SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12739
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2327381
----------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1810 N.E. 144TH STREET
NORTH MIAMI, FLORIDA 33181
----------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (305) 944-7710
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, as of
August 17, 2000, is 3,691,391 shares.
Transitional Small Business Disclosure Format (check one)
Yes [X] No [ ]
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 2000
(unaudited).........................................................................................3
Condensed Consolidated Statements of Income for the three months and six months
ended June 30, 2000 and 1999 (unaudited)............................................................4
Condensed Consolidated Statements of Shareholders' Equity for the six months ended
June 30, 2000 (unaudited)...........................................................................5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 (unaudited)...........................................................................6
Notes to Condensed Consolidated Financial Statements................................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........................................10
Part II. Other Information
Item 1. LEGAL PROCEEDINGS..................................................................................14
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES....................................................................14
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS..................................................14
Item 5. OTHER INFORMATION..................................................................................14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................14
</TABLE>
2
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Advanced Electronic Support Products
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(unaudited) 1999
-----------------------------------------------------------------------------------------------------
<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 ................................................ 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
Notes 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
Other current liabilities .................................... 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 shares at June 30, 2000 and
3,233,921 shares 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
$ 15,252,122 12,488,166
=====================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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Advanced Electronic Support Products
and Subsidiaries
Condensed Consolidated Statements Of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Sales ....................................... $ 7,121,235 $ 6,229,449 $ 13,819,994 $ 12,675,137
Operating Expenses:
Cost of sales ............................... 4,425,798 3,720,746 8,412,545 7,181,402
Selling, general and administrative expenses 2,526,088 2,371,040 4,847,738 4,662,995
------------------------------------------------------------------------------------------------------------------------
Total operating expenses ........................ 6,951,886 6,091,786 13,260,283 11,844,397
------------------------------------------------------------------------------------------------------------------------
Income from Operations .......................... 169,349 137,663 559,711 830,740
Other income (expense):
Interest .................................... (58,517) (68,386) (111,830) (110,752)
Other ....................................... 62,966 160,856 108,927 101,809
------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes ...................... 173,798 230,133 556,808 821,797
Provision (benefit) for income taxes ............ 13,519 8,651 149,136 117,351
------------------------------------------------------------------------------------------------------------------------
Net Income ...................................... $ 160,279 $ 221,482 $ 407,672 $ 704,446
------------------------------------------------------------------------------------------------------------------------
Net income per common share ..................... $ 0.05 $ 0.07 $ 0.12 $ 0.22
Net income per common share assuming dilution ... $ 0.04 $ 0.06 $ 0.11 $ 0.21
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
Condensed Consolidated Statements Of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Compre- Total
Common Paid-In Comprehensive hensive Stockholders
Stock Capital Deficit Income 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 issues 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 financial statements.
5
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(NOTE 2)
<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 assets (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
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Net cash (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 stocks and warrants, net 443,455 --
-------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 206,806 (105,571)
-------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (49,613) (506,663)
Effect of exchange rate changes on 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
Common stock issued for the acquisition of Lanse $ 596,725 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of The accompanying unaudited condensed consolidated
Presentation 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. A waiver has been
requested and management believes, although there can
be no assurance, that such a waiver will be 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>
7
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Advanced Electronic Support Products
and Subsidiaries
4. Earnings The following reconciles the components of the
Per Share earnings per share (EPS) computation:
<TABLE>
<CAPTION>
For the three 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 shares
Net income $160,279 3,489,326 $0.05 $221,482 3,167,921 $0.07
available to
common shares
Effect of dilutive
Securities:
Exercisable 516,816 247,573
options to
purchase shares of
common stock
Net income $160,279 4,006,142 $.04 $221,482 3,415,494 $0.06
available to
common
shareholders plus
assumed conversions
<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 options 495,872 236,687
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>
8
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
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.
9
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-QSB CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THE FOLLOWING:
COMPETITION FROM OTHER MANUFACTURERS AND DISTRIBUTORS OF CONNECTIVITY AND
NETWORKING PRODUCTS BOTH NATIONALLY AND INTERNATIONALLY; THE BALANCE OF THE MIX
BETWEEN ORIGINAL EQUIPMENT MANUFACTURER SALES (WHICH HAVE COMPARATIVELY LOWER
GROSS PROFIT MARGINS WITH LOWER EXPENSES) AND RETAIL SALES (WHICH HAVE
COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO
PERIOD; AND THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND
ASSEMBLY OF PRODUCTS AND THE ABSENCE OF SUPPLY AGREEMENTS. THESE AND ADDITIONAL
FACTORS ARE DISCUSSED HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB
FOR 1998 (THE "FORM 10-KSB"). THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN
AND THEREIN INVOLVE AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING), ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENT. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLIC RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE INFORMATION SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" IN THE FORM 10-KSB.
Results of Operations
For the six months ended June 30, 2000, the Company 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. For the quarter ended June 30,
2000, the Company achieved net sales of $7.1 million, an increase of $900,000 or
14.5% over net sales of $6.2 million for the quarter 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 $2.1 million for the first six months of 1999, and up 81.6% to
$1.7 million for the second quarter of 2000 from $936,000 for the second quarter
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, and increased
17.6% to $2.0 million for the second quarter of 2000, from $1.7 million for the
second quarter of 1999.
