Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 000-12739
AESP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2327381
------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1810 N.E. 144TH STREET
NORTH MIAMI, FLORIDA 33181
- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(305) 944-7710
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities to Be Registered Pursuant To Section 12(B) Of The Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
NONE N/A
Securities registered pursuant to section 12(g) of the Exchange Act:
COMMON STOCK $.001 PAR VALUE
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing bid price of the Company's common
stock, $.001 par value per share (the "Common Stock") as of June 28, 2002 of
$.90 per share (as reported on the NASDAQ SmallCap Market), was approximately
$2,740,236. There is no non-voting stock.
The number of shares of the Company's Common Stock which were
outstanding as of March 27, 2003 was 5,984,221.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits listed in Part IV of this Annual Report on Form
10-K are incorporated by reference from prior filings made by the Registrant
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended.
AESP, INC.
TABLE OF CONTENTS
PAGE
----
FORWARD LOOKING STATEMENTS........................................................................................1
PART I............................................................................................................2
Item 1. Description of Business..........................................................................2
Item 2. Description of Properties.......................................................................17
Item 3. Legal Proceedings...............................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.............................................17
PART II..........................................................................................................18
Item 5. Market for Common Equity and Related Stockholder Matters........................................18
Item 6. Selected Financial Data.........................................................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................22
Item 7(A). Quantitative and Qualitative Disclosures About Market Risks.....................................35
Item 8. Financial Statements and Supplementary Data.....................................................35
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.............................................................35
PART III.........................................................................................................36
Item 10. Directors and Executive Officers of the Registrant..............................................36
Item 11. Executive Compensation..........................................................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.............................................................................44
Item 13. Certain Relationships and Related Transactions..................................................46
Item 14. Controls and Procedures.........................................................................46
PART IV..........................................................................................................47
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................47
i
FORWARD LOOKING STATEMENTS
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO AESP, Inc.,
"AESP," "THE COMPANY," "WE," "OUR" AND "US" IN THIS ANNUAL REPORT ON FORM 10-K
INCLUDES AESP, INC. AND ITS SUBSIDIARIES. THE MATTERS DISCUSSED IN THIS ANNUAL
REPORT ON FORM 10-K CONTAIN OR MAY 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, UNCERTAINTIES, AND ASSUMPTIONS,
INCLUDING, IN ADDITION TO THOSE DESCRIBED BELOW, IN "RISK FACTORS RELATED TO OUR
OPERATIONS," IN "RISK FACTORS RELATED TO OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, 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 SALES (WHICH HAVE COMPARATIVELY
HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO PERIOD; OUR
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND ASSEMBLY OF PRODUCTS; AND THE
ABSENCE OF SUPPLY AGREEMENTS. THESE AND ADDITIONAL FACTORS ARE DISCUSSED HEREIN.
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION INCORPORATED BY REFERENCE, AND
INFORMATION THAT WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC")
FROM TIME TO TIME. THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND," AND SIMILAR EXPRESSIONS USED IN
THIS FORM 10-K ARE INTENDED TO INDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD
NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY
AS OF THE DATE MADE. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE ANY REVISION
OF THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE THEY ARE MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. YOU
SHOULD ALSO KNOW THAT SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND ARE SUBJECT TO RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ANY OF THESE
RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF OUR ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
AESP, Inc. designs, manufactures, markets and distributes networking
and computer connectivity products nationally and internationally. We 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. We
offer our products to a broad range of original equipment manufacturers ("OEM")
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 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.
Our strategy is to increase revenues and operating income through
internal growth combined with growth through acquisitions. In 2000 and 2001, we
completed two acquisitions and sold one of our operations.
o 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;
o 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
2
o 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 (paid in August 2002), 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 WHICH MAY DECREASE REVENUES
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 products to take advantage of
new technologies that could render existing products obsolete. Our personnel,
through discussions with customers, attendance at trade and association meetings
and industry experience, identify new and improved technologies and work closely
with our vendors, who are responsible for the cost of developing and building
these products. We do not directly spend significant funds on research and
development but instead rely on our suppliers for developmental expertise. 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 with our vendors 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 revenues. 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, thereby decreasing our future
revenues.
3
THE NETWORKING AND COMPUTER CONNECTIVITY INDUSTRY IS CYCLICAL WHICH COULD MAKE
OUR REVENUES MORE VOLATILE
The networking and computer connectivity 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, which could
have a material adverse effect on our future revenues.
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. Any such downturns,
unexpected changes in technology or shifts in the distribution channel for
networking and computer connectivity equipment could have a material adverse
effect on our revenues and results of operations.
WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING AND ASSEMBLY; THE LACK OF
SUPPLY AGREEMENTS COULD DISRUPT OUR DELIVERY OF INVENTORY
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 materially increase our material costs and/or decrease
our revenues through an inability to deliver timely product to our customers.
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.
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 8% of our purchases during 2002, 9% of our
purchases during 2001 and 14% of our purchases during 2000. No other source of
supply accounted for more than 10% of our purchases during 2002, 2001 or 2000.
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.
4
Nevertheless, the loss of one or more of our suppliers could increase our
product costs and negatively affect our revenues by increasing delivery times.
WE UTILIZE FOREIGN SUPPLIERS AND MANUFACTURERS WHICH MAY INCREASE OUR COSTS
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 and/or commercially reasonable costs.
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; A LOSS OF ANY KEY
DISTRIBUTORS COULD DECREASE OUR REVENUES
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
revenues and results of operations.
WE ARE DEPENDENT ON SIGNIFICANT CUSTOMERS; THE LOSS OF WHICH COULD DECREASE
REVENUES
Our exclusive distributor in Russia accounted for 10% of our net sales
for 2002, 14% of our net sales in 2001 and 12% of our net sales in 2000. During
these same periods, our top ten customers (including our Russian distributor)
accounted for 33%, 27% and 38%, respectively, of our net sales. No customer
(other than our Russian distributor) accounted for more than 10% of our net
sales during fiscal years 2002, 2001, or 2000. The loss of one or more
significant customers could have a material adverse effect on our cash flow and
results of operations.
5
WE MAINTAIN SIGNIFICANT INVENTORY WHICH PUTS US AT RISK FOR ADDITIONAL
OBSOLESCENCE WRITE-OFFS
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 increase our expense and have a material adverse effect
on our revenues and our results of operations.
We recorded provisions for inventory obsolescence totaling $538,000 in
2002 and $1.1 million in 2001 due to the significant decrease in demand for our
products because of lower spending on technology due to 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
calculated based on the carrying value of specific current inventory balances
compared to current sales volumes and 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, SOME OF WHOM POSSESS GREATER RESOURCES
We compete with many companies that manufacture, distribute and sell
computer connectivity and networking products. In our active networking product
line, we compete with hundreds of companies, including Cisco, 3Com, Transition
Networks and Allied Telesyn. In this market, we believe we compete favorably on
service and value, offering a high performance to price ratio. In our passive
networking and connectivity product lines, we compete with approximately 30 - 50
companies, such as Ortronics, Tyco Electrical, Netconnect and Leviton. In these
markets, we stress our breadth of products, service, price and performance.
While these companies are largely fragmented throughout different sectors of the
computer connectivity industry, many 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
materially adversely affect our business and will likely continue to affect our
business and financial condition in the future by causing erosion of gross
margins in these difficult economic times. 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
revenues and results of operations. We may not be able to compete successfully
in the future.
6
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 and computer industries. We
believe that acquisitions, mergers, asset purchases or other strategic alliances
in these categories should enable us to achieve operating leverage on our
existing resource base. Our ability to expand by acquisition has been, and will
continue to be limited by the availability of suitable acquisition candidates,
in both the United States and internationally, and by our financial condition
and the price of our common stock. Our ability to grow by acquisition is
dependent upon, and will be limited by, the availability of suitable acquisition
candidates and capital, and by restrictions contained in our credit agreement,
which restrictions include maintaining certain minimum ratios of assets and
liabilities and not permitting any indebtedness, guarantees or liens which could
materially affect our ability to repay our loan. In addition, acquisitions
involve risks that could adversely affect our costs and operating results,
including the assimilation of the operations and personnel of acquired
companies, the possible amortization of acquired intangible assets and the
potential loss of key employees of acquired companies. We may not be able to
complete any acquisitions on suitable terms. No material commitments or binding
agreements have been entered into to date. Other than as required by our
articles of incorporation, by-laws, and applicable law, our shareholders
generally will not be entitled to vote upon such acquisitions.
