ITEM 1. DESCRIPTION OF BUSINESS -----------------------
THE COMPANY
Advanced Electronic Support Products, Inc. designs, manufactures, markets and distributes networking and computer connectivity 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. 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 also assemble a small percentage of our products at our North Miami facility and manufacture connectivity products at the facility of our subsidiary, Communications Components Company, Inc. ("CCCI"). We offer our products to a broad range of both original equipment manufacturer ("OEM") customers and retailers (such as computer superstores and dealers, and mail order customers) in North America, Latin America, and Eastern and Western Europe. Our networking products are marketed under the name "Signamax Connectivity Systems" and our OEM products are sold under the customer's name. We generally do not offer our products to end users.
Despite the current economic slowdown generally and particularly in the computer market, we believe that 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 thereby create a continuing substantial 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 strategy is to increase revenues and operating income through internal growth combined with growth through acquisitions. In 2000 and 2001, we completed two acquisitons and sold one of our operations.
. In June 2000, we acquired the stock of Lanse AS located in Oslo, Norway. Lanse distributes networking hardware to the network installation industry in Norway and also holds exclusive rights in Norway for the Telesafe (TM) product line;
. During January 2001, we sold our interest in AESP Ukraine, a distributor of our products located in the Ukraine. We expect that AESP Ukraine will continue to act as an exclusive distributor of our products; and
. On August 29, 2001, we completed the acquisition of Intelek spol. s.r.o for a purchase price of $1,065,700, consisting of $426,142 in cash , a $213,000 note payable, and the issuance of 139,398 shares of our common stock. Intelek is a distributor and manufacturer of networking hardware and wireless networking products with offices in Brno and Prague, Czech Republic.
We were incorporated in Florida in 1983. Our principal executive offices are at 1810 N.E. 144th Street, North Miami, Florida 33181, and our telephone number is (305) 944-7710.
RISK FACTORS RELATED TO OUR OPERATIONS
IN ADDITION TO OTHER INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-K, YOU SHOULD UNDERSTAND THE FOLLOWING RISK FACTORS RELATED TO OUR OPERATIONS:
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 future 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. 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 products is one of the fastest growing segments of the technology industry, the technology industry has historically experienced cyclical downturns. The current and any future 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; We Have 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 our products. The loss of one or more manufacturers of our 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 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 65 suppliers. We have one supplier (located in China), which supplied 11% of our purchases during 1999, 14% of our purchases during 2000 and 9% of our purchases during 2001. No other source of supply accounted for more than 10% of our purchases during 2000 or 2001. 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, Czech Republic, 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.
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.
We Are Dependent on Significant Customers
Our exclusive distributor in Russia accounted for 9.4% of our net sales for 1999, 11.5% of our net sales in 2000 and 13.7% of our net sales in 2001. We are currently selling products to our Russian distributor generally on a paid-in- advance basis. No other customer accounted for more than 10% of our net sales during fiscal years 1999, 2000, or 2001. During these same periods, our top ten customers (including our Russian distributor) accounted for 32%, 38% and 27%, respectively, of our net sales. 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 recorded provisions for inventory obsolescence totaling $1.1 million in 2001 due to the sudden and significant decrease in demand for our products resulting from decreased spending on technology and a generally sluggish economy, as well as our ongoing transition of focusing our core business on networking products instead of PC connectivity products. These provisions were estimated based on the carrying value of specific current inventory balances compared to current sales prices and
estimated future sales price analysis prepared by our sales departments for computer connectivity and networking products in each of our geographic areas 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 that we do not carry and provide services which we do not provide. Competitive pressure from these companies currently affects our business and will likely continue to affect our business and financial condition in the future. In the event that competitors carry products which we carry and price competition with respect to our products were to significantly increase, competitive pressures would likely 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 also 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 that market to the networking, telecommunications and cable audio/video 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 will be limited by, the availability of suitable acquisition candidates and capital, and by restrictions contained in our credit agreement, which require that our senior lender approve any acquisition that we make. In addition, acquisitions involve risks that could adversely affect our operating results, including the assimilation of the operations and personnel of acquired companies and the potential loss of key employees of acquired companies. We may not be able to complete any acquisitions on suitable terms. Other than as required by our Articles of Incorporation, By-Laws, and applicable law, our shareholders generally will not be entitled to vote upon acquisitions that we decide to make.
We Rely on Executive Officers and Key Employees
Our continued success is dependent to a significant degree upon the services of our executive officers 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 outstanding warrants and options, Messrs. Stein and Briskin own collectively 1,552,014 shares of our Common Stock, representing approximately 35.2% of our outstanding common stock. Since our Articles of Incorporation and By-Laws do not provide for cumulative voting, as a result of their ownership of their shares of common stock, Messrs. Stein and Briskin are effectively able to control us through the election of our entire Board of Directors.
