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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2002
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
AESP, Inc.
(Exact name of registrant 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)
Registrant's Telephone Number, Including Area Code: (305) 944-7710
Former Name: ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
Check whether the registrant (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 of the registrant's Common Stock outstanding as of
August 5, 2002 is 4,596,721 shares.
Advanced Electronic Support Products, Inc.
and Subsidiaries
INDEX
Page
----
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at December 31, 2001 and
June 30, 2002 (unaudited)..............................................................................3
Condensed Consolidated Statements of Operations for the three months and six months
ended June 30, 2002 and 2001 (unaudited)...............................................................4
Condensed Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 2002 (unaudited).............................................................5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited)...............................................................6
Notes to Condensed Consolidated Financial Statements (unaudited).......................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................13
Item 3 QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT
MARKET RISK...........................................................................................20
Part II. Other Information
Item 1. LEGAL PROCEEDINGS.....................................................................................21
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................21
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................21
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.....................................................21
Item 5. OTHER INFORMATION.....................................................................................21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................21
2
Advanced Electronic Support Products, Inc.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 2002 December 31, 2001
(unaudited)
------------- -----------------
Current Assets
Cash ......................................................... $ 643 $ 1,288
Accounts receivable, net of allowance for doubtful accounts
of $352 at June 30, 2002 and $233 at December 31, 2001 ....... 4,205 4,094
Inventories .................................................. 5,848 5,930
Income tax receivable ........................................ 79 148
Due from employees ........................................... 49 31
Prepaid expenses and other current assets .................... 394 211
-------- --------
Total current assets ............................................ 11,218 11,702
Property and equipment, net ..................................... 605 580
Goodwill, net ................................................... 643 643
Deferred tax assets ............................................. 93 78
Assets of business transferred under contractual arrangement .... 706 732
Investment in marketable equity securities ...................... 210 270
Other assets .................................................... -- 200
-------- --------
TOTAL ASSETS .................................................... $ 13,475 $ 14,205
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Line of Credit ............................................... $ 1,809 $ 1,546
Accounts payable ............................................. 5,247 5,619
Accrued expenses ............................................. 595 1,058
Income taxes payable ......................................... 109 52
Customer deposits and other .................................. 422 449
Due to shareholders .......................................... -- 152
Other current liabilities .................................... 612 270
-------- --------
Total current liabilities ....................................... 8,794 9,146
Long term liabilities ........................................... 18 30
-------- --------
TOTAL LIABILITIES ............................................... 8,812 9,176
-------- --------
Shareholders' Equity
Preferred stock, $.001 par value; 1,000 shares authorized;
none issued .................................................. -- --
Common stock, $.001 par value; 20,000 shares authorized;
issued: 4,597 and 4,407 shares at June 30, 2002 and December
31, 2001, respectively ....................................... 5 4
Paid-in capital .............................................. 12,349 12,198
(Deficit) .................................................... (7,391) (6,684)
Accumulated other comprehensive loss ......................... (300) (489)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ...................................... 4,663 5,029
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 13,475 $ 14,205
======== ========
See accompanying notes to condensed consolidated financial statements.
3
Advanced Electronic Support Products, Inc.
and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six Months ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales ..................................... $ 6,795 $ 6,511 $ 14,281 $ 14,722
Operating expenses
Cost of sales .............................. 4,867 5,108 9,904 10,753
Selling, general and administrative expenses 2,657 2,569 5,036 5,009
-------- -------- -------- --------
Total operating expenses ...................... 7,524 7,677 14,940 15,762
-------- -------- -------- --------
Loss from operations .......................... (729) (1,166) (659) (1,040)
Other income (expense):
Interest, net .............................. (47) (59) (98) (146)
Other ...................................... 96 38 120 26
-------- -------- -------- --------
Loss before income taxes ...................... (680) (1,187) (637) (1,160)
Provision (benefit) for income taxes .......... 32 (13) 70 (8)
-------- -------- -------- --------
Net loss ...................................... $ (712) $ (1,174) $ (707) $ (1,152)
-------- -------- -------- --------
Net loss per common share ..................... $ (0.15) $ (0.32) $ (0.16) $ (0.31)
Net loss per common share assuming dilution ...