In August 2001, we completed the acquisition of Intelek spol. s.r.o., a
Czech Republic manufacturer and distributor of networking hardware and wireless
networking products and in May 2000, we completed the acquisition of Lanse AS, a
Norwegian manufacturer and distributor of networking hardware. To date, the
Company has not had any material problems with either of such acquisitions.
However, no assurance can be given that problems in these or other acquired
businesses may not occur in the future or that future acquisitions will not
involve significant risks.
WE RELY ON EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our continued success is dependent to a significant degree upon the
services of Slav Stein, our President and Chief Executive Officer, and Roman
Briskin, our Executive Vice President and Secretary, 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 26% of our outstanding common stock. Since our articles of
incorporation and bylaws do not provide for cumulative voting, as a result of
their ownership of their shares of common stock, Messrs. Stein and Briskin are
effectively able to control us through the election of our entire board of
directors and the appointment of our officers.
In addition, under such circumstances, we will not, without Messrs.
Stein's and Briskin's approval, be able to consummate transactions involving the
actual or potential change in our control, including transactions in which the
holders of our common stock might otherwise receive a premium for their shares
over then current market prices.
7
OUR STOCK MAY BE SUBJECT TO GREAT PRICE VOLATILITY
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market generally, and technology-related
securities in particular, may experience extreme price and volume fluctuations
that may be unrelated or disproportionate to the operating performance of
companies. Such fluctuations, and general economic and market conditions, may
adversely affect the market price of our common stock.
OUR STOCK MAY NO LONGER CONTINUE TO MEET THE LISTING REQUIREMENTS OF THE NASDAQ
SMALLCAP MARKET
Our common stock is currently traded on the Nasdaq SmallCap Market. In
the event we are no longer in compliance with the Nasdaq SmallCap Market
continued listing criteria, which require, among other things, that the market
value of our publicly held shares is not less than $1,000,000 and that the
closing bid price of our publicly held shares is not less than $1.00 for more
than 30 consecutive trading days, then Nasdaq may delist our common stock. We
may then have to seek to have our common stock quoted on the OTC Bulletin Board
maintained by the NASD. The average bid price for our common stock has fallen
below $1.00 in the past and may fall below $1.00 in the future. We cannot assure
you that if our shares of common stock are quoted on the OTC Bulletin Board that
our shares will be as liquid as they have historically been on the Nasdaq
SmallCap Market. Further, the market price for our shares may become more
volatile than it has been historically.
IF OUR COMMON STOCK IS DEEMED A "PENNY STOCK", ITS LIQUIDITY WILL BE ADVERSELY
AFFECTED
If the market price for our common stock falls and remains below $1.00
per share (which has occurred in the past and may occur in the future), our
common stock may be deemed to be penny stock. If our common stock is considered
penny stock, it would be subject to rules that impose additional sales practices
on broker-dealers who sell our securities. For example, broker-dealers must make
a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Also, a disclosure
schedule must be prepared before any transaction involving a penny stock and
disclosure is required about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Monthly statements are also required to be sent disclosing recent price
information for the penny stock held in the account as well as information on
the limited market in penny stocks. Because of these additional obligations,
some brokers may not handle transactions in penny stocks. If our stock is deemed
a "penny stock", it could have an adverse effect on the liquidity of our common
stock.
8
IMPACT OF WARRANT EXERCISE ON MARKET
We intend to complete a warrant dividend to the holders of our common
stock as of the record date of April 10, 2003. We will issue to holders of
record on the record date one common stock purchase warrant for each common
share which they own on that date. The warrants will become exercisable upon the
effectiveness of a registration statement registering our sale of the shares of
common stock underlying the warrants. In the event of the exercise of a
substantial number of warrants after the right to exercise commences, the
resulting increase in the amount of our common stock in the trading market could
substantially affect the market price of our common stock. See Item 5. "MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS" for a description of the
warrant dividend.
ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE CERTAIN TRANSACTIONS
Our articles of incorporation and bylaws contain provisions that may
have the effect of discouraging certain transactions involving an actual or
threatened change of control of us. In addition, our board of directors has the
authority to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the preferences, rights and limitations of any such series
without shareholder approval. In addition, our executive officers (Messrs. Stein
and Briskin) have provisions in their employment agreements requiring us to pay
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 by us for federal corporate income tax purposes. The ability to
issue preferred stock and the change in control payments could have the effect
of discouraging unsolicited acquisition proposals or making it more difficult
for a third party to gain control of our company, or otherwise could adversely
affect the market price of our common stock.
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 dominate 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
9
existing products obsolete. Company personnel, through discussions with
customers, attendance at trade and association meetings and industry experience,
identify new and improved technologies and work closely with our vendors, who
are responsible for the cost of developing and building these products. The
Company does not directly spend significant funds on research and development
but instead relies on its suppliers for development expertise. 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 has
historically been one of the fastest growing segments of the technology
industry, the technology industry is currently experiencing a cyclical
downturns. If this downturn persists, or if there are unexpected changes in
technology or shifts in the distribution channel for networking and computer
connectivity equipment, these developments 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.
10
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
11
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. The trading company acts as a manufacturers
representative by coordinating our orders and shipments with our Far East
suppliers in exchange for payment based on a percentage of orders invoiced to
us. The Company has made no long-term commitment to the trading company and is
able to terminate the arrangement on short notice. We also assemble a small
percentage of our products at our North Miami, Florida facility.
For the production of each specific type of product, we usually
maintain an on-going relationship with several suppliers to insure against the
possibility of problems with one supplier adversely impacting our business. For
the production of original manufacturer products, we usually use a single
supplier for each product, with other factories providing competitive price
quotes and being available to supply the same product if a primary supplier
fails to 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 8% of our purchases during 2002, 9% of our
purchases during 2001 and 14% of our purchases during 2000. No other source of
supply accounted for more than 10% of our purchases during 2002, 2001 or 2000.
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, the 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
12
assembly may be more expensive. 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
13
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 10% of our net sales for 2002, 14% of our net sales for 2001 and 12% of our
net sales for 2000. 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 33%, 27% and 38% of our net sales for the years
ended December 31, 2002, 2001, and 2000, respectively. Other than AESP-Russia,
no customer accounted for more than 10% of our net sales in 2002, 2001 or 2000.
International sales have become a more significant portion of our consolidated
worldwide sales over the past few years primarily due to sales added by our
European acquisitions. See Note 5 of Notes to the Consolidated Financial
Statements for the disclosure on the geographic areas of our business.
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 and vice versa. However, the
loss of one or more significant customers during any particular period 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 product line and/or 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 and from our German, Swedish, Norwegian, and Czech Republic offices and
warehouses.
14
COMPETITION
We compete with many companies that manufacture, distribute and sell
computer connectivity and networking products. In our active networking product
line, we compete with hundreds of companies worldwide, including Cisco, 3Com,
Transition Networks and Allied Telesyn. In this market, we compete favorably on
service and value, offering a high performance to price ratio. In our passive
networking and connectivity product lines, we compete with approximately 30 to
50 companies worldwide, such as Ortronics, Tyco Electrical, Netconnect and
Leviton. With these markets, we stress our breadth of products, service, price
and performance. While these companies are largely fragmented throughout
different sectors of the computer networking and connectivity industry, many 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. In our
Norwegian market sales volume has been adversely affected by a competitive
situation involving former employees who established a competing company.
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 Operations."
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
15
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 that impact our ability to complete acquisitions and
for risks relating to acquisitions that we complete.
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. 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. See Note 5 of Notes to the
Consolidated Financial Statements for disclosure on our operating segments.
EMPLOYEES
As of December 31, 2002, we employed 139 people at the following
locations: Miami -44; Norway -24; Pennsylvania -9; Sweden -8; Czech Republic
- -44; and Germany -10. Company wide, 28 employees work in
administration/accounting, 7 employees work in purchasing, 56 employees work in
sales and marketing, and 48 employees 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.
16
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, 2002. 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 property to us. The mortgage on the property, in a principal amount of
approximately $181,000 at December 31, 2002, has been guaranteed by the Company.
Under the terms of our credit agreement, RSB Holdings has executed landlord
waivers, permitting the lender the priority right to enter our premises and
seize collateral in the event of a default under the credit agreement. See Note
8 of Notes to Consolidated Financial Statements for information regarding the
financial terms of our leases.