BUSINESS OPERATIONS
General
The networking and computer connectivity market consists of two wholesale categories: manufacturers of computers and peripherals and distributors; and three resale categories: retail stores, catalog companies and 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.
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 we 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 future 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. See "Risk Factors Related to our Operations."
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 computer industry.
The networking and computer connectivity industry is also characterized by inevitable price erosion across the life cycle of products and technologies. 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 main categories: networking and computer connectivity products. In some cases, our OEM business will manufacture products outside this product classification (e.g., medical equipment).
Networking products are products which connect a computer to another computer, a network server, the Internet, a public switched telephone network or another enterprise. Networking products are divided into two sub-categories: active and passive. Active networking products include interface cards, transceivers, hubs, routers and repeaters. Passive networking products include patch panels, patch cables and wallplates.
Connectivity products are products which connect a computer to peripheral equipment, such as printers, external storage devices, scanners, facsimiles or communications devices. Connectivity products include cables, plugs and interface devices. Within the computer industry, the trend in connectivity equipment is toward the development of so-called universal interfaces, using USB, Firewire and SCSI standards. These universal interfaces allow many different devices, such as monitors, keyboards, printers and modems, to be connected using one universal interface per connection. Universal interfaces have the potential to replace a number of connectivity products currently marketed by us. However, we believe that future sales of universal interfaces have the potential to be equal to or greater than sales of the connectivity devices replaced by such interfaces.
We are constantly expanding and changing our product line within the aforementioned categories to expand the total number of products we can offer customers, to attract new customers, to penetrate new geographic and vertical markets and to increase gross sales. By expanding our product line to include products for different voltages, frequencies and connection configurations, and warehousing these products near potential customers, we have successfully expanded our sales activities into a number of Western and Eastern European countries.
In order to provide assistance to our customers and to be competitive with other companies in our industry, we offer our customers several services. These services include: 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 a customers relies 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); 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, the United Kingdom and the Czech Republic. 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, we manufacture connectivity products at CCCI's facility in Broomall, Pennsylvania.
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 supply us with the required product 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 our suppliers and implementing quality assurance programs in our suppliers' factories.
Over the last five years, we have progressively expanded our supplier base. Presently, we work with approximately 65 suppliers. We have one supplier (located in China) which supplied 11% of our purchases during 1999, 14% of our purchases during 2000 and 9% of our purchases during 2001. No other source of supply accounted for more than 10% of our purchases during 1999, 2000 or 2001. 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.
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, the Peoples' Republic of China, Czech Republic, 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 of 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. See "Risk Factors Related to our Operations."
Quality Control
Our goal is to provide our customers with defect-free products. Working with our primary manufacturers and often with our manufacturers of various 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 component parts function properly. The third and fourth stages of quality control occur after each molding process, with the final product being subject to quality control at the time of shipment to us. The fifth and final stage of quality control occurs at one of our distribution warehouses (North Miami, Germany, Czech Republic, Sweden and Norway). At this final stage of quality control, we test a certain percentage of each shipment of 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 computers and computer-related 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, web-based selling organizations and catalog houses. Catalog houses constitute a large share of our U.S. resale sales. The resale mass merchandising market also represents a significant growth area for us. We generally do not offer 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. See "Risk Factors Related to our Operations."
Sales to our exclusive distributor in Russia, AESP-Russia, accounted for 9.4% of our net sales for 1999, 11.5% of our net sales for 2000 and 13.7% of our net sales for 2001. We are currently selling products to our Russian distributor on a paid-in-advance basis. Our top 10 customers (including AESP-Russia) accounted for approximately 32%, 38% and 27% of our net sales for the years ended December 31, 1999, 2000, and 2001. Other than AESP-Russia, no customer accounted for more than 10% of our net sales in 1999, 2000, and 2001.
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. However, the loss of one or more significant customers could have a material adverse impact on our future business and results of operations.
Marketing and Sales
Our marketing and sales efforts are directed by our Sales and Marketing department. From a marketing perspective, this 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. From the sales perspective, this 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 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 or directly from the factory manufacturing their products. Networking and connectivity sales are generally handled from our headquarters in North Miami, Florida, from CCCI's facilities in Broomall, Pennsylvania, and from our German, Swedish, Norwegian, and Czech Republic 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 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 also have a material adverse effect on our results of operations. We may not be able to compete successfully in the future. See "Risk Factors Related to Our Operations."
Growth Strategy
Our strategic objective is to become a leader in the computer connectivity and networking equipment market, and to make the name "Signamax" and "AESP" synonymous with state-of-the-art hardware in this segment.
Strategy to Increase 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 our national and international customer base, we intend to continue to market to large distributor catalog companies, to increase both our product lines 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 television.
Strategic Acquisitions
The other element of our growth strategy involves growth through the acquisition of other companies, assets and/or product lines that will compliment or expand our business. We are seeking companies which market to the networking, telecommunications, cable audio/video and computer industries. We believe that acquisitions, mergers, asset purchases or other strategic alliances in these categories should enable us to achieve operating leverage on our existing resource base.