10
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Advanced Electronic Support Products
and Subsidiaries
Year to year 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, and $3.3 million for the second quarter of 2000 compared to
$3.5 million for the second quarter of 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, the Company benefited from one month's sales by Lanse AS,
which was acquired on May 31, 2000.
The Company's 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, and was
37.9% for the second quarter of 2000 compared to 40.3% for the second quarter of
1999. The primary reasons were a decline in gross margins overseas 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 the Company has
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.
Selling, general and administrative ("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. For the quarter ended June
30, 2000, SG&A expenses increased by 6.5% to $2.5 million, from $2.4 million for
the comparative 1999 period. SG&A expenses as a percentage of sales for the
three and six months ended June 30, 2000 was 35.5% and 35.1%, respectively,
compared to 38.1% and 36.8%, respectively, for the three and six months ended
June 30, 1999. These decreases reflect continued efforts on the part of the
Company to control its 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 three months ended June 30, 2000 was $169,000, an increase of 22.4% over
income from operations of $138,000 for the three months ended June 30, 1999. For
the first six months of 2000, income from operations 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. Second quarter 2000
interest decreased 14.4% to $59,000, from $68,000 for the comparable 1999
period, due to lower borrowings.
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 the acquisition by the Company 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 three and six month periods 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, the Company 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, and net income of
$160,000 for the quarter ended June 30, 2000, a decrease of 27.6% over net
income of $221,000 for the second quarter of 1999.
11
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Advanced Electronic Support Products
and Subsidiaries
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. For the second quarter of 2000, primary earnings per
share were $.05, compared to primary earnings per share of $.07 for the second
quarter of 1999. Likewise, fully diluted earnings per share were $.04 for the
second quarter of 2000, reduced from fully diluted earnings per share of $.06
for the second quarter of 1999. Earnings per share for 2000 were adversely
impacted (compared to 1999) by a substantial increase in weighted average shares
outstanding from period to period. The increase primarily resulted from the
issuance of 163,300 shares of the Company's common stock upon exercise of stock
options and the issuance by the Company in May 2000 of an additional 294,170
shares of its common stock in connection with its acquisition of Lanse AS.
Liquidity & Capital Resources
Historically, the Company has financed its operations primarily with
cash flow from operations and with borrowings under its available lines of
credit.
At June 30, 2000, the Company's 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 $95,000, or 5.9%, as
the Company's 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, the Company's 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 1999, the Company obtained a $3.5 million line of credit
from a financial institution. Borrowings available under the line of credit,
which matures on September 2, 2000, bear interest at the rate of prime plus
one-quarter (.25) percent. Borrowings under the line of credit are based on
specific percentages of the Company's receivables and inventories. The line of
credit is secured by a lien on the Company's U.S. assets, including its accounts
receivable and inventories. The line of credit is also guaranteed by the
Company's principal stockholders, who have pledged the shares of the Company's
common stock which they own to secure their respective guarantees. Under the
terms of the loan agreement, the Company is 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, 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% under its tangible net
worth requirement. A waiver has been requested
12
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Advanced Electronic Support Products
and Subsidiaries
and the Company believes, although there can be no assurance, that such waiver
will be granted. 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.
In August, 2000, the Company asked the financial institution to extend
the current line of credit based on the same terms and conditions, and the
financial institution is considering the request. Under the terms of the
proposed facility, the Company will be able to continue to finance its domestic
inventory and domestic and international insured receivables under predetermined
advance rates. Consummation of the new borrowing facility is subject to approval
of the Board of Directors of the Company; the financial institution's review of
the Company's domestic inventory and domestic and international receivables, and
the execution of definitive loan documents.
While there can be no assurance, the Company expects to obtain an
extension of its line of credit from its lender. However, if the Company is
unable to close this new financing (or other alternative financing), and the
Company were unable to further extend its existing line of credit beyond its
September 2, 2000 maturity date, the Company's business would likely be
materially and adversely affected.
The Company believes that its internally generated cash flow from
operations, combined with its line of credit, will be sufficient to fund its
operations for the balance of the fiscal year ending December 31, 2000.
The Company does not believe that inflation has had a material effect
on its financial condition or operating results for the last several years, as
the Company has historically been able to pass along increased costs in the form
of adjustments to the prices it charges to its customers.
13
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On August 4, 2000, the Company held its 2000 annual meeting of
stockholders. At the meeting, the stockholders elected the following
five persons to serve on the Company's Board of Directors until their
successors are elected and qualified: Slav Stein, Roman Briskin,
Leonard Sokolow, Terrence R. Diadone and William B. Coldrick. The
shares voted for and against each of the candidates for director were
as follows: (i) 3,246,092 shares were voted in favor of each nominee
for director; and (ii) 700 shares were voted against each nominee for
director.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed July 10, 2000 under Item 5.
14
<PAGE>
Advanced Electronic Support Products
and Subsidiaries
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
Date: August 18, 2000 By: /s/ ROY RAFALCO
--------------------------------------
Roy Rafalco, Chief Financial Officer
15
<PAGE>
Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
27.1 Financial Data Schedule