SQUARE
FACILITY DESCRIPTION LOCATION FOOTAGE
- -------------------- -------- -------
Corporate Headquarters, Product
Assembly and Central Warehouse North Miami, FL 30,000
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. LEGAL PROCEEDINGS
As of the date of this Form 10-K, we were not a party to any material
legal proceedings, nor, to our knowledge, are any such proceedings threatened.
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 2002 fiscal year.
The Company's common stock is listed on the NASDAQ SmallCap Market and
is required to comply with the NASDAQ SmallCap Market rules. One of those rules
requires that the Company obtain shareholder approval of issuances of more that
20% of the Company's outstanding shares of common stock before issuance. The
Company's 2002 private placement, in which the Company issued an amount of
common stock equal to 24.8% of the Company's then outstanding common stock, did
not comply with such rule. In order to correct the non-compliance, the Company,
in January 2003, with the consent of NASDAQ, exchanged 230,000 shares of its
Series A preferred stock for 230,000 shares of the common stock issued in the
2002 private placement. The preferred stock was then automatically converted
back into common stock upon the approval of the Company's shareholders of the
issuance of the 230,000 shares of common stock at a special meeting held on
March 26, 2003.
At the special meeting, our shareholders approved: (i) the issuance of
230,000 shares of authorized but unissued common stock upon the conversion of an
equal number of shares of our Series A preferred stock, (ii) the issuance of
three-year warrants to purchase up to 118,750 shares of our common stock at an
exercise price of $1.10 per share to the selling agents in our December 2002
private placement, and (iii) the issuance of up to 59,375 shares of our common
stock as liquidated damages if we do not timely satisfy our registration rights
obligation in connection with our December 2002 private placement. Holders of
53% of the Company's outstanding common shares attended the meeting, in person
or by proxy. The matters described above were approved by the following vote:
In Favor: 2,351,705
Against: 155,034
Abstain: 401,800
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
------------ ------------ ----------- -----------
2001
- ----
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
2002
- ----
First Quarter 2.40 0.71 0.01 0.01
Second Quarter 1.43 0.44
Third Quarter 2.15 0.72
Fourth Quarter 2.20 0.79
The above prices reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
At March 24, 2003, the number of holders of record of our common stock
was 88. However, we estimate that there are also approximately 1,300 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 (which warrants were issued in connection with our
February 1997 initial public offering), expired by their terms.
We have never paid any dividends on our common stock 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.
18
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 December 2002, we completed the sale of 1,187,500 shares of our
common stock in a private placement at a price of $1.00 per share (before
underwriting commissions and expenses aggregating $245,000), yielding net
proceeds of $943,000. 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. The net proceeds of the placement
were used for working capital. In connection with the placement, the Company
agreed to issue a warrant to designees of Newbridge Securities Corporation and
View Trade Securities Inc., who acted as the placement agents, to purchase an
aggregate of 118,750 shares at an exercise price of $1.10 per share. We have
filed a registration statement (which has not yet become effective) to register
for public resale the shares of common stock sold in the private placement.
The Company's common stock is listed on the Nasdaq SmallCap Market and
is required to comply with the Nasdaq SmallCap Marketplace Rules. One of those
rules requires that the Company obtain shareholder approval of issuances of more
than 20% of the Company's outstanding shares of common stock before issuance.
The Company's 2002 private placement, in which shares of the Company's
authorized but unissued common stock equal to 24.8% of the Company's then
outstanding common stock were issued, did not comply with the Nasdaq Marketplace
Rules. In order to correct the Company's violation of the rule, the Company,
effective January 16, 2003, with the consent of Nasdaq, exchanged 230,000 shares
of common stock sold in the private placement for an equal number of the
Company's Series A preferred stock. The preferred stock was then automatically
converted back into common stock upon the Company's shareholders' approval of
the share issuances at a special shareholders' meeting held on March 26, 2003.
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.
We intend to distribute to the holders of our outstanding common stock
(the "Warrant Dividend"), as of the record date of April 10, 2003, on a pro-rata
basis, common stock purchase warrants to purchase one share of common stock for
each share owned as of the record date (the "Warrants"). The Warrants will be
non-transferable. The Warrant exercise period
19
will commence on the date following the effectiveness of a registration
statement registering the sale of the shares of common stock underlying the
Warrants (the "Warrant Effective Date") and will continue for a period of
one-year thereafter. The exercise price of the Warrants will be as follows:
o For the 90 day period following the Warrant Effective Date, the
Warrants will be exercisable at an exercise price of $1.50 per
share,
o For the subsequent 90 day period following the completion of the 90
day period referred to above, the Warrants will be exercisable at
an exercise price of $2.50 per share, and
o For the balance of the term of the Warrants, the Warrants will be
exercisable at an exercise price of $5.50 per share.
Any proceeds received by us from the exercise of the Warrants will be
used for general working capital purposes or for acquisitions. Additionally, we
will pay NASD licensed broker-dealers a fee of ten percent (10%) of the gross
proceeds received upon the exercise of the Warrants for their services in
connection with the solicitation of the exercise of the Warrants. Such fee will
only be paid in accordance with applicable NASD rules.
We intend to file a registration statement with the SEC shortly after
the record date of the Warrant Dividend to register the issuance of the shares
of common stock underlying the Warrants.
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 approximately 26%
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.
20
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. 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.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ----------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net Sales $ 29,664 $ 30,183 $ 30,231 $ 26,466 $ 21,969
Cost of sales 20,987 22,114 18,722 16,300 13,646
Operating expenses 10,955 12,050 10,464 9,267 11,697
-------- -------- -------- -------- --------
Income (loss) from operations (2,278) (3,981) 1,045 899 (3,374)
Interest expense and other (188) 218 163 263 1,164
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,090) (4,199) 882 636 (4,538)
Income tax expense 201 15 170 249 267
-------- -------- -------- -------- --------
Net Income (loss) $ (2,291) $ (4,214) $ 712 $ 387 $ (4,805)
======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic (.49) (1.05) .20 .12 (1.99)
Diluted (.49) (1.05) .18 .10 (1.99)
AS OF DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Accounts receivable $ 4,347 $ 4,094 $ 3,299 $ 3,058 $ 3,038
Inventories 5,500 5,930 7,411 5,689 6,158
Working capital 1,740 2,556 4,959 4,653 4,496
Total assets 13,846 14,243 15,426 12,488 12,415
Current liabilities 9,740 9,184 7,884 6,353 6,531
Long term debt, less current portion 11 30 119 229 221
Shareholders' equity 4,095 5,029 7,423 5,907 5,663
21
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 AND LOSSES MAY CONTINUE
Our net income (loss) for the 2002, 2001 and 2000 fiscal years was
$(2,291,000), $(4,214,000) and $712,000, respectively. While we have expended
our capital to make acquisitions and to create an infrastructure to support our
business, we cannot assure you that we will achieve or sustain profitable
operations.
OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE AND FUTURE REQUIRED FUNDING MAY
NOT BE AVAILABLE
We operate our business using working capital derived from our
operations (during periods when our operations are cash flow positive) and from
funds available from our lines of credit. We have made efforts to improve our
cash flow through cost reductions, collections of accounts receivable and
reductions in our inventory. We have also raised working capital through private
placements of our securities. We believe that our internally generated cash flow
from operations combined with the proceeds of our recently completed private
placement and borrowings available under our lines of credit will be sufficient
to fund our current operations for the next twelve months, provided our efforts
to increase our working capital and to obtain a replacement U.S. line of credit
are successful. We may also sell additional debt or equity securities in order
to meet our current and future working capital requirements or to fund future
acquisitions, including shares of common stock issuable upon the exercise of the
warrants to be issued in the Warrant Dividend. If we are unable to generate
sufficient cash flow from operations or reduce our expenses, and we are unable
to obtain the working capital required for our business, our financial condition
and results of operations will be materially and adversely affected.
OUR U.S. CREDIT AGREEMENT IMPOSES RESTRICTIONS AND WE ARE NOT IN COMPLIANCE WITH
SOME OF THE RESTRICTIONS; OUR U.S. LINE OF CREDIT COULD BE CALLED IF WAIVERS OF
FINANCIAL COVENANTS AND DEFAULTS ARE NOT OBTAINED
We have a $1.9 million revolving line of credit with a U.S. financial
institution secured by our U.S. assets. 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
22
requires us to be in compliance with certain financial covenants. 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. Our revolving line of credit, as extended,
currently expires on July 22, 2003. As part of the most recent extension
agreement signed in January 2003, the interest rate charged on the outstanding
balance was raised to prime + 2% for the period from January 17, 2003 to April
23, 2003 and to prime + 3% for the period thereafter until maturity. As of
December 31, 2002, we were not in compliance with the financial covenants
regarding tangible net worth and leverage contained in our credit agreement. A
waiver has been granted by the financial institution with respect to the year
ended December 31, 2002. We also anticipate that we may violate the financial
covenants in our credit agreement during future periods, including as of the end
of the quarter ended March 31, 2003, and we will need waivers for such financial
covenant violations unless our results of operations substantially improve.