Our ability to expand by acquisition has been, and will continue to be, limited by the availability of suitable acquisition candidates, in both the United States and internationally, and by our financial condition and the market price of our common stock. Our ability to grow by acquisition is also impacted by restrictions contained in our credit agreement. See "Risk Factors Related to our Operations" for factors which impact our ability to complete acquisitions and for risks relating to acquisitions which we completed.
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, the Czech Republic, and Norway), (3) the Purchasing Department, (4) the Operations Department (including shipping, warehouse and quality control and production groups), (5) the Finance/Accounting Department (including MIS), and (6) manufacturing/CCCI. The Sales and Marketing Department covers sales in the United States, Canada, and Latin America. 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 Czech Republic, and Norway, and exclusive distributors in Russia and Ukraine.
Employees
As of December 31, 2001, we employed 134 people at the following locations: Miami office-44; Norway-21; CCCI-12; Sweden-8; Czech Republic-41; and Germany-8. Company wide-25 employees work in administration/accounting, 9 employees work in purchasing, 47 employees work in sales and marketing, and 53 work in operations. None of our employees are 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. There can be no assurance that laws or regulations adopted in the future relating to our business will not adversely affect our business.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES -------------------------
Our executive offices are located in North Miami, Florida. The table set forth below identifies the principal properties we currently utilize as of December 31, 2001. All properties are leased, are in good condition and are adequate for our present requirements. RSB Holdings, Inc., a related party, owns our 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 notes 2 and 6 of Notes to Consolidated Financial Statements for information regarding the financial terms of our leases.
SQUARE FACILITY DESCRIPTION LOCATION FOOTAGE -------------------- -------- ------- Corporate Headquarters, Product North Miami, FL 30,000 Assembly and Central Warehouse Sales Office and Warehouse Oslo, Norway 18,300 Sales Office and Warehouse Munich, Germany 12,000 Sales Office and Warehouse Brno, Czech Republic 10,650 Sales Office and Manufacturing Broomall, Pennsylvania 5,085 Sales Office and Warehouse Tierp, Sweden 5,000 Sales Office and Warehouse Prague, Czech Republic 4,500
We also utilize a bonded warehouse in Rotterdam, Netherlands. We pay rent for this warehouse based upon the number of pallets which we store in this facility from time to time.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
As of the date of this Form 10-K, we were not a party to any material legal proceedings, nor are any such proceedings threatened.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted to a vote of our shareholders during the fourth quarter of the 2001 fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the NASDAQ Small Cap Market under the symbol "AESP" since February 12, 1997. Our common stock purchase warrants were quoted on the NASDAQ Small Cap Market from February 12, 1997 until they expired by their terms on February 12, 2002. The following table sets forth the high and low bid prices for our common stock for each quarter during our two most recent fiscal years, as reported by NASDAQ:
COMMON STOCK WARRANTS ------------- ------------- HIGH LOW HIGH LOW ----- ----- ----- ----- - ---- First Quarter $8.38 $1.66 $2.88 $0.28 Second Quarter 3.25 1.75 1.00 0.34 Third Quarter 3.63 1.81 0.88 0.25 Fourth Quarter 2.38 1.06 0.38 0.09
- ---- First Quarter 2.59 1.38 0.44 0.09 Second Quarter 3.47 1.53 0.47 0.09 Third Quarter 3.69 2.25 0.27 0.12 Fourth Quarter 3.02 1.46 0.33 0.03
- ---- First Quarter 2.40 .71 0.01 0.01
At March 26, 2002, the number of holders of record of our common stock was 35. However, we estimate that there are approximately 500 beneficial holders of our common stock.
On February 12, 2002, our outstanding publicly traded common stock purchase warrants to purchase 920,000 shares of our common stock at an exercise price of $6.90 per share expired by their terms.
We have never paid any dividends and we do not intend to pay any cash dividends on our 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 on us by our credit facility, there are no restrictions that limit our ability to pay dividends.
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 to or disproportionate to the operating performance of companies. Such fluctuations, and general economic and market conditions, may adversely affect the market price of our common stock.
In June 2001, we completed a private placement of 573,900 shares of our common stock at a price of $2.00 per share before underwriting commissions and expenses of $210,800. The private placement was completed in accordance with the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder. We used the net proceeds of the placement (approximately $.9 million) to complete the acquisition of Intelek and for working capital. In connection with the placement, we issued a warrant to designees of Newbridge Securities Corporation, which acted as the placement agent, to purchase 57,390 shares of our common stock at an exercise price of $2.20 per share. Additionally, we have subsequently registered for resale in the public market all of the shares of common stock issued in the Intelek acquisition and sold in the private placement.