$ (0.15) $ (0.32) $ (0.16) $ (0.31)
-------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
Advanced Electronic Support Products, Inc.
and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
(IN THOUSANDS)
Accumulated
Other Total
Common Paid-In Comprehensive Comprehensive Stockholders
Stock Capital Deficit Income (Loss) Income (Loss) Equity
-------- -------- -------- -------- -------- ------------
Balance at January 1, 2002 $ 4 $ 12,198 $ (6,684) $ (489) -- $ 5,029
Net loss (707) (707) (707)
Conversion of debt 1 151 152
Investment in marketable
equity securities, net of
tax (60) (60) (60)
Cumulative foreign currency
translation adjustment -- -- -- 249 249 249
--------
$ (518)
-------- -------- -------- -------- -------- --------
Balance at June 30, 2002 $ 5 $ 12,349 $ (7,391) $ (300) $ 4,663
======== ======== ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
5
Advanced Electronic Support Products, Inc.
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(IN THOUSANDS)
Six months ended June 30,
-------------------------
2002 2001
------- -------
Operating Activities:
Net loss $ (707) $(1,152)
Adjustments to reconcile net income to net cash (used in) operating
activities:
Provision, net for losses on accounts receivable 14 88
Depreciation and amortization 141 104
Amortization of goodwill -- 107
Provision for inventory obsolescence 36 779
(Increase) decrease, net of acquired business, in:
Accounts receivable (298) (302)
Inventories 702 717
Income tax receivable 83 (32)
Prepaid expenses and other current assets 36 121
Other assets 40 (150)
Increase (decrease), net of acquired business, in:
Accounts payable and accrued expenses (977) (728)
Income taxes payables 33 (134)
Other liabilities 88 (36)
------- -------
Net cash used in operating activities (809) (618)
------- -------
Investing Activities:
Additions to property and equipment (131) (157)
Collection (issuance) of loans due from employees (42) 5
Collection on note receivable from sale of Ukrainian subsidiary 26 23
------- -------
Net cash used in investing activities (147) (129)
------- -------
Financing Activities:
Net Proceeds (payments) on borrowings 263 (1,295)
Proceeds from sale of stocks and warrants, net -- 982
------- -------
Net cash (used in) provided by financing activities 263 (313)
------- -------
Net decrease in cash (693) (1,060)
Effect of exchange rate changes on cash 48 (91)
Cash, at beginning of period 1,288 1,769
------- -------
Cash, at end of period $ 643 $ 618
======= =======
Supplemental information:
Cash paid for:
Interest $ 95 $ 146
Taxes $ 79 $ 190
Non-cash transactions:
Note in exchange for sale of business -- $ 772
Conversion of debt to equity $ 152
See accompanying notes to condensed consolidated financial statements.
6
Advanced Electronic Support Products, Inc.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance
with generally accepted accounting principles for
interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required
by generally accepted accounting principles for
complete financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results
for the three and six-month periods ended June 30,
2002 are not necessarily indicative of the results
that may be expected for the year ended December 31,
2002. The condensed consolidated balance sheet
information as of December 31, 2001 was derived from
the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K
for 2001 (the "Form 10-K"). For further information,
refer to the consolidated financial statements and
footnotes thereto included in the Form 10-K.
2.Line of Credit The Company has a line of credit which matures on
September 23, 2002. The line of credit agreement
requires the Company to comply with covenants,
including limitations on further borrowings, dividend
payments, and with certain financial covenants. As of
June 30, 2002, the Company was not in compliance with
two of the financial covenants contained in the
agreement, and the lender waived compliance with
those covenants at that date. In connection with the
waiver, the Company has agreed to a reduction in the
line of credit from $3 million to $1.9 million which
includes a reduction in the amount the Company can
borrow on its U.S. based inventories. As of June 30,
2002, $1,809,000 was outstanding under the line of
credit and $24,000 was available for borrowing based
on the applicable borrowing base formulas. Further,
its lender has advised the Company that it is
unlikely that it will renew the line of credit at its
maturity; however they will extend the termination
date in order to give AESP time to secure new
financing. The Company has begun a search for a new
lender.