While there can be no assurance, we anticipate that our lender will continue to
waive such covenant violations. If our lender does not waive such covenant
violations and seeks to foreclose on the assets securing our line of credit, it
would have a material and adverse effect on our business
OUR LENDER HAS ADVISED US THAT IT DOES NOT PRESENTLY INTEND TO RENEW OUR LINE OF
CREDIT
Our lender has advised us that at this time it is unlikely that
they will renew our line of credit, although they have indicated that they will
continue to extend our line of credit for limited periods of time to allow us to
obtain alternative financing from another lender. While we expect to be able to
find alternative financing, there can be no assurance that we will be able to do
so. In the event that we are unable to find alternative financing to replace our
line of credit and our current lender declines to further extend our line of
credit, it would have a material and adverse effect on our business.
OUR OPERATING RESULTS MAY BE ADVERSELY EFFECTED BY MANY FACTORS
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
operating expenses are relatively fixed. Since we typically do not obtain
long-term purchase orders or commitments from our customers, we must anticipate
the future volume of orders based upon the historic purchasing patterns of our
customers and upon our discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a large customer
or a group of customers and inventory obsolescence could have a material adverse
impact on our revenues and results of operations.
IMPACT OF FLUCTUATIONS IN INTEREST RATES AND EXCHANGE RATES COULD NEGATIVELY
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 lines of credit. If short-term interest rates averaged 2% more in
2002 and 2001, our interest expense and loss before taxes would have increased
by $44,600 and $32,600, respectively. For 2000, our
23
interest expense would have increased and our income before taxes would have
decreased by $47,800. The increase in the interest rate on our U.S. line of
credit in 2003 will increase our interest expense and decrease our income before
taxes by approximately $31,000 in 2003, compared to interest expense and income
before taxes under the prior interest rate.
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 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,
2002, 2001 and 2000 in the value of the dollar would have resulted in reduced
revenues of $1.6 million, $1.3 million and $1.3 million, respectively. A uniform
10% strengthening as of December 31, 2002, 2001 and 2000 in the value of the
dollar would have resulted in a reduction of our consolidated net worth by
$201,000, $193,600 and $418,400, respectively. We find it impractical to hedge
foreign currency exposure and, as a result, will continue in the future to
experience foreign currency gains and losses.
WE WILL NOT PAY DIVIDENDS ON OUR COMMON STOCK 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. Further,
our U.S. line of credit agreement contains restrictions on the payment of
dividends, including lender approval. Therefore, we do not presently intend to
declare or pay cash dividends on our common stock, and it is not likely that any
dividends will be paid in the foreseeable future. This policy could have an
adverse effect on the market price of our common stock.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, 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
The Company's customers include original equipment manufacturers,
distributors and other value added resellers. Sales are generally not made
directly to end-users of the Company's products.
Revenues are recognized at the time of shipment to customers, by
which time the customer has agreed to purchase the merchandise, is obligated to
pay the fixed, reasonably collectible sales price and ownership and risk of loss
has passed to the customer.
24
The Company's sales are not subject to rights of future return.
Warranties are provided on certain of the Company's networking products for
periods ranging from five years to lifetime. Warranty claims have historically
been nominal. The Company estimates provisions for sales returns, allowances,
product warranties and losses on accounts receivable.
The Company's credit policy provides for an evaluation of the
credit worthiness of new customers and for continuing evaluations of customers'
financial condition and credit worthiness. Although the Company generally does
not require collateral, letters of credit or deposits may be required from
customers.
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, 2002, 2001, and 2000
are shipping and handling fees of $723,000, $926,000, and $841,000 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, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2002, we recorded net sales of $29.7
million, compared to net sales of $30.2 million for the year ended December 31,
2001, a decrease of $.5 million or approximately 1.7%. Revenues in 2002 include
full year Intelek sales of $5.6 million compared to $1.8 million for the prior
year, based on four months of ownership in 2001. Further, the declining value of
the US dollar increased sales in Western Europe when converted from local
currency to U.S. dollars in the amount of approximately $1.6 million. Without
the impact of this acquisition and foreign currency change, revenues would have
declined from $28.4 million in 2001 to $22.5 million in 2002, a decrease of $5.9
million or approximately 20.8%. This drop in net sales for our full year
operations reflects the continuing depressed economic conditions in our
worldwide
25
markets, which have resulted in pricing pressures and to a lesser degree, unit
reductions in volume on certain of our products. As a result, the Company has
had to adjust some of its prices downward to meet competitive situations. Gross
profit percentages did not decline as well, as the Company was able to secure
lower pricing from its suppliers. Overall, the Company posted net revenue
declines in its U.S., Norwegian, Swedish and Russian markets of $1,500,000,
$1,500,000, $400,000 and $1,500,000, respectively, before the effect of foreign
currency changes. The Company's U.S. market was affected by an approximately 10%
- - 20% drop in selling prices, but was able to maintain a relatively consistent
level in unit sales. The Norwegian market's unit volume was adversely affected
by a competitive situation involving former employees who established a
competing company. The Swedish and Russian markets were affected by both sales
price declines and unit volume reductions. Alternatively, the Company's German
operations recorded a sales increase of $500,000 due to the employment in early
2002 of a new sales team that expanded the Company's customer base and product
line in Germany. We expect that the factors which impacted our 2001 and 2002 net
sales will continue to impact our 2003 net sales.
Cost of sales for the year ended December 31, 2002, decreased to $21.0
million, compared to cost of sales of $22.1 million for the year ended December
31, 2001. This decrease of $1.1 million, when coupled with a smaller drop in net
sales, led to a rise in gross profit to $8.7 million in 2002 compared to $8.1
million in 2001. The gross profit percentage rose in 2002 to 29.3% compared
26.7% in the prior year. This improvement in gross profit was due to two items,
a decline in the amounts set aside for inventory obsolescence and a change in
the sales mix to higher margin Signamax products in the U.S. The provision for
inventory impairment decreased from $1,129,000 in 2001 to $538,000 in 2002. We
recorded these impairment provisions based on the sudden and significant
decrease in demand which began in 2001 for certain of our products caused by the
worldwide economic slowdown, specifically in the technology markets for our
goods. This decrease in demand had a more significant effect on our inventory in
2001, thereby requiring a greater inventory impairment charge in 2001, compared
to 2002. These provisions were calculated based on the carrying value of
specific inventory items compared to historical and estimated sales volumes and
sales prices. Without the effect of the inventory impairment charges in each
year, the gross profit would have been relatively unchanged from year to year at
approximately $9.2 million, while the gross profit percentage would have
increased from 30.5% in 2001 to 31.1% in 2002. The remainder of the improvement
in gross margin percentage was due to the $1.2 million decrease in U.S. sales to
our Russian distributor in 2002, whereby that customer, whose gross margins at
20% - 25% run lower than the historic consolidated average, accounted for a
smaller percentage of U.S. sales. Essentially, these sales were replaced by
sales at a higher margin.
26
Selling, general and administrative ("S,G & A") expenses increased
to $11.0 million for the year ended December 31, 2002, compared to $10.5 million
for the year ended December 31, 2001. The following table reconciles the S,G & A
expenses for each year by segregating those items that could be considered
isolated or non-recurring (in thousands):
2002 2001
----------- --------
Total S,G & A expenses: 10,954 10,508
Intelek - full year (1,350) --
Intelek - four months -- (553)
Options and stock for services (93) (161)
Goodwill amortization -- (203)
---------- --------
9,511 9,591
---------- --------
Our Czech Republic subsidiary, Intelek, was purchased in August 2001, therefore
only four months of operations are included in 2001. Based on the table above,
operational S,G & A expenses were relatively constant from 2001 to 2002,
decreasing $80,000 or less than 1%. Increases in insurance costs and marketing
expenses (new computer connectivity catalog) of approximately $150,000 were
offset by $200,000 in cost reductions in our U.S. workforce and other variable
expenses, such as office expenses. Subsequent to the Intelek acquisition, in
early 2002, the Company instituted expense reduction measures at Intelek,
thereby decreasing S,G&A expenses at Intelek on an annualized basis from 2001 to
2002. We are continuing to closely monitor our S,G & A expenses and may make
additional headcount reductions if sales levels do not begin to increase in
future periods. We believe that if sales increase in the future, we will see a
reduction in S,G & A expenses as a percentage of net sales, since many of our
S,G & A expenses are relatively fixed.