Our Articles of Incorporation and By-Laws contain provisions that may have the effect of discouraging certain transactions involving an actual or threatened change of control of our company. 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 shareholder approval. Further, two of our executive officers (Messrs. Stein and Briskin), who collectively at present own 35.2% of our outstanding common stock, have provisions in their employment agreements requiring us to pay, under certain circumstances, each of them $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 for 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
The following table represents our selected consolidated financial information. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and notes thereto and Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations which contains a description of the factors that materially affect - ------------- the comparability from period to period of the information presented herein
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------ OF OPERATIONS -------------
RISK FACTORS RELATING TO OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-K, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS RELATED TO OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Our Operating Results are Uncertain
Our net income (loss) for the 1999, 2000 and 2001 fiscal years was $387,000, $712,000 and $(4.2) million, respectively. We expect our expenses to increase in the future as we seek to continue to grow our business. We cannot assure you that our revenue will increase. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may be unable to return to profitability as in prior years.
Our Working Capital is Tight
We operate our business using working capital derived from our operations and from funds available from our line of credit. We believe that growth requires working capital to support the increased levels of inventory necessary to meet customer demands and to support accounts receivable generated from increased sales. We believe that operating cash flow generated through existing customers and business activities, current cash and cash equivalents and funds available from our line of credit will be sufficient to fund operating cash flow needs over the next twelve months. However, financing will likely be required if we are to be in a position to complete additional acquisitions. We may also consider selling debt or equity securities in order to meet our current and future working capital requirements or to fund future acquisitions. If we are unable to generate sufficient cash flow from operations or in some other fashion, or reduce our expenses or obtain a renewal of our line of credit, our business will be materially and adversely affected.
Our Credit Agreement Imposes Restrictions
We have a $3.0 million revolving line of credit with a financial institution. The agreement governing the line of credit contains covenants that impose limitations on us (including the requirement that any acquisition which we make be approved by the financial institution), 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 certain financial covenants. Our revolving line of credit currently expires in September 2002. If we fail to make required payments, or if we fail to comply with the various covenants contained in our credit agreement, the lender may be able to accelerate the maturity of such indebtedness. The line of credit is also guaranteed by our principal shareholders, who have pledged a portion of the shares of common stock which they own to secure their respective guarantees. As of December 31, 2001, we were not in compliance with the required financial covenants in our credit agreement. A waiver has been granted by the financial institution with respect to the year ended December 31, 2001. In connection with obtaining the waiver, the Company has agreed to an interest rate increase of a half percent (.5%) thus bringing the interest rate on the line of credit to prime plus one percent (1%). Further, we will likely violate these financial covenants during future periods including at March 31, 2002, and need waivers for such financial covenant violations unless our results of operations substantially improve. Our U.S. receivables, inventory and other assets are pledged to the lender to secure our line of credit. To the extent that there is an increase in interest rates, or present borrowing arrangements are no longer available or the lender is unwilling to waive future covenant violations, it would likely cause us to be adversely impacted.
Our Operating Results May Fluctuate
Our quarterly and annual operating results are impacted by many factors, including the timing of orders, the availability of inventory to meet customer requirements, and inventory obsolescence. A large portion of our SG&A 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 and inventory obsolescence could have a material adverse impact of our business, financial condition and results of operations.
Impact of Fluctuations in Interest Rates and Exchange Rates Could Affect Our Results
We are exposed to market risk from changes in interest rates, and as a global company, we also face exposure to adverse movements in foreign currency exchange rates.
Our earnings are affected by changes in short-term interest rates as a result of our credit facility. If short-term interest rates averaged 2% more in 2001, 2000 and 1999, our interest expense would have increased, and loss before taxes would increase by $32,600, $47,800, and $ 48,200 respectively. In the event of a change of such magnitude, our management would likely take actions to mitigate its exposure to change.
Our revenues and net worth are affected by foreign currency exchange rates due to having subsidiaries in Norway, Sweden, Germany, and the Czech Republic. While our sales to our subsidiaries are denominated in U.S. dollars, each subsidiary owns assets and conducts business in its local currency. Upon consolidation, our subsidiaries' financial results are impacted by the value of the U.S. dollar. A uniform 10% strengthening as of December 31, 2001 and 2000, in the value of the dollar would have resulted in reduced revenues of $1.3 million for the years of 2001 and 2000. A uniform 10% strengthening as of December 31, 1999, in the value of the dollar would have resulted in reduced revenues of $1.2 million for the year of 1999. A uniform 10% strengthening as of December 31, 2001 in the value of the dollar would have resulted in a reduction of our consolidated net worth by $193,600. A uniform 10% strengthening as of December 31, 2000 in the value of the dollar would have resulted in a reduction of our consolidated net worth by $418,400. A uniform 10% strengthening as of December 31, 1999 in the value of the dollar would have resulted in a reduction of our consolidated net worth by $377,600. The strengthening of the value of the dollar has a lesser impact at December 31, 2001 versus 2000 since we sold our wholly owned Ukrainian subsidiary in January 2001 and we acquired Intelek late in the year. We periodically evaluate the materiality of foreign exchange risk and the financial instruments available to mitigate this exposure. We attempt to mitigate our foreign exchange exposures by only maintaining assets directly related to the local operations in the exposed currency wherever possible. We find it impractical to hedge foreign currency exposure and as a result will continue to experience foreign currency gains and losses.