7
Advanced Electronic Support Products, Inc.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Earnings Per Share The following reconciles the components of the
earnings per share (EPS) computation (In thousands,
except per share amounts):
For the three months
ended June 30, 2002 2001
- -------------------- ---------------------------------------------- ---------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ---------
Earnings per
common share
Net loss
applicable to
common
shareholders $ (712) 4,597 $ (0.15) $(1,174) 3,694 $ (0.32)
Effect of
dilutive
Securities:
Exercisable
options to
purchase shares
of common stock -- --
Net loss
applicable to
common
shareholders
plus assumed
conversions $ (712) 4,597 $ (0.15) $(1,174) 3,694 $ (0.32)
For the six months
ended June 30, 2002 2001
- ------------------ ---------------------------------------------- ---------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ---------
Earnings per
common share
Net loss
applicable to
common
shareholders $ (707) 4,509 $ (0.16) $(1,152) 3,689 $ (0.31)
Effect of
dilutive
Securities:
Exercisable
options to
purchase shares
of common stock -- --
Net loss
applicable to
common
shareholders
plus assumed
conversions $ (707) 4,509 $ (0.16) $(1,152) 3,689 $ (0.31)
8
Advanced Electronic Support Products, Inc.
and Subsidiaries
Options to purchase 20,000 shares, 91,450 shares,
332,401 shares, and 19,000 shares of common stock at
$3.69, $2.13, $1.75, and $2.86 per share,
respectively, were outstanding during 2002, but were
not included in the computation of diluted EPS as the
options' exercise price were greater than the average
market price of the common shares and because of the
Company's net loss. These options, which expire in
2007, 2009, 2010, and 2011 were outstanding at June
30, 2002.
Options to purchase 20,000 shares and 91,450 shares
of common stock at $3.69 and $2.13 per share,
respectively, were outstanding during 2001, but were
not included in the computation of diluted EPS as the
options' exercise price were greater than the average
market price of the common shares and because of the
Company's net loss. These options, which expire in
2007 and 2009, were outstanding at June 30, 2001.
9
Advanced Electronic Support Products, Inc.
and Subsidiaries
4. Recent Accounting In June 2001, the Financial Accounting Standards
Pronouncements 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 amortize 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. Other
than its 1997 acquisition of Jotec, AS, the Company's
previous business combinations were accounted for
using the purchase method of accounting. The Company
initially adopted SFAS 141 and SFAS 142 during the
quarter ended March 31, 2002. During the quarter
ended June 30, 2002, the Company completed the
transitional goodwill impairment test and determined
that it had no impairment to its goodwill at that
date. The Company will continue to assess the value
of its goodwill during future periods in accordance
with the rules.
10
Advanced Electronic Support Products, Inc.
and Subsidiaries
The principal effect of initial adoption of SFAS 141
and SFAS 142 was to eliminate amortization of the
Company's goodwill. Had goodwill amortization ceased
at January 1, 2001, expenses would have decreased by
$107,000 and net loss and net loss per share for the
six months ended June 30, 2001 would have been $1.1
million and $ 0.29, respectively.
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. The
adoption of SFAS 144 on January 1, 2002, had no
material effect on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statement No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections." Under Statement 4, all gains and losses
from extinguishments of debt were required to be
aggregated and, if material, classified as an
extraordinary item, net of related income tax effect.
This Statement eliminates Statement 4 and as a
result, gains and losses from extinguishment of debt
should be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board
Opinion 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." Additionally,
this Statement amends SFAS No. 13, "Accounting for
Leases," such that lease modifications that have
economic effects similar to sale-leaseback
transactions be accounted for in a similar manner as
a sale-leaseback. This statement is generally
effective for financial statements issued on or after
May 15, 2002. The impact of adopting SFAS No. 145 was
not material.
