6,843,374 $1,235,413 $(97,079) $ -- $7,983,991
1997
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, 3,082 9,363,902 (3,569,399) (134,856) -- 5,662,729
1998
Issuance of common stock
in connection with
acquisition (Note 1) 86 149,914 -- -- -- 150,000
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, $ 3,234 $9,615,501 $(3,181,922) $(530,147) $5,906,666
1999
==========================================================================================================================
</TABLE>
See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements.
F-5
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 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)
Provisions (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 receivables 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:
Loan to related parties (448,684) --
Cash paid in acquisition, net of cash acquired (71,504) 18,701
Additions to property 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>
See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements.
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
Conversion of convertible debt into common stock -- 1,439,125
Non-cash charge associated with the conversion of convertible debt -- 852,202
Options granted in lieu of consulting fees -- 230,000
</TABLE>
See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements.
F-7
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS......... Advanced Electronic Support Products, Inc.,
(AESP) is primarily a wholesaler of computer
cables and accessories whose customers are
computer manufactures, dealers and retailers
located in the U.S. and foreign markets. The
Company grants credit to customers without
collateral.
SUBSIDIARIES AND BASIS OF
PRESENTATION.................. The Company's subsidiaries are based and
operating in the United States, Sweden,
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 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), approximating ($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 CONSOLIDATION.... The accompanying consolidated financial
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 AND EQUIPMENT......... Property and equipment is recorded at cost.
Depreciation and amortization is computed by
the straight line and accelerated methods
based on the estimated useful lives of the
related assets 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 RECOGNITION............ Revenues are recognized at the time of
shipment of the respective merchandise.
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
F-8
<PAGE>
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 calculations.
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 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
PRONOUNCEMENTS................. In June 1999, the Financial Accounting
Standard Board issued SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires
companies to recognize all derivatives
contracts as either assets or liabilities in
the balance sheet and to measure them at
fair value. If certain conditions are met, a
derivative may be specifically designated as
a hedge, the objective of which is to match
the timing of gain or loss recognition on
the hedging derivative with the recognition
of (i) the changes in the fair value of the
F-9
<PAGE>
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>
YEARS 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:
DECEMBER 31, 1999
--------------------- ----------
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
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:
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
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 waives the covenant
violation for 1999.
4. RUSSIAN WRITE-DOWN During the third quarter of 1998, the
Company wrote-off approximately $1,400,000
related to a receivable from its
F-12
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
STATES EUROPE EUROPE ELIMINATION TOTAL
Year ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
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
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>
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 TRANSACTIONS During 1998, the Company repaid an 8.5% note
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
F-13
<PAGE>
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 INSTRUMENTS The carrying amounts of financial
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 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:
YEARS ENDING DECEMBER 31,
2000 $ 164,000
2001 164,000
2002 157,000
2003 155,000
2004 155,000
-------
$ 795,000
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, it is required to pay a fee (as
defined) for each product to pay a fee (as
defined) for each product sold subject to
the agreement. During 1999 and 1998, $6,000
and $21,000, respectively, of royalties were
incurred.
9. DEFERRED COMPENSATION PLAN The Company has a defined contribution plan
for its U.S. employees established pursuant
to Section 401(k) of the Internal Revenue
Code. Employees contribute to the plan a
percentage of their salaries, 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
$16,952 and $21,545, respectively.
F-14
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES The following are the components of income
tax expense:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998
---------- -----------
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
========== ==========
The Company intends to invest the
undistributed earnings of the foreign
subsidiaries in their respective countries.
Accordingly, no provision for United States
income taxes on undistributed earnings is
required. The reconciliation of income tax
computed at the United States federal
statutory tax rate of 34% to income tax
expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
<S> <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-15
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts $ 22,578
Inventory 162,607
Net operating loss carry forward 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. The
Company issued an option to purchase 80,000
shares of common stock of the Company at
$7.80 per share to the underwriters, plus
80,000 warrants exercisable through February
13, 2002 at $.1625 per warrant. These
warrants allow the holder to purchase an
additional 80,000 shares of the Company's
common stock at $6.90 per 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 $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
F-16
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 YEAR 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 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.
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, 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
F-17
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998, the Company granted options to
purchase 75,000 shares of common stock at an
exercise price of $1.50 a share to its
directors. Accordingly, the Company has
taken 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. 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 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 option 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, or
certain other transactions involving the
Company.
In 1998, the Company granted a total of
66,400 options to employees. These options
vest one-third upon the date of the grant
and one-third each upon the next two
anniversaries of the date of the grant,
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
F-18
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options vest 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. 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 options-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.