We Will Not Pay Dividends Even If We Are Profitable
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.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the U.S. Securities and Exchange Commission, encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.
Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements.
Revenue Recognition
Revenues are recognized at the time of shipment of the respective merchandise. The Company includes shipping and handling fees billed to customers as revenues. Costs of sales include outbound freight and preparing customers' orders for shipment. Included in net sales in the accompanying consolidated statements of operations for the years ended December 31, 2001, 2000, and 1999 are shipping and handling fees of $926,000, $841,000 and $844,000 respectively.
Use of Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and the carrying value of inventories and long-lived assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
For the year ended December 31, 2001, we achieved net sales of $30.2 million, compared to net sales of $30.2 million for the year ended December 31, 2000. Revenues in 2001 were positively impacted by $3.0 million in full year sales of Lanse (2000 revenues of $1.7 million for the seven months of 2000 during which we owned Lanse) and by $1.8 million in 2001 sales by Intelek (acquired in August 2001). Without the impact of these acquisitions, net sales would have decreased by $3.1 million or 10.2% from 2000 to 2001. This significant drop in sales throughout our worldwide operation for the year ended December 31, 2001 was due to several factors including worsening worldwide economic conditions generally in the technology market and specifically in several of our markets. We expect those factors will continue to impact our revenues in 2002, although we believe that our revenues will increase as the economy improves during the latter part of 2002 and into 2003.
For the year ended December 31, 2001, U.S. original equipment manufacturer (OEM) sales totaled $4.9 million reflecting a reduction of $900,000 (15.7%) when compared to $5.8 million for the year ended December 31, 2000. International sales were $17.8 million reflecting an increase of $1.5 million (9.3%) when compared to $16.3 million for the year ended December 31, 2000. However, this increase related to increased sales from Lanse and Intelek. Without sales from companies acquired, international sales for the year ended December 31, 2001 would have been $16.1 million or 8.2 % lower from period to period. U.S. networking sales were $7.3 million for 2001, compared to $7.8 million for 2000.
Our gross profit margin for the year ended December 31, 2001 was 26.7% compared to 38.1% for the year ended December 31, 2000. The primary reasons for the gross profit margin decline were the impact of lower margins relating to sales by Lanse and Intelek (which have historic margins lower than the Company's historic margins), heightened price competition and lower demand for the Company's products (due to the economic slowdown) and provisions for inventory impairment. We recorded provisions for inventory impairment totaling $1.1 million in 2001 due to the sudden and significant decrease in demand for our products resulting from decreased spending on technology and a generally sluggish economy, as well as our ongoing transition from PC connectivity products to networking products. These provisions were estimated based on the carrying value of specific current inventory balances compared to current sales prices and estimated future sales price analysis prepared by our sales departments for computer connectivity and networking products in each of our geographic areas of operations. The provision for inventory obsolescence was made for certain specific inventory items in the U.S. of $635,000 and in Western Europe of $494,000. Had the Company not recorded the $1.1 million provision for inventory impairment in 2001, its gross profit margin would have been 30.5% of net sales.
Selling, general and administrative ("SG&A") expenses increased by approximately $44,000, or .4%, to $10.5 million for the year ended December 31, 2001, from $10.5 million for the year ended December 31, 2000. The increase in SG&A expenses is as a result of cost reductions offset by $542,000 in expenses relating to Intelek's operations after its acquisition by the Company. We also incurred a $161,000 non cash charge in 2001 relating to a stock option granted to an investment banking firm for its services and recorded an increase in our provision for losses on accounts receivable of $170,000, due to worsening economic conditions. We believe (although there can be no assurance) that as sales increase in the future, we will again see a reduction in SG&A as a percentage of net sales, since many of our SG&A expenses are relatively fixed.
Based on current market conditions and an analysis of projected undiscounted cash flows calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 121, the Company determined that the carrying value of certain long-lived assets associated with the Company's 1997 purchase of Focus Enhancement's Networking Division (Focus), March 1999 purchase of CCCI., May 2000 purchase of Lanse AS, and August 2001 purchase of Intelek spol. s.r.o. may not be recoverable. The resultant impairment has necessitated a write-down of goodwill of approximately $331,000 related to Focus, $317,000 related to CCCI, $680,000 related to Lanse AS, and $214,000 related to Intelek spol. s.r.o. The estimated fair value of these long-lived assets has been determined by calculating the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
In the second and third quarters of 2001, the Company began steps to modify its cost structure and reduce expenditures in order to respond to the economic slowdown affecting the Company's sales. As a result, worldwide employment dropped at December 31, 2001 by 20% from March 31, 2001 levels and additional workforce and expense reductions are being considered.