Amortization of intangible assets was discontinued on January 1, 2002
as we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". SFAS 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for
impairment at least annually. During the quarter ended June 30, 2002, we
completed the transitional goodwill impairment test and at December 31, 2002, we
completed our annual goodwill impairment test, determining that we had no
impairment of our goodwill at either date. We will continue to assess the value
of our goodwill during future periods in accordance with the rules.
In 2001, in accordance with the provisions of Statement of Financial
Accounting Standards No. 121, we determined that the carrying value of certain
long-lived intangible assets associated with certain acquisitions may not be
recoverable. The resulting impairment of $1,542,000, was recorded as an
impairment of long-lived assets in the accompanying Consolidated Statements of
Operations for the year ended December 31, 2001. No such impairment charge was
required in 2002.
As a result of the above factors, the loss from operations for the
year ended December 31, 2002 was $2,278,000, compared to a loss from operations
of $3,981,000 for the year ended December 31, 2001, a reduction in the loss from
operations of $1,703,000.
27
Interest expense dropped from $292,000 in 2001 to $202,000 in 2002
due to a decrease in the average outstanding balance under our U.S. line of
credit, as well as a significant decline in the applicable interest rate, which
is variable and pegged to the prime rate.
Due to a material drop in the value of the U.S. dollar against those
foreign currencies where we conduct operations in local currency, namely
Germany, Norway, Sweden and the Czech Republic, we recorded a gain from foreign
exchange of $243,000 in the year ended December 31, 2002, compared to a loss
from foreign exchange of $19,000 in 2001, when the U.S. dollar performed
relatively well against foreign currencies.
The loss before income taxes narrowed in 2002 to $2,090,000, compared
to $4,199,000 in 2001, as a result of the factors mentioned above.
The provision for income taxes has been recorded for the past two
years on those European subsidiaries that recorded profitable operations, namely
Jotec and Lanse in Norway and Intelek in the Czech Republic. Additionally, we
recorded a provision of $130,000 as a result of a preliminary assessment on an
in-process tax audit at our German subsidiary. For 2002, the provision is
$201,000 and for 2001, the provision is $15,000. Realization of the net deferred
tax assets recorded on the U.S. losses, resulting primarily from net operating
loss carryforwards, is not considered more likely than not and accordingly, a
valuation allowance has been recorded for the full amount of such assets.
As a result of the foregoing factors, we incurred a net loss of $2.3
million for the year ended December 31, 2002, compared to a net loss of $4.2
million for the year ended December 31, 2001. For the year ended December 31,
2002, the loss per common share, both basic and diluted, was $.49, compared to a
basic and diluted loss per common share of $1.05 for the year ended December 31,
2001. Weighted average shares outstanding were 4,685,712 in 2002 and 4,028,112
in 2001.
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 $1.3 million for the full
year sales of Lanse (2001 revenues of $3.0 million compared to 2000 revenues of
$1.7 million for the seven months of ownership in 2000) 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.
This significant drop in sales throughout our worldwide operations 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.
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%) compared to $5.8 million for the year ended December 31, 2000. U.S.
networking sales were $7.3 million for 2001,
28
compared to $7.8 million for 2000. International sales were $17.8 million
reflecting an increase of $1.5 million (9.3%) 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.
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 gross margins lower than our historic
margins), provisions for inventory impairment taken in 2001, and the economic
slowdown which heightened price competition as a result of reduced demand for
the Company's products. 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 business 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 volumes and 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 we not recorded the $1.1
million provision for inventory impairment in 2001, our gross profit margin
would have been 30.5% of net sales. The remainder of the gross profit percent
decline from 38.1% in 2001 to 30.5% in 2002 (net of the inventory obsolescence
provision), was due to depressed technology market conditions, which pushed
market prices lower for many of the Company's products. We were forced to meet
the lower prices in order to seek to maintain market share and revenue levels,
and this, coupled with an inability to immediately lower our supplier prices to
the same degree, drove our gross margins lower from period to period.
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 subsequent to its acquisition by us. 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.
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, we determined in 2001 that
the carrying value of certain long-lived assets associated with our 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 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.
29
In the second and third quarters of 2001, we began steps to modify our
cost structure and reduce expenditures in order to respond to the economic
slowdown affecting our sales. As a result, worldwide employment dropped at
December 31, 2001 by 20% from March 31, 2001 levels.
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 our acquisition of Lanse in May
2000. Due to the our adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" during the quarter ended
March 31, 2002, amortization of goodwill has been effectively eliminated as of
January 1, 2002. See "Recent Accounting Pronouncements" for further discussion
of SFAS 142.
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 we
have U.S. income tax loss carry-forwards, and currently maintain a tax valuation
allowance of $3.6 million, we do 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 4,028,112 in 2001, compared
to 3,929,742 in 2000 (on a diluted basis), due principally to shares issued in
our June 2001 private placement.
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.
30
Below is a chart setting forth our contractual payment obligations as
of December 31, 2002 which have been aggregated in order to facilitate a basic
understanding of our liquidity (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
LESS THAN 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS YEARS 5 YEARS
----------- ----------------- ------------- ---------- ------------
Lines of credit $2,457 $2,457 $ -- $ -- $ --
Long-term debt 45 34 11 -- --
Operating leases 3,068 627 1,143 792 506
----------- ----------------- ------------- ---------- ------------
Total contractual cash
obligations $5,570 $3,118 $1,154 $ 792 $ 506
=========== ================= ============= ========== ============
We also have employment agreements with two of our officers (who are
also our principal shareholders) which require annual payments of base
compensation, plus, in the event we are profitable, additional bonus
compensation. See Item 11, "Executive Compensation - Employment Agreements."
During 2002, we completed a private placement of shares of our common
stock. We sold 1,187,500 shares in the private placement at a gross purchase
price of $1.00 per share. The net proceeds of the placement ($942,000) were used
for working capital purposes.
At December 31, 2002, our working capital was $1.7 million, a decrease
of 35% from working capital of $2.6 million at December 31, 2001. Similarly, our
current ratio was 1.18 at December 31, 2002, compared to 1.28 at December 31,
2001. The accounts with the most significant changes from December 31, 2001 to
December 31, 2002 were the following (in thousands):
2002 2001
------------ ------------
Inventories $ 5,500 $ 5,930
Inventories declined $325 in the U.S. and $105 in Western Europe as a result of
our efforts to reduce the carrying value of our inventory and therefore the
costs invested in our inventory. Further, we recorded a provision for inventory
obsolescence of $162 in the U.S. and $376 in Western Europe in 2002. However,
the inventory obsolescence charge in Western Europe was offset by the effect of
the declining value of the U.S. dollar, which caused an increase in Western
European inventory when converted from local currency to the U.S. dollar.
2002 2001
------------ -------------
Line of credit $ 2,457 $ 2,000
Line of credit borrowings increased principally due to $347 borrowed in the U.S.
as we utilized our line to partially fund our U.S. losses from operations.
2002 2001
------------ -------------
Accounts payable $ 4,499 $ 5,203
In the U.S., accounts payable decreased $638 as a result of our utilization of a
portion of the funds generated from our 2002 private placement to make
additional payments to our vendors.
31
2002 2001
------------ -------------
Accrued expenses $ 928 $ 357
The increase in accrued expenses is due primarily to two items, additional
accruals in the U.S. for professional and other fees of approximately $190 and
an increase in the liability for the value-added tax ("V.A.T.") in Germany of
$130. This V.A.T. liability is offset by a like asset in accounts receivable due
to the goods that are generating the tax being classified as resale items and
therefore, the tax generated by the vendor invoice is then offset by the tax due
from the customer.
2002 2001
----------- -------------
Customer deposits and other $ 820 $ 449
Customer deposits increased principally in the fourth quarter of 2002, when we
received additional advance payments from a significant customer of
approximately $320.