Under the accounting provisions of FASB
Statements 123, the Company's pro forma net
income and earning per share would have been
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998
<S> <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>
F-19
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's fixed stock option plan and non-plan
options as of December 31, 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>
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>
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 at Remaining Average Exercisable at Average
Exercise Price 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
-------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.50-3.69 1,295,050 7.4 $ 1.72 833,716 $1.84
</TABLE>
F-20
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 1,506,693 $ 1,601,770
Accounts receivable, net of allowance for doubtful accounts
of $69,234 at June 30, 2000 and $60,000 at December 31, 1999 3,743,682 3,058,018
Inventories 6,948,107 5,688,914
Income tax receivable 26,859 38,187
Due from related parties 219,811 448,684
Prepaid expenses and other current assets 335,955 170,591
------- -------
TOTAL CURRENT ASSETS 12,781,107 11,006,164
PROPERTY AND EQUIPMENT, NET 505,482 492,208
INTANGIBLE ASSETS, NET 1,882,860 907,979
DEFERRED TAX ASSET 23,244 21,380
OTHER ASSETS 59,429 60,435
------ ------
TOTAL ASSETS $ 15,252,122 $ 12,488,166
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,271,000 $ 2,409,471
Accounts payable 4,042,686 2,382,798
Accrued expenses 768,197 778,431
Income taxes payable 99,993 272,661
Customer deposits and other 358,076 381,675
Current portion of long term debt 224,378 127,706
------- -------
Total current liabilities 7,764,330 6,352,742
LONG TERM LIABILITIES 178,738 228,758
------- -------
TOTAL LIABILITIES 7,943,068 6,581,500
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued. -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
issued: 3,691,391 at June 30, 2000 and 3,233,921 at December 31,
1999 3,691 3,234
Paid-in capital 10,655,224 9,615,501
Deficit (2,774,250) (3,181,922)
Cumulative foreign currency translation adjustment (575,611) (530,147)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 7,309,054 5,906,666
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,252,122 $ 12,488,166
============ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
F-21
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
2000 1999
---- ----
<S> <C> <C>
NET SALES $13,819,994 $12,675,137
OPERATING EXPENSES:
Cost of sales 8,412,545 7,181,402
Selling, general and administrative expenses 4,847,738 4,662,995
--------- ---------
Total operating expenses 13,260,283 11,844,397
---------- ----------
INCOME FROM OPERATIONS 559,711 830,740
Other income (expenses):
Interest, net (111,830) (110,752)
Other 108,927 101,809
------- -------
INCOME BEFORE INCOME TAXES 556,808 821,797
Provision for income taxes 149,136 117,351
------- -------
NET INCOME $ 407,672 $ 704,446
========= =========
Net income per common share - basic $.12 $ .22
==== ======
Net income per common share - diluted $ .11 $ .21
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
F-22
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency Total
Common Paid-In Transaction Comprehen- Shareholder's
Stock Capital Deficit Adjustment sive Income Equity
----- ------- ------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ 3,234 $ 9,615,501 $(3,181,922) $ (530,147) $ -- $ 5,906,666
Net Income -- -- 407,672 -- 407,672 407,672
Issuance of common stock in
connection with exercise of
stock options 163 443,292 -- -- -- 443,455
Shares issued in conjunction
with acquisition of Lanse 294 596,431 -- -- -- 596,725
Cumulative Foreign currency
translation adjustment -- -- -- (45,464) (45,464) (45,464)
--------
$ 362,208
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 3,691 $10,655,224 $(2,774,250) $ (575,611) $ 7,309,054
=====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
F-23
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 407,672 $ 704,446
Adjustments to reconcile net income to net cash used in operating
activities:
Provision for losses on accounts receivable (9,234) 11,840
Depreciation and amortization 107,503 63,720
Amortization of goodwill 74,404 67,700
(Increase) decrease, net of acquired business, in:
Accounts receivable (467,062) 495,979
Inventories (1,046,202) (465,773)
Income tax receivable (8,479) 62,205
Prepaid expenses and other current assets (127,709) (229,258)
Deferred tax asset (1,864) 34,150
Other assets 1,006 (37,613)
Increase (decrease), net of acquired business, in:
Accounts payable and accrued expenses 1,249,891 (1,058,020)
Income taxes payable (179,337) (85,185)
Other liabilities (23,598) (12,710)
Deferred tax liability -- 24,082
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (23,009) (424,437)
------------- -------------
INVESTING ACTIVITIES:
Net cash acquired in (used in) acquisitions (369,760) 40,361
Additions to property and equipment (92,523) (17,016)
Collection of loans due from related parties 228,873 --
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (233,410) 23,345
FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings (236,649) (37,939)
Eliminate overdraft -- (67,632)
Proceeds from sale of stock and warrants, net 443,455 --
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 206,806 (105,571)
NET DECREASE IN CASH (49,613) (506,663)
Effect of exchange rate changes in cash (45,464) (95,444)
CASH, AT BEGINNING OF YEAR 1,601,770 1,407,106
------------- -------------
CASH, AT END OF PERIOD $ 1,506,693 $ 804,999
------------- -------------
Supplemental information:
Cash paid for:
Interest $ 62,134 $ 110,752
Taxes $ 70,361 $ 93,836
Non Cash Investing & Financing Activities:
Common Stock issued for the acquisition of Lanse $ 596,725 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
F-24
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation The accompanying unaudited condensed
consolidated financial statements have been
prepared in accordance with generally
accepted accounting principles for interim
financial information and with the
instructions to Form 10-QSB. Accordingly,
they do not include all of the information
and footnotes required by generally accepted
accounting principles for complete financial
statements. In the opinion of management,
all adjustments (consisting of normal
recurring accruals) considered necessary for
a fair presentation have been included.