Amortization of intangible assets was $203,000 for the year ended December 31, 2001, an increase of $20,000 or 11% over amortization of $183,000 for the year ended December 31, 2000. This increase is primarily attributable to amortization charges arising as a result of the acquisition by the Company of Lanse in May 2000. Commencing in 2002, we will no longer be obligated to amortize goodwill, but will be required to periodically assess the value of goodwill on our balance sheet under Statement of Financial Accounting Standard No. 142 in order to determine whether an impairment charge is required relating to the goodwill remaining on our financial statements. We are assessing but have not yet determined how the new accounting pronouncement will impact our financial statements.
As a result of the aforementioned factors, the loss from operations for the year ended December 31, 2001 was $(4.0) million, a decrease of $5.0 million from income from operations of $1 million for the year ended December 31, 2000.
Interest expense was relatively flat from period to period ($292,000 in 2001 compared to $285,000 for 2000). Interest income decreased due primarily to lower interest rates. Income tax expense decreased to $15,000 in 2001 from $170,000 in 2000, as a result of decreased profitability in Europe. Since the Company has U.S. income tax loss carry forwards, and currently maintains a tax valuation allowance of $3.6 million, the company does not expect to pay U.S. income tax in the forseeable future.
As a result of the foregoing factors, we incurred a net loss of $4.2 million for the year ended December 31, 2001, a decrease of $4.9 million compared to net income of $712,000 for the year ended December 31, 2000.
The loss per diluted share was $(1.05) for the year ended December 31, 2001, compared to the earnings per diluted share of $.18 for the year ended December 31, 2000. Weighted average shares outstanding were 4,634,420 in 2001, compared to 3,929,742 in 2000 (on a diluted basis), due principally to shares issued in June 2001 in a private placement.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
For the year ended December 31, 2000, net sales were $30.2 million, an increase of $3.8 million, or 14.2%, over net sales of $26.5 million for the year ended December 31, 1999. The
increase in sales primarily resulted from increases in domestic sales to both OEM and networking customers. OEM sales were up $1.7 million, or 42.9%, for the 2000 fiscal year compared to the 1999 fiscal year. Sales during 2000 also benefited from $2.2 million increase in international sales (after accounting for the negative effect on international sales of the strengthening U.S. dollar during the period), which includes $1.7 million of sales from Lanse AS (which we acquired in June 2000). Sales during 2000 and 1999 to our Russian distributor aggregated $3.5 million and $2.5 million respectively.
Our gross profit margin was 38.1% for the year ended December 31, 2000, compared to 38.4% for 1999. The drop in gross profit margin was due to the impact to our foreign subsidiaries of the strengthening U.S. dollar which increased their cost of products. In addition, gross profit margin was reduced by the increase in OEM sales as a percentage of total sales. OEM business produces lower margins than either networking or international business.
Selling, general, and administrative (SG&A) expenses increased $1.2 million, or 12.9%, for 2000 compared to 1999, as a result of the increase in net sales. As a percentage of net sales, SG&A for the twelve months ended December 31, 2000 was 34.6%. Comparatively, SG&A expenses as a percentage of sales for 1999 were 35.0%.
As a result of the aforementioned factors, income from operations for 2000 was $1,045,000, compared to $899,000 for 1999.
Interest expense increased by $8,000 from year to year. Exchange rates losses were $21,000 for 2000 compared with a $131,000 exchange rate loss for 1999, due to the strengthening U.S. dollar from period to period. The effective tax rate was lower for the twelve months ending December 31, 2000 compared to the 1999 period as a result of a reduction in operating losses in the United States and a lower overall effective tax rate realized on our overseas operations.
As a result, net income for 2000 was $712,000, compared to net income of $387,000 for 1999.
Earnings per diluted share for the 2000 fiscal year were $.18, compared to earnings per diluted share of $0.10 for the 1999 fiscal year. Weighted average diluted shares outstanding were 3,973,275 for 2000, compared to 4,026,798 for 1999.
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.
Below is a chart setting forth our contractual payment obligations as of December 31, 2001 which have been aggregated in order to facilitate a basic understanding of our liquidity (in thousands):
During 2001, we completed a private placement of shares of our common stock. We sold 573,900 shares in the private placement at a gross purchase price of $2.00 per share. The net proceeds of the placement ($937,000) were used to complete the acquisition of Intelek and for working capital.