For the year ended December 31, 2002, $1,154,000 of cash was used by
operations. The primary reasons for the use of cash in 2002 was the net loss of
$2,291,000 reduced by non-cash items such as depreciation and amortization of
$270,000 and a provision for inventory obsolescence of $538,000. Additionally,
uses of cash were generated by a reduction in accounts payable and accrued
expenses of $762,000 and an increase in accounts receivable of $257,000, offset
by an inventory reduction of $675,000. Net cash used in investing activities was
$161,000, due to additions to property and equipment of $295,000 offset by
proceeds on the sale of investments of $78,000 and collections on a note
receivable of $50,000. Cash of $1,031,000 was provided by financing activities
primarily from the 2002 private placement, which raised net cash for the Company
of approximately $942,000. As a result of the foregoing, our cash position
decreased $284,000 between December 31, 2001 and December 31, 2002. That
decrease, combined with a increase of $184,000 attributable to the effects of
exchange rate changes on cash, produced an overall decrease in cash of $100,000.
We are continuing efforts to improve our cash position through personnel and
expense reductions, collection of accounts receivable, and a reduction in our
inventory.
In January, 2003, we obtained an extension of a $1.9 million U.S. based
line of credit from a financial institution. Borrowings available under the line
of credit, which matures on July 23, 2003, bear interest at the rate of prime
plus two percent (increasing to prime plus three percent in April 2003 until
maturity). 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 that 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 December 31, 2002,
we were not in compliance with the tangible net worth and leverage covenants. A
32
waiver has been granted by the financial institution. 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. Further, our lender has advised us that at this time it is unlikely
that they will renew our line of credit, although they have indicated that they
intend to continue to extend our line of credit for limited periods of time to
allow us to obtain alternative financing from another lender. While we expect to
be able to find alternative financing, there can be no assurance that we will be
able to do so. As of December 31, 2002, $1,893,000 was outstanding under the
line of credit line and $7,000 was available for borrowing based on applicable
borrowing base formulas. As of March 24, 2003, $1,825,000 was outstanding under
the line of credit and $75,000 was available for borrowing based on
applicable borrowing base formulas.
We believe that revenue 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 further believe that our
internally generated cash flow from operations combined with the proceeds of the
recent private placement of common stock, combined with borrowings available
under our lines of credit, will be sufficient to fund our current operations for
the next twelve months, provided our efforts to increase our working capital and
to obtain a replacement U.S. line of credit are successful. As a result of our
reducing operations at our CCCI facility in Pennsylvania during the latter part
of 2002, we expect to realize expense savings of approximately $400,000 during
2003. 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, including shares issuable upon the exercise of the warrants to be
issued in the Warrant Dividend. If we are unable to generate sufficient cash
flow from operations or in some other fashion, or reduce our expenses, our
operations will be materially and adversely affected.
We do not believe that inflation has had a material effect on our
financial condition or operating results for the last several years, as we have
historically been able to pass along increased costs in the form of adjustments
to the prices we charge to our customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting For Asset Retirement Obligations". That standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity will capitalize a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2002, with earlier adoption permitted. We believe
that adoption of SFAS No. 143 will not have a material effect on our
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and technical
corrections. SFAS No. 145 will rescind SFAS No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax benefit. As a result of SFAS
No. 145, the criteria in APB No. 30 will now be used to classify those gains and
33
losses. The new requirements are effective commencing May 15, 2002, with early
application encouraged. We believe that adoption of SFAS No. 145 will not have a
material effect on our consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit (including restructuring) or disposal
activities at fair value when the related liability is incurred rather than at
the date of a commitment to an exit or disposal plan under current practice.
Costs covered by the standard include certain contract termination costs,
certain employee termination benefits and other costs to consolidate or close
facilities and relocate employees that are associated with an exit activity or
disposal of long-lived assets. The new requirements are effective prospectively
for exit or disposal activities initiated after December 31, 2002 and will be
adopted by us effective January 1, 2003. The adoption of SFAS No. 146 is
expected to impact the timing of recognition of costs associated with future
exit and disposal activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". The Statement amends the
transition provisions of SFAS No. 123 for companies that choose to adopt the
fair value based method of accounting for stock based employee compensation. The
Statement does not amend the provisions of SFAS No. 123 which allow for entities
to continue to apply the intrinsic value-based method as prescribed in APB No.
25, "Accounting for Stock Issued to Employees", however it does amend some of
the disclosure requirements regardless of the method used to account for
stock-based employee compensation. See "Stock-Based Compensation".
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation addresses the
disclosures required to be made by a guarantor in its interim and annual
financial statements. It also clarifies that a guarantor is required to
recognize at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This interpretation was
effective for disclosure purposes as of December 31, 2002 and the recognition
provisions are effective for all guarantees issued or modified after December
31, 2002. As of December 31, 2002 we had no material guarantees for disclosure
purposes.
Interpretation No. 46, "Consolidation of Variable Interest Entities",
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Interpretation No.
46 is applicable immediately for variable interest entities created after
January 31, 2003. For variable interest entities created prior to January 31,
2003, the provisions of Interpretation No. 46 are applicable no later than July
1, 2003. We do not expect this Interpretation to have an effect on the Company's
consolidated financial statements.
34
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 face 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 our credit
facility. If short-term interest rates averaged 2% more in the years ended
December 31, 2002 and 2001, our interest expense and loss before taxes would
have increased by $44,600 and $32,600, respectively. For the year ended December
31, 2000, our interest expense would have increased and our income before taxes
would have decreased by $47,800. In the event of a change of such magnitude,
management would likely take actions to mitigate our exposure to change. The
increase in the interest rate on our U.S. line of credit in 2003 will increase
our interest expense and decrease our income before taxes by approximately
$31,000 in 2003, compared to interest expense and income before taxes under the
prior interest rate.
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 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, 2002, 2001 and
2000 in the value of the dollar would have resulted in reduced revenues of $1.6
million, $1.3 million and $1.3 million, respectively. A uniform 10%
strengthening as of December 31, 2002, 2001 and 2000 in the value of the dollar
would have resulted in a reduction of our consolidated net worth by $201,000,
$193,600 and $418,400, respectively. 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 acquired Intelek late in
August 2001. 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 in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Each of our directors currently holds office until his or her successor
is elected and qualified. At present, our By-Laws provide for not less than one
director nor more than twelve directors. Currently, we have five directors. Our
By-Laws permit our Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders or until his successor is
elected and qualified. Officers serve at the discretion of our Board of
Directors. Our officers devote their full time to our business. As of March 21,
2003, the members of the Board and their length of service as Directors are as
follows:
NAME AGE DIRECTOR POSITIONS SINCE
- ---- --- ------------------ -----
Slav Stein 58 President, Chief Executive Officer and Director 1983
Roman Briskin 53 Executive Vice President, Secretary/Treasurer and Director 1984
Terrence Daidone (1)(2) 43 Director 1997
William B. Coldrick (1)(2) 61 Director 1997
Leonard Sokolow (1)(2) 46 Director 1999
- ------------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
BUSINESS EXPERIENCE
The principal occupation and business experience for each of our
Directors for at least the past five years is as follows:
Mr. Stein is one of our founders and has been employed by us in a
senior executive capacity and has been one of our Directors since our formation
in 1983. Mr. Stein has been the President, Chief Executive Officer and a
Director of our Company since our initial public offering in February 1997. Mr.
Stein is also one of our principal shareholders. See Item 12 "Security Ownership
of Certain Beneficial Owners and Management" and Item 13 "Certain Relationships
and Related Transactions."
Mr. Briskin has been one of our senior executive officers since 1984, a
Director since 1992 and has served as Executive Vice President,
Secretary/Treasurer and a Director of our Company since our IPO. Mr. Briskin is
also one of our principal shareholders. See Item 12 "Security Ownership of
Certain Beneficial Owners and Management" and Item 13 "Certain Relationships and
Related Transactions."
Mr. Daidone has served as one of our Directors since January 1997. Mr.
Daidone has been Vice President of Sales and Marketing of Fugate and Associates,
Inc./ERS Imaging Supplies, Inc., a private corporation engaged in the collection
and distribution of empty printer cartridges, since January 1996. From 1993 to
1996, Mr. Daidone served as Director of Mass
36
Merchant Operations with Nashua Corporation, a company engaged in the
manufacturing of coated products.
Mr. Coldrick has served as one of our Directors since June 1997. Mr.