In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or
Disposal Activities." This Statement addresses
financial accounting and reporting for costs
associated with exit or
11
Advanced Electronic Support Products, Inc.
and Subsidiaries
disposal activities and supercedes Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits
and Other Costs to Exit and Activity (including
certain costs incurred in a Restructuring)." A
liability for a cost associated with an exit or
disposal activity shall be recognized and measured
initially at its fair value in the period in which
the liability is incurred, except for certain
qualifying employee termination benefits. This
Statement will be effective for exit or disposal
activities initiated by the Company after December
31, 2002.
5. Subsequent Events Effective July 1, 2002, the Company agreed to issue
200,000 shares of its common stock to two investment
banking firms for services. These shares will vest
over a twelve month period as to 100,000 shares and
over an eighteen month period as to 100,000 shares.
The $176,000 estimated fair value of these shares at
the date the Company committed to issue them will be
included in selling, administrative expenses during
the eighteen month period in which the investment
bankers have agreed to provide services.
On August 8, 2002, at the Company's annual
stockholders' meeting, the Company shareholders
approved a change in the Company's corporate name to
AESP, Inc.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF 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: THE COMPANY'S ABILITY TO REFINANCE ITS LINE OF CREDIT
WHICH BECOMES DUE SEPTEMBER 23, 2002, THE COMPANY'S ABILITY TO OBTAIN SUFFICIENT
WORKING CAPITAL TO MEET ITS CURRENT AND FUTURE REQUIREMENTS, 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 NETWORKING AND INTERNATIONAL SALES (WHICH HAVE
COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO
PERIOD; THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND ASSEMBLY
OF PRODUCTS AND THE ABSENCE OF SUPPLY AGREEMENTS; AND THE COMPANY'S ABILITY TO
FINANCE AND INTEGRATE FUTURE ACQUISITIONS. THESE AND ADDITIONAL FACTORS ARE
DISCUSSED HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
2001 (THE "FORM 10-K"). 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 PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE INFORMATION SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN THE FORM 10-K.
13
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was 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 contained in Form
10-K include a summary of the significant accounting policies and methods used
in the preparation of the 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. Cost of sales include outbound freight and preparing customers'
orders for shipment.
Use of Estimate
Management's discussion and analysis of financial condition and results
of operations is based upon our condensed 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 require 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 judgments 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
For the six months ended June 30, 2002, the Company achieved net sales
of $14.3 million, a decrease of $441,000 or 3.0% over net sales of $14.7 million
for the six months ended June 30, 2001. For the quarter ended June 30, 2002, the
Company achieved net sales of $6.8 million, an increase of $284,000 or 4.4% over
net sales of $6.5 million for the quarter ended June 30, 2001.
Revenues for the first half of 2002 were positively impacted by $2.1 million of
sales by Intelek, which was acquired in August 2001. Without Intelek's sales,
net sales for the first half of 2002 would have decreased by $2.6 million or
17.5% compared to first half 2001 net sales. Contributing to the overall
decrease in first half sales were decreases in international sales, which were
down by 22.2% to $6.6 million for the first six months of 2002, from $8.5
million for the first six months of 2001. In addition, U.S. networking sales
were down by 24.5% to $3.0 million for the first six months of 2002, from $3.9
million for the first six months of 2001. OEM sales
14
increased by 12.4% to $2.6 million for the first six months of 2002, from $2.3
million for the first six months of 2001. The increase in sales for the second
quarter resulted from Intelek sales ($1.1 million) offset by reductions of U.S
networking sales of $393,000, and international sales (other than from Intelek)
of $415,000.
The weakening U.S. dollar also benefited sales in 2002 due to better
currency translations of net sales from the various currencies in which the
Company sells its products. The decrease in net sales for the three and six
months 2002 periods was due primarily to heightened competition, worsening
worldwide economic conditions generally in the technology market, and worsening
economic conditions specifically in the networking, telecom and consumer
sectors, which are the Company's primary markets. The Company expects these
factors will continue to impact its net sales throughout 2002, although it
believes that its net sales will increase as the economy improves, which the
Company believes will occur in 2003.