At December 31, 2001, our working capital was $2.6 million, a decrease of 48.4% over working capital of $5.0 million as of December 31, 2000. Similarly, our current ratio was 1.28 at December 31, 2001, compared to 1.63 at December 31, 2000. The principal causes of the decrease were decreases of approximately $1.5 million in inventories (20%) and approximately $481,000 (27.2%) in cash along with increases of approximately $2.0 million (55.6%) in accounts payable ($1.2 million of the increase was due to consolidating Intelek beginning in the third quarter 2001), offset in part by increases of approximately $795,000 (24.1%) in accounts receivable (Increase in accounts receivable was due to consolidating Intelek beginning in the third quarter 2001), and decrease of approximately $1.1 million (42.3%) in short term borrowings. The decrease in short term borrowings related primarily to the receipt of proceeds from the above described private placement.
For the year ended December 31, 2001, $434,000 of cash was provided by operations. Net cash used in investing activities was $653,000, including $394,000 (including expenses) used in connection with the acquisition of Intelek spol. s.r.o. and an increase in property and equipment ($265,000). Cash of $217,000 was used in financing activities primarily from the private placement, which was used on a temporary basis for payments on borrowings. The total used to reduce borrowings was $1.2 million. As a result of the foregoing, the Company's cash position decreased $436,000 between December 31, 2000 and December 31, 2001. 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 $481,000. The Company is making efforts to improve its cash situation through cost reductions, collection of accounts receivable, and further reduction in its inventory.
In September 2001, the Company obtained a renewal of a $4.0 million line of credit from a financial institution. Borrowings available under the line of credit, which matures on September 23, 2002, bear interest at the rate of prime plus one-half (.50) percent (increased to prime plus one percent (1.0%) in March 2002). 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 accounts receivable and inventories. The line of credit is also guaranteed by our principal shareholders, who have pledged
a portion of the shares of 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 September 30, 2001, we were not in compliance with the tangible net worth and leverage requirements. A waiver has been granted by the financial institution and in connection with the waiver, we agreed to reduce its line of credit to $3.0 million. We were also not in compliance with the tangible net worth and leverage requirements at December 31, 2001. While the lender has granted a waiver of our covenant violations, it has increased our interest rate by .5%, to prime plus 1%. Additionally, we will likely not meet our financial covenants in future periods unless our results of operations substantially improve. While there can be no assurance, we expect that our lender will continue to waive covenant violations during future periods. As of December 31, 2001, $1.5 million was outstanding under the line of credit line and $950,000 was available for borrowing under the line of credit based on applicable borrowing base formulas. As of March 27, 2002, $2.0 million was outstanding under the line of credit and $180,000 was available for borrowing under the line of credit based on applicable borrowing base formulas.
The Company believes that revenue growth requires working capital to support increased sales and to support the receivables generated from increased sales. The Company believes that its internally generated cash flow from operations, combined with funds expected to be available under its line of credit, will be sufficient to fund its current operations for the next twelve months. The Company may also consider selling debt or equity securities in order to meet its current and future working capital requirements or to fund future acquisitions.
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.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) finalized Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortise goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method except the acquisition of AFSP Jotec as in 1997. The Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary. Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment a business" (as previously defined in that Opinion). The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The provisions of this Statement generally are to be applied prospectively. Currently the Company is assessing but has not yet determined how the adoption of SFAS 144 will impact its financial position and results of operations.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS -----------------------------------------------------------
We are exposed to market risk from changes in interest rates, and as a global company, we also faces exposure to adverse movements in foreign currency exchange rates.
Our results of operations are affected by changes in short-term interest rates as a result of the variable interest rate contained in its credit facility. If short-term interest rates averaged 2% more in the year ended December 31, 2001 and 2000 and 1999, our interest expense would have increased by $32,600, $47,800, and $48,200 respectively. In the event of a change of such magnitude, management would likely take actions to mitigate our exposure to change.