Coldrick is also a Director of Focus Enhancements, Inc., a Delaware corporation,
where he has served since 1993. Mr. Coldrick is retired. Prior to his
retirement, Mr. Coldrick served in various senior capacities with Apple Computer
and Unisys Corporation. Mr. Coldrick currently acts as an investor in and a
consultant to several companies.
Mr. Sokolow has been a Director of our company since November 1999.
Since November 1999, Mr. Sokolow has been CEO and President of vFinance.com,
Inc. which is traded over the counter. Since September 1996, Mr. Sokolow has
been the President of Union Atlantic LC, a merchant, banking and strategic
consulting firm specializing domestically and internationally in technology
industries. Union Atlantic is a wholly owned subsidiary of vFinance.com. Since
August 1993 Mr. Sokolow has been President of Genesis Partners, Inc., a private
financial business consulting firm. Mr. Sokolow was Chairman and Chief Executive
Officer of the Americas Growth Fund, Inc., a closed-end management investment
company, from August 1994 to December, 1998. Further, Mr. Sokolow presently
serves as a director of Ezcony Interamerica, Inc., a distributor of major brand
name consumer electronics to Latin America.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are annually granted
options to purchase 25,000 shares of Common Stock at an option exercise price
equal to the closing price of the Common Stock on the date of grant. These
options vest immediately. Directors also receive $3,000 per year for service on
the Board of Directors and on committees of the Board of Directors. Directors
who are employees of the Company receive no additional compensation for their
service on the Board of Directors. All Directors are also reimbursed for
expenses incurred in attending Board meetings.
EXECUTIVE OFFICERS
The following list reflects our executive officers, as of the date of
this report, the capacity in which they serve our company, and when they took
office:
OFFICER
NAME AGE EXECUTIVE POSITION SINCE
- ---- --- ------------------ --------
Slav Stein 58 President, Chief Executive Officer 1983
Roman Briskin 53 Executive Vice President and Secretary 1984
Stephen Daily 45 Vice President / Network Group 2000
John F. Wilkens 44 Chief Financial Officer 2003
BUSINESS EXPERIENCE
Mr. Stein. See the biographical information contained in "Board of
Directors."
37
Mr. Briskin. See the biographical information contained in "Board of
Directors."
Mr. Daily became a Vice President in September 2000. Prior to his
appointment, he provided consulting services to us. In 1990, Mr. Daily founded
Interlink Technologies, a manufacturer of premise cabling and connectivity
products, where he remained as President until 1998.
Mr. Wilkens joined us in January 2003. Prior to joining us, for more
than the last five years, Mr. Wilkens was a Vice President and Treasurer (and
during his last three years also served as the principal financial and
accounting officer) of Hotelworks.com Inc., a worldwide service provider to the
hospitality industry.
FAMILY RELATIONSHIPS
There are no family relationships between or among any of our directors
and executive officers.
38
ITEM 11. EXECUTIVE COMPENSATION
The following table shows remuneration paid or accrued by us during the
year ended December 31, 2002 and for each of the two preceding years, to our
Chief Executive Officer and to each of our other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000:
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ ---------------------------------
AWARDS PAYOUTS
----------------------- -------
Other Securities
Fiscal Annual Restricted Underlying LTIP All Other
Year Salary Bonus Compensation Stock Options/ Payouts Compensation
Name and Principal Position Ended ($) ($) (1) ($) Awards SARs ($) ($) ($) (2)
- --------------------------- ----- ------- ------- ------------ ------- ---------- ------- --------
Slav Stein.................. 2002 242,699 -- -- -- 200,000 -- 10,392
CEO 2001 217,311 -- -- -- 75,000 -- 10,346
2000 199,650 24,945 -- -- 175,000 -- 9,993
Roman Briskin............... 2002 242,699 -- -- -- 200,000 -- 10,392
Executive Vice President 2001 217,311 -- -- -- 75,000 -- 10,346
2000 199,650 24,945 -- -- 175,000 -- 9,993
Stephen Daily............... 2002 130,500 -- -- -- -- -- 2,600
Vice President 2001 130,000 -- -- -- 50,000 -- 2,600
2000 130,000 -- -- -- 20,000 -- --
Roy Rafalco (3)............. 2002 130,827 20,000 -- -- -- -- 120
Chief Financial Officer 2001 116,515 22,600 -- -- 60,000 -- 210
2000 110,000 -- -- -- 20,000 -- --
- ------------------------------
(1) Bonus for Messrs. Stein and Briskin is based on a percentage of pre-tax
income pursuant to current employment agreements. In 2000, Messrs.
Stein and Briskin voluntarily elected to reduce their bonus percentage
for 2000. See "Employment Agreements."
(2) Messrs. Stein and Briskin each receive an automobile allowance of
$6,000 per year pursuant to the terms of their employment agreements
with the Company. See "Employment Agreements." In addition, Messrs.
Stein and Briskin received partially matched contributions as part of
the Company's 401(k) Plan. Table includes value of $500,000 term life
insurance policy which the Company purchases for the benefit of each of
Messrs. Stein and Briskin.
(3) Mr. Rafalco voluntarily terminated his employment with the Company in
November 2002.
39
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during the fiscal year ended December 31, 2002 to the persons named in the
preceding summary compensation table under the caption "Executive Compensation":
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (1)
------------------------------------------------------------- -----------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OF BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------- ---------------- ----------------- ------------ ------------- --------------- ------------------
Slav Stein 200,000 42.1% $0.93 03/25/12 $ 117,000 $ 296,400
Roman Briskin 200,000 42.1% $0.93 03/25/12 $ 117,000 $ 296,400
Stephen Daily -- -- -- -- -- --
Roy Rafalco -- -- -- -- -- --
- ----------------
(1) These amounts represent assumed rates of appreciation in the price of
common stock during the term of the options in accordance with rates specified
in applicable federal securities regulations. Actual gains, if any, on stock
option exercises will depend on the future price of common stock and overall
stock market conditions. There is no representation that the rates of
appreciation reflected in the table will be achieved.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth information concerning the value of
unexercised stock options at the end of the 2002 fiscal year for the persons
named in the preceding summary compensation table under the caption "Executive
Compensation":
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/ SARS AT FISCAL SARS AT FISCAL YEAR-END
YEAR-END (#) ($) (1)
--------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------- --------------- -------------- --------------------------- --------------------------
Slav Stein -- -- 650,000/180,250 14,000/--
Roman Briskin -- -- 650,000/180,250 14,000/--
Stephen Daily -- -- 58,334/16,666 --/--
Roy Rafalco -- -- 60,000/20,000 --/--
- --------------------
(1) Computed based upon the difference between the closing price of our common
stock at December 31, 2002 ($1.00) and the exercise price of the outstanding
options. No value has been assigned to options which are not in-the-money. As of
March 25, 2003, the closing price of our common stock was $0.86.
40
EMPLOYMENT AGREEMENTS
On February 19, 1997, Messrs. Stein and Briskin each entered into an
employment agreement with us. The term of such employment agreements (subject to
earlier termination for cause) was initially for a period of five years and
currently continues for successive one-year terms unless canceled by either
party. During the term of such employment agreements, Messrs. Stein and Briskin
each receive a base salary (currently $266,000 in 2003) which increases annually
by 10 percent of the prior year's salary plus the increase in the consumer price
index, which annual increase may not, in any event, exceed 20 percent of the
prior year's salary. In addition, Messrs. Stein and Briskin are each entitled to
receive an annual bonus equal to five percent of our pre-tax net income in each
fiscal year. We provide each of Messrs. Stein and Briskin with an automobile
allowance of $500 per month and a term life insurance policy in the amount of
$500,000.
In the event that during the term of such employment agreements there
is a change of control of our company which has not been approved by the our
Board of Directors, Messrs. Stein and Briskin will have the option to terminate
their employment with us within three months of the change of control and
receive a lump sum payment of $750,000 each. In such event, all previously
granted stock options would become automatically vested. If the Board of
Directors approves a change of control, Messrs. Stein and Briskin may terminate
their employment, but would only be entitled to receive a payment equal to the
prior year's annual salary and to become automatically vested in a portion of
their stock options equal to their percentage completion of the term of their
employment agreement. For purposes of the employment agreements, a "change in
control" is defined as an event that: (i) would be required to be reported in
response to Item 6(e) of Schedule 14(a) of Regulation 14A under the Exchange
Act; or (ii) causes a person other than Messrs. Stein and Briskin to
beneficially own more than 30 percent of our outstanding securities. As part of
such employment agreements, each of Messrs. Stein and Briskin have agreed not to
compete against us for a 12-month period following the termination of their
employment with us for any reason other than a change in control without the
approval of the Board of Directors.