The Company's gross profit margin was 30.6% for the six months
ended June 30, 2002, compared to 27% for the six months ended June 30, 2001, and
was 28.4% for the second quarter of 2002 compared to 21.5% for the second
quarter of 2001. During the three and six month 2001 periods, the Company
recorded a provision totaling $779,000 for inventory impairment. No such
provision was required to be recorded in the comparative 2002 periods. The
Company believes that with its current mix of operations, gross profit margin
should remain in the 28% to 32% range during the foreseeable period, although
there can be no assurance of that fact and factors described above may impact
where its gross profit margin falls within the range or whether its gross profit
falls outside the range.
Selling, general and administrative ("SG&A") expenses remained roughly
the same at $5.0 million for the six months ended June 30, 2002 and 2001. For
the quarter ended June 30, 2002, SG&A expenses increased by 3.4% to $2.7
million, from $2.6 million for the comparative 2001 period. SG&A expenses as a
percentage of sales for the three and six months ended June 30, 2002 were 39.1%
and 35.3%, respectively, compared to 39.5% and 34.0%, respectively, for the
three and six months ended June 30, 2001. SG&A in 2002 was affected by Intelek's
SGA in the amount of $251,000 and $466,000 for the three and six months ended
June 30, 2002. SG&A was also affected in the first half by goodwill amortization
of $107,000 and $54,000 for the 2001 six and three month periods. No such
amortization was required in 2002.
As a result of the aforementioned factors, the loss from operations for
the three months ended June 30, 2002 was $729,000, a decrease of $437,000 from
the loss from operations of $1.2 million for the three months ended June 30,
2001. For the first six months of 2002, the loss from operations was $659,000 a
decrease of $381,000 from the loss from operations of $1.0 million for the first
six months of 2001.
Other income for the 2002 three and six month periods primarily
benefited from the substantial changes in currency exchange rates during 2002.
Interest expense for the six months ended June 30, 2002 was $98,000,
compared to $146,000 for the first six months of 2001. Interest decreased for
the first six months of 2002 due to lower borrowings by the Company and a lower
interest rate compared to the similar period in
15
2001. For the same reasons, second quarter 2002 interest was $47,000, compared
to $59,000 in the first quarter of 2001.
Income tax expense for the three and six months ended June 30, 2002 is
computed based upon the tax rates applicable to the Company's operations in the
United States, Germany, Sweden, Norway and the Czech Republic which range from
34% to 45%. Substantially all of the Company's 2002 loss before income taxes
arose in tax jurisdictions where no immediate income tax benefit is available.
Realization of substantially all of the Company's deferred tax assets resulting
from the available net operating loss carryforwards and other net temporary
differences is not considered more likely than not and accordingly a valuation
allowance has been provided for all but $93,000 of the Company's deferred tax
assets at June 30, 2002.
The Company anticipates that its consolidated effective tax rate in
future periods will be impacted by which of its businesses are profitable in any
such future period and whether it will be able to take advantage of its net
operating loss carry forwards to affect taxable income in such periods.
As a result of the foregoing factors, the Company had a net loss of
$707,000 for the six months ended June 30, 2002, a reduction of $445,000 from
the net loss of $1.2 million for the six months ended June 30, 2001, and a net
loss of $712,000 for the quarter ended June 30, 2002, a reduction of $462,000
from net loss of $1.2 million for the second quarter of 2001. The Company
believes that its revenues, gross profit, and net income (loss) will be
negatively impacted for the discernable future by the economic slowdown and by
decreased spending on technology.
Basic (loss) per share was $(0.16) for the six months ended June 30,
2002, compared to basic (loss) per share of $(0.31) for the six months ended
June 30, 2001. Diluted (loss) per share was $(0.16) for the first six months of
2002, compared to diluted (loss) per share of $(0.31) for the first six months
of 2001. For the second quarter of 2002, basic (loss) per share was $(0.15),
compared to basic (loss) per share of $(.032) for the second quarter of 2001.