Our revenues and net worth are also affected by foreign currency exchange rates due to having subsidiaries in Norway, Sweden, Germany and the Czech Republic. While our sales to its subsidiaries are denominated in U.S. dollars, each subsidiary owns assets and conducts business in its local currency. Upon consolidation, the subsidiaries' financial results are impacted by the value of the U.S. dollar. A uniform 10% strengthening as of December 31, 2001 and 2000 in the value of the dollar would have resulted in reduced revenues of $1.3 million for the years 2001 and 2000. A uniform 10% strengthening as of December 31, 1999 in the value of the dollar would have resulted in reduced revenues of $1.2 million for the year of 1999. A uniform 10% strengthening as of December 31, 2001 in the value of the dollar would have resulted in a reduction of the our consolidated net worth by $193,600. A uniform 10% strengthening as of December 31, 2000 in the value of the dollar would have resulted in a reduction of our consolidated net worth by $418,400. A uniform 10% strengthening as of December 31, 1999 in the value of the dollar would have resulted in a reduction of the our consolidated net worth by $377,600. The strengthening of the value of the dollar has a lesser impact at December 31, 2001 versus 2000 since the Company sold its wholly owned Ukrainian subsidiary in January 2001 and we acquired Intelek late in the year. We periodically evaluate the materiality of foreign exchange risk and the financial instruments available to mitigate this exposure. We attempt to mitigate its foreign exchange exposures by only maintaining assets directly related to the local operations in the exposed currency wherever possible. We find it impractical to hedge foreign currency exposure and as a result will continue to experience foreign currency gains and losses in the future.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The financial information required by Item 8 is attached to this Report following Part IV.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. ---------------------
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
The information required by Item 10 is hereby incorporated by reference from the Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days after the end of the fiscal year ended December 31, 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
The information required by Item 11 is hereby incorporated by reference from the Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days after the end of the fiscal year ended December 31, 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
The information required by Item 12 is hereby incorporated by reference from the Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days after the end of the fiscal year ended December 31, 2001.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
The information required by Item 13 is hereby incorporated by reference from the Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days after the end of the fiscal year ended December 31, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
FINANCIAL STATEMENTS - --------------------
EXHIBITS - --------
3.1 Amended and Restated Articles of Incorporation of the Company (1) 3.2 By-Laws of the Company (2) 3.3 Articles of Amendment to Amended and Restated Articles of Incorporation (2) 3.4 Second Amended and Restated By-Laws of the Company (2) 4.1 Form of Common Stock Certificate (2) 4.3 Form of Newbridge Warrant Agreement * 10.1 Lease Agreement between the Company and RSB Holdings, Inc., dated July 15, 1996 (2) 10.2 Promissory Note between the Company and U.S. Advantage, dated July 15, 1996 (2) 10.3 Form of 1996 Stock Option Plan (2) 10.4 Form of Employment Agreement between the Company and Slav Stein (2) 10.5 Form of Employment Agreement between the Company and Roman Briskin (2) 10.6 Reserved 10.7 Form of Contingent Stock Option Agreement between the Company and Messrs. Stein and Briskin (2) 10.8 Amendment to 1996 Stock Option Plan (7) 10.9 Loan Agreement between the Company and Commercebank, N.A., dated September 23, 1999 (6) 10.10 Reserved 10.11 Reserved 10.12 Reserved 10.13 Reserved 10.14 Reserved 10.15 Amendment to Loan Agreement between the Company and Commercebank, N.A. dated as of September 2, 2000 (9) 10.16 Stock Purchase Agreement dated May 31, 2000 by and among Jotec AESP AS and the shareholders of Lanse AS (8) 10.17 Amendment to Loan Agreement between the Company and Commercebank, N.A. dated March 16, 2001 (10) 10.18 Stock Purchase Agreement dated August 29, 2001 by and among AESP Computerzubehor GmbH and Intelek spol. s.r.o. (11) 10.19 Amendment to Loan Agreement between the Company and Commercebank, N.A. dated as of September 21, 2001 (12) 21 List of Subsidiaries* 23 Consent of BDO Seidman, LLP*
* 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) Reserved
(4) Reserved
(5) Reserved
(6) Incorporated by reference to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999.
(7) Incorporated by reference from the Company's definitive proxy statement, dated September 10, 1999.
(8) Incorporated by reference to our Current Report on Form 8-K filed July 10, 2000.
(9) Incorporated by reference to our Registration Statement on Form SB-2 (SEC File No. 333-48944) filed with the SEC on October 30, 2000.
(10) Incorporated by reference to our Annual Report on Form 10-KSB for the year ended December 31, 2000.
(11) Incorporated by reference to our Current Report on Form 8-K filed September 7, 2001.
(12) Incorporated by reference to our Current Report on Form 8-K filed September 26, 2001.
REPORTS ON FORM 8-K - -------------------
There were no current reports on Form 8-K filed during the fourth quarter of 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
By: /s/ SLAV STEIN --------------------------- Slav Stein, President
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
INDEX
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Advanced Electronic Support Products, Inc. North Miami, Florida
We have audited the accompanying consolidated balance sheets of Advanced Electronic Support Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. We have also audited the schedule listed in the accompanying index. These financial statements and the accompanying schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Miami, Florida March 22, 2002
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Results for the quarterly periods in the years ended December 31, 2001 and 2000 are as follows:
(A) During the fourth quarter of 2001, provisions were recorded for inventory obsolescence and impairment of long-lived assets amounting to $350 and $1,211, respectively.
ADVANCED ELECTRONICS SUPPORT PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS Three Years Ended December 31, 2001 (In thousands)
- ---------- (A) Represents allowance for doubtful accounts acquired in purchase accounting. (B) Represents accounts receivable written-off. (C) Increase in amount of deferred tax assets for which realization is more likely than not.
EXHIBIT INDEX
- --------------------------- -------------------------------------------------- EXHIBIT DESCRIPTION - --------------------------- -------------------------------------------------- 4.3 Form of Warrant Agreement - --------------------------- -------------------------------------------------- 21 List of Subsidiaries - --------------------------- -------------------------------------------------- 23 Consent of BDO Seidman, LLP - --------------------------- --------------------------------------------------