Operating results for the six-month period
ended June 30, 2000 are not necessarily
indicative of the results that may be
expected for the year ended December 31,
2000. For further information, refer to the
consolidated financial statements and
footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year
ended December 31, 1999.
2. Long-term Debt The line of credit agreement requires the
Company to comply with certain covenants
including limitations on further borrowings
and dividend payments. As of June 30, 2000,
the Company was in compliance with all of
the aforementioned benchmarks and ratios
except for the tangible net worth
requirement. Due to the Lanse acquisition,
the amount of goodwill recorded caused the
Company to be $74,000 or 1% below its
required tangible net worth, and a waiver
has been granted.
3. Acquisitions In May 2000, the Company completed the
acquisition of Lanse AS, a Norway
manufacturer and distributor of networking
hardware, for a purchase price of $736,095
in cash (including expenses) and 294,170
shares of the Company's common stock (valued
at $597,000). This acquisition was accounted
for under the purchase method, whereby the
purchase price was allocated to the
underlying assets and liabilities based on
their estimated fair values. The excess cost
over net assets acquired amounted to
approximately $1.0 million. This amount will
be amortized over fifteen years.
The following unaudited proforma information
presents the results of operations of the
Company and its subsidiaries as if this
acquisition had occurred on January 1, 2000
and 1999:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
<S> <C> <C>
Net sales $15,161,817 $14,535,272
Net income (loss) 420,313 743,382
Net income (loss) per common share 0.12 0.22
Net income (loss) per common share - assuming dilution 0.10 0.20
</TABLE>
F-25
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Earnings Per Share The following reconciles the components of
the earnings per share (EPS) computation:
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------------------
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 $407,672 3,377,109 $0.12 $704,446 3,140,144 $0.22
available to
common shares
Effect of
dilutive
Securities:
Exercisable 495,872 236,687
options to
purchase shares
of common stock
Net income $407,672 3,872,981 $0.11 $704,446 3,376,831 $0.21
available to
common
shareholders
plus assumed
conversions
</TABLE>
F-26
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Options to purchase 10,000 shares of common
stock at $3.69 per share were outstanding
during 2000, but were not included in the
computation of diluted EPS as the options'
exercise price was greater than the average
market price of the common shares. The
options, which expire in 2007, were
outstanding at June 30, 2000.
Options to purchase 63,000 shares and 80,000
shares of common stock at $2.13 and $3.69
per share, respectively, were outstanding
during 1999, but not included in the
computation of diluted EPS as the options'
exercise price was greater than the average
market price of the common shares. The
options, with expirations from 2006 to 2007,
were outstanding at June 30, 1999.
F-27
<PAGE>
-------------------
Advanced Electronic Support Products, Inc.
2,000,000 Shares of Common Stock
---------------
PROSPECTUS
---------------
_______ __, 2000
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Pursuant to the provisions of Section 607.0850(1) of the Florida
Business Corporation Act, we have the power to indemnify any person who is or
was a party to any proceeding (other than an action by us, or in our right),
because such person is or was a director, an officer, an employee, or an agent
of ours (or is or was serving at our request under specified capacities) against
liability incurred in connection with such proceeding provided such person acted
in good faith and in a manner such person reasonably believed to be in, or not
opposed to, our best interest (and with respect to any criminal action or
proceeding, such person had no reasonable cause to believe such person's conduct
was unlawful).
With respect to a proceeding by or in our right to procure a judgment
in our favor, Section 607.0850(2) of the Florida Business Corporation Act
provides that we shall have the power to indemnify any person who is or was a
director, officer, employee, or agent of ours (or is or was serving at our
request under specified capacities) against expenses and amounts paid in
settlement not exceeding, in the judgment of our Board of Directors, the
estimated expense of litigating the proceeding to conclusion, actually and
reasonably incurred in connection with the defense or settlement of such
proceeding provided such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, our best interest, except that
no indemnification shall be made in a case in which such person shall have been
adjudged to be liable to us unless and only to the extent that the court in
which the proceeding was brought, shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses.