Likewise, diluted (loss) per share was $(0.15) for the second quarter of 2002,
reduced from diluted (loss) per share of $(0.32) for the second quarter of 2001.
LIQUIDITY & CAPITAL RESOURCES
Historically, the Company has primarily financed its operations with
cash flow from operations, borrowings under its available lines of credit, and
sales of its equity securities.
At June 30, 2002, the Company had working capital of $2.4 million, a
decrease of 5.2% over working capital of $2.6 million at December 31, 2001. The
principal causes of the decrease were a decrease of approximately $645,000
(change of 50.1%) in cash offset by a decrease of approximately $463,000 (change
of 43.8%) in accrued expenses.
For the six months ended June 30, 2002, $809,000 of cash was used in
operations. The net loss of approximately $707,000 million reduced cash. Net
cash used in investing activities was $147,000, as there was an increase in
property and equipment. Cash of $263,000 was generated
16
in financing activities primarily from short term borrowings. As a result of the
foregoing, the Company's cash position decreased $693,000 between December 31,
2001 and June 30, 2002. That decrease, combined with an increase of $48,000
attributable to the effects of exchange rate changes on cash, produced an
overall decrease in cash of $645,000.
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, as described below, to prime plus
one percent (1.0%) in March 2002). 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 accounts
receivable and inventories. The line of credit is also guaranteed by the
Company's principal shareholders, who have pledged a portion of the shares of
the Company's common stock which they own to secure their 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. As of September 30, 2001, the Company was not
in compliance with the tangible net worth and leverage convents. A waiver was
granted by the lender, and in connection therewith, the Company agreed to reduce
the size of the line of credit to $3.0 million. The Company was also not in
compliance with the tangible net worth and leverage covenants at December 31,
2001. While the lender granted a waiver of this covenant violation, it increased
the interest rate payable on the line of credit by .5%, to prime plus 1%.
Further, as of March 31, 2002 and June 30, 2002, the Company was again not in
compliance with the tangible net worth and leverage covenants, and the lender
has granted a waiver of these covenant violations. In connection with the
waiver, the Company has agreed to a reduction in the line of credit to $1.9
million which includes a reduction in the amount the Company can borrow on its
Florida based inventories. Additionally, the Company will likely not meet its
financial covenants during future periods unless its results of operations
improve substantially. While there can be no assurance, the Company expects that
its lender will continue to waive financial covenant violations during future
periods. As of June 30, 2002, $1,809,000 was outstanding under the line of
credit and $24,000 was available for borrowing based on previous and current
borrowing base formulas.
In August 2002, the Company requested that the financial institution to
extend the current line of credit based on the same terms and conditions. The
financial institution has advised the Company that it is unlikely that the
financial institution will renew the line of credit; although the lender has
advised the Company that it will likely extend the termination date of the line
of credit for a limited period of time to allow the Company to obtain
alternative financing from another lender. While the Company expects to be able
to obtain alternative financing, there can be no assurance that it will be able
to do so. If the Company is unable to obtain alternative financing or additional
extensions beyond its September 23, 2002 maturity date, the Company's business
would likely be materially and adversely affected.
The Company's foreign subsidiaries also have various lines of credits.
At June 30, 2002, $863,000 is outstanding under these lines and $443,000 is
available for borrowing.
The Company is making efforts to improve its cash situation through
cost reductions, collection of accounts receivable, and reduction in inventory.
The Company believes that revenue growth requires working capital to support
increased sales and to support the receivables
17
generated from increased sales. The Company believes that its internally
generated cash flow from operations, combined with 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.
In March 2002, debt of $152,000 owed to the Company's principal
stockholders was converted into an aggregate of 190,000 shares of common stock
(at $.80 per share, the fair market value of the common stock on the conversion
date).