Indemnification as described above shall only be granted in a specific
case upon a determination that indemnification is proper under the circumstances
using the applicable standard of conduct which is made by (a) a majority of a
quorum of directors who were not parties to such proceeding, (b) if such a
quorum is not attainable or by majority vote of a committee designated by the
Board of Directors consisting of two or more directors not parties to the
proceeding, (c) by independent legal counsel selected by the Board of Directors
described in the foregoing parts (a) and (b), or if a quorum cannot be obtained,
then selected by a majority vote of the full Board of Directors, or (d) by our
shareholders by a majority vote of a quorum consisting of shareholders who are
not parties to such proceeding.
Section 607.0850(12) of the Florida Business Corporation Act permits us
to purchase and maintain insurance on behalf of any director, officer, employee
or agent of ours (or one who is or was serving at our request in specified
capacities) against any liability asserted against such person or incurred by
such person in any such capacity whether or we have the power to indemnify such
person against such liability.
Articles of Incorporation
Our Articles of Incorporation provide for the indemnification of our
directors and officers to the fullest extent permitted by Section 607.0850 of
the Florida Business Corporation Act. The Articles of Incorporation further
provide that the indemnification provided for therein shall not be exclusive of
any rights to which those indemnified may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise.
The Articles also contain a provision that eliminates the personal
liability of our directors to us for monetary damages unless the director has
breached his or her fiduciary duty and such breach constitutes or includes
certain violations of criminal law, a transaction from which the director
derived an improper personal benefit, certain unlawful distributions or certain
other reckless, wanton or willful acts or misconduct. This provision does not
alter a director's liability under the federal securities laws. In addition,
this provision does not affect the availability of equitable remedies, such as
an injunction or rescission, for breach of fiduciary duty.
II-1
<PAGE>
Securities and Exchange Commission Policy
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us, we have
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses incurred or paid by
a director, officer or controlling person of us in the successful defense of any
action, suit or proceeding) is asserted by such, director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against the public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of estimated expenses payable by the
Company in connection with the offer and sale of the Securities registered
hereby:
SEC Registration Fee................................. $ 924
Legal Fees........................................... 25,000
Accounting Fees...................................... 15,000
Printing Fees........................................ 5,000
Misc................................................. 4,076
--------
$50,000
========
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
II-2
<PAGE>
Item 27. Exhibits.
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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)
5 Opinion of Akerman, Senterfitt & Eidson, P.A.*
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,
1995 (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 Agreement 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
Enhancements, Inc. (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)
10.21 Amendment to Loan Agreement between the Company and Commerce Bank, N.A.
dated as of September 2, 2000.*
10.22 Stock Purchase Agreement dated May 31, 2000 by and among JOTEC AESP AS
and the shareholders of Lanse AS (10)
21.1 List of Subsidiaries (6)
23.1 Consent of Akerman, Senterfitt & Eidson, P.A. (included in Exhibit 5)*
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule (for the Securities and Exchange Commission
purposes only)*
-------------
* Filed herewith.
(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 16, 1997.
(5) Incorporated by reference to our Quarterly Report on Form 10-QSB for
the quarter ended September 20, 1997.
II-3
<PAGE>
(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 to our definitive proxy statement, dated
September 10, 1999.
(10) Incorporated by reference to our Current Report on Form 8-K filed
July 10, 2000.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under Securities
Act, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule
430A and contained in a form of Prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of Prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: (i) To include any prospectus required by Section
10(a)(3) of the Securities Act; (ii) To reflect in the
prospectus any facts or events arising after the effective
date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing,
any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and (iii) To include any material
information with respect to the plan of distribution not
previously disclosed in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering
II-4
<PAGE>
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26th day of October, 2000.
Advanced Electronic Support Products, Inc.
By: /s/ Slav Stein
------------------------------------------
Slav Stein
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Slav Stein President, Chief Executive Officer and Director October 26, 2000
------------------------------------
Slav Stein
/s/ Roman Briskin Executive Vice President, Secretary and Director October 26, 2000
------------------------------------
Roman Briskin
/s/ Terrence R. Daidone Director October 27, 2000
------------------------------------
Terrence R. Daidone
/s/ William B. Coldrick Director October 26, 2000
------------------------------------
William B. Coldrick
/s/ Leonard Sokolow Director October 27, 2000
------------------------------------
Leonard Sokolow
/s/ Roy Rafalco Chief Financial Officer October 26, 2000
------------------------------------
Roy Rafalco (Chief Financial Officer and Chief Accounting
Officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
5 Opinion of Akerman, Senterfitt & Eidson, P.A.
10.21 Amendment to Loan Agreement between the Company and Commerce Bank,
N.A. dated as of September 2, 2000
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