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
amortize 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. Other than its 1997
acquisition of Jotec, AS, the Company's previous business combinations were
accounted for using the purchase method. The Company initially adopted SFAS 141
and SFAS 142 during the quarter ended March 31, 2002. The Company has now
completed the transitional goodwill impairment test in the quarter ending June
30, 2002 and no impairment was required.
The principal effect of initial adoption of SFAS 141 and SFAS 142 was
to eliminate amortization of the Company's goodwill. Had goodwill amortization
ceased at January 1, 2001, expenses would have decreased by $107,000 and net
loss and net loss per share for the six months ended June 30, 2001 would have
been $1.1 million and $ 0.29, respectively.
18
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
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. The adoption of SFAS 144 on January 1, 2002 had no
material effect on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Under Statement 4, all gains and losses from extinguishments of
debt were required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. This Statement eliminates
Statement 4 and as a result, gains and losses from extinguishment of debt should
be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion 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." Additionally, this
Statement amends SFAS No. 13, "Accounting for Leases," such that lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in a similar manner as a sale-leaseback. This Statement is
generally effective for financial statements on or after May 15, 2002. The
impact of adopting SFAS No. 145 was not material.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including certain costs incurred in a Restructuring)." A liability
for a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for certain qualifying employee termination benefits. This
Statement will be effective for exit or disposal activities initiated by the
Company after December 31, 2002.
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ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, and as a
global company, the Company also faces exposure to adverse movements in foreign
currency exchange rates.
The Company's earnings are affected by changes in short-term interest
rates as a result of its credit facility. If short-term interest rates averaged
2% more in the first six months ended June 30, 2002, the Company's interest
expense would have increased, and loss before taxes would increase by $28,000;
comparably, the Company's interest expense would have increased, and loss before
taxes would increase by $38,000 in the first six months ended June 30, 2001. In
the event of a change of such magnitude, management would likely take actions to
mitigate its exposure to change.
The Company's revenues and net worth are affected by foreign currency
exchange rates due to having subsidiaries in Norway, Sweden, Germany and the
Czech Republic. While the Company's 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 June 30, 2002
in the value of the dollar would have resulted in reduced revenues of $757,000
for the six months ended June 30, 2002. A uniform 10% strengthening as of June
30, 2001 in the value of the dollar would have resulted in reduced revenues of
$599,000 six months ended June 30, 2001. A uniform 10% strengthening as of June
30, 2001 in the value of the dollar would have resulted in a reduction of the
consolidated Company's net worth by $321,000. A uniform 10% strengthening as of
June 30, 2001 in the value of the dollar would have resulted in a reduction of
the consolidated Company's net worth by $299,000. The strengthening of the value
of the dollar has a larger impact at June 30, 2002 versus 2001 since the Company
purchased its Czech Republic subsidiary, Intelek, in August 2001. The Company
periodically evaluates the materiality of foreign exchange risk and the
financial instruments available to mitigate this exposure. The Company attempts
to mitigate its foreign exchange exposures by only maintaining assets directly
related to the local operations in the exposed currency wherever possible.
However, the Company finds it impractical to hedge foreign currency exposure,
and as a result will continue to experience foreign currency gains and losses in
the future.
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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
No matters were submitted to the Company's shareholders during the
quarter ended June 30, 2002.
ITEM 5. OTHER INFORMATION
The Company has received a letter from The Nasdaq SmallCap Market that
it has regained compliance with the Nasdaq SmallCap continued listing
maintenance standards. As previously reported on April 24, 2002, the Company
received a letter from Nasdaq that as a consequence of its common stock having
traded below $1.00 per share for 30 consecutive trading days, it was not in
compliance with Nasdaq's continued listing standards. On June 11, 2002, the
Company received a second letter from Nasdaq that as a result of the closing bid
price of the Company's common stock remaining at or over $1.00 per share for at
least 10 consecutive trading days, the Company has regained compliance with
Nasdaq's continued listing maintenance standards.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
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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.
AESP, Inc.
Date: August 14, 2002 By: /s/ ROY RAFALCO
--------------------------------------
Roy Rafalco, Chief Financial and
Accounting Officer
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