STOCK OPTION PLAN
Our board of directors adopted a new stock option plan in March 2003
(the "2003 stock option plan"), and we intend to seek ratification of the 2003
stock option plan at our 2003 annual meeting of shareholders.
Since the approval of the 2003 stock option plan, no new options have
been or will be granted under our 1996 stock option plan, and any shares of
common stock reserved for issuance upon the exercise of options that were not
issued under such plans were cancelled. However, the terms of any option issued
under the 1996 stock option plan will continue to be governed by such plan and
by the option agreements currently in effect for such options. As of March 21,
2003, options to purchase 380,368 shares of our common stock were outstanding
under the 1996 stock option plan.
The 2003 stock option plan authorizes, among other things, the granting
of incentive or nonqualified stock options to purchase our common stock to
persons selected by our board of
41
directors (or by the compensation committee of our board of directors) from a
class of our officers, directors, key employees and independent contractors or
consultants that perform services for us. The compensation committee is
authorized to interpret the provisions of the 2003 stock option plan and makes
all other determinations that it deems necessary or advisable for the
administration of the 2003 stock option plan.
Pursuant to the 2003 stock option plan, an aggregate amount of
1,000,000 shares of our common stock are reserved for issuance upon exercise of
options granted thereunder. The option price per share of common stock may be
any price determined by the 2003 stock option plan administrators, except that
incentive stock option grants may not be less than fair market value per share
of common stock on the date of grant (or not less than 110% of the fair market
value for stockholders who own more than 10% of the company's stock). At the
date of this Form 10-K, options to purchase 382,000 shares of our common stock
at an exercise price of $0.81 per share were outstanding under the 2003 stock
option plan.
Pursuant to the 2003 stock option plan we may grant incentive stock
options as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended, (the "Code"), and non-qualified stock options, not intended to qualify
under Section 422(b) of the Code. The price at which our common stock may be
purchased upon the exercise of options granted under the 2003 stock option plan
will be required to be at least equal to the per share fair market value of the
common stock on the date the particular options are granted. Options granted
under the 2003 stock option plan may have maximum terms of not more than 10
years and are not transferable, except by will or the laws of descent and
distribution. None of the incentive stock options under the stock option plan
may be granted to an individual owning more than 10% of the total combined
voting power of all classes of stock issued by us unless the purchase price of
the common stock under such option is at least 110% of the fair market value of
the shares issuable on exercise of the option determined as of the date the
option is granted, and such option is not exercisable more than five years after
the grant date.
Generally, options granted under the 2003 stock option plan may remain
outstanding and may be exercised at any time up to three months after the person
to whom such options were granted is no longer employed or retained by us or
serving on our board of directors.
Pursuant to the 2003 stock option plan, unless otherwise determined by
the compensation committee, one-third of the options granted to an individual is
exercisable on the date of grant, one-third is exercisable on the first
anniversary of such grant and the final one-third is exercisable on the second
anniversary of such grant. However, the compensation committee of our board has
the discretion to make appropriate adjustments, including accelerating the
vesting, to the outstanding options granted under the 2003 stock option plan if
we undergo a "change of control." A "change in control" of AESP is generally is
deemed to occur when (a) any person (other than our majority-owned subsidiary,
our compensation plan or any person (other than our majority-owned subsidiary,
our compensation plan or Roman Briskin and/or Slav Stein, or their affiliates)
becomes the beneficial owner of or acquires voting control with respect to more
than 20% of the common stock; (b) a change occurs in the composition of a
majority of our board of directors during a two-year period, provided that a
change with respect to a member of our board of directors shall be deemed not to
have occurred if the appointment of a member of our board of directors is
42
approved by a vote of at least 75% of the individuals who constitute the then
existing board of directors; or (c) our stockholders approve the sale of all or
substantially all of our assets.
Incentive stock options granted under the 2003 stock option plan are
subject to the restriction that the aggregate fair market value (determined as
of the date of grant) of options, which first become exercisable in any calendar
year cannot exceed $100,000.
The 2003 stock option plan provides for appropriate adjustment to
the number and type of shares covered by such options granted thereunder in the
event of any reorganization, merger, recapitalization or certain other
transactions involving us.
TOTAL OPTIONS AND WARRANTS OUTSTANDING
The following options are currently outstanding: (i) options to
purchase an aggregate 297,000 shares of common stock held by consultants and
advisors; (ii) options to purchase an aggregate of 1,810,050 shares of common
stock held by our principal shareholders; (iii) options to purchase 448,250
shares of common stock held by non-employee directors; and (iv) options to
purchase an aggregate of 537,368 shares of common stock held by current and
former employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, no members of the Company's compensation
committee are or were current or former employees of the Company. Except as set
forth in Item 13 "Certain Relationships and Related Transactions," during the
last fiscal year there were no material transactions between the Company and any
of the members of the compensation committee.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon our review of Forms 3 and 4 and amendments thereto
furnished to us pursuant to Rule 16a-3(e) under the Securities Exchange Act of
1934 (the "Exchange Act"), during our fiscal year ended December 31, 2002 and
any Forms 5 and amendments thereto furnished to us with respect to such fiscal
year, and any written representations referred to in subparagraph (b)(2)(i) of
Item 405 of Regulation S-K, (i) all of our officers and directors are delinquent
in filing their Section 16(a) reports and will file the appropriate Section
16(a) reports in the near future and (ii) no other person who at any time during
the fiscal year ended December 31, 2002 was, to our knowledge, a beneficial
owner of more than 10% of any class of our equity securities registered pursuant
to Section 12 of the Exchange Act, failed to file on a timely basis, as
disclosed in Forms 3, 4 and 5, reports required by Section 16(a) of the Exchange
Act during the fiscal year ended December 31, 2002.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of March 26, 2003, we had outstanding 5,984,221 shares of our common
stock. The following table sets forth, as of March 26, 2003, certain information
regarding our common stock owned of record or beneficially by: (i) each person
who owns beneficially more than 5% of our outstanding common stock; (ii) each of
our directors; and (iii) all directors and executive officers as a group.
BENEFICIAL OWNERSHIP
OF COMMON STOCK (1)
---------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENT
- ---------------------------------------------------------------------------- ------------------- -----------------
Slav Stein (2)............................................................. 1,501,007 22.4%
Roman Briskin (2).......................................................... 1,501,007 22.4%
Terrence R. Daidone (3).................................................... 180,000 2.9%
William B. Coldrick (3).................................................... 162,000 2.6%
Leonard Sokolow (3)........................................................ 106,250 1.7%
Steve Daily (3)(4)......................................................... 70,000 1.2%
John Wilkens (3)(5)........................................................ 8,333 0.1%
All directors and executive officers as a group (7 persons)(6)............. 3,278,598 44.3%
- -------------------------------
(1) Unless otherwise indicated, each person named in the table has the
sole voting and investment power with respect to the shares
beneficially owned. The address for each beneficial owner is c/o AESP,
Inc., 1810 N.E. 144th Street, North Miami, Florida 33181.
(2) Includes options to purchase 725,000 shares of Common Stock issuable
upon the exercise of vested stock options. Excludes unvested options
to purchase 180,250 shares of Common Stock.
(3) Shares of Common Stock issuable upon the exercise of vested stock
options.
(4) Excludes unvested stock options to purchase 25,000 shares of Common
Stock.
(5) Excludes unvested stock options to purchase 16,667 shares of Common
Stock.
(6) Includes vested stock options to purchase an aggregate of 1,976,583
shares of Common Stock.
44
EQUITY COMPENSATION PLANS
The following table summarizes information, as of March 24, 2003, relating
to equity compensation plans of the Company pursuant to which grants of options,
restricted stock, restricted stock units or other rights to acquire shares may
be granted from time to time.
- ------------------------------ ------------------------------- ------------------------- -----------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, WARRANTS OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION
PLANS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a))
(a) (b) (c)
- ------------------------------ ------------------------------- ------------------------- -----------------------------
Equity compensation plans 1996 Plan - 380,368 shares $1.66 --
approved by security 2003 Plan - 382,000 shares $0.81 628,000
holders(1)
- ------------------------------ ------------------------------- ------------------------- -----------------------------
Equity compensation plans
not approved by security 2,033,750 $1.61 --
holders(2)
- ------------------------------ ------------------------------- ------------------------- -----------------------------
Total 2,796,118 $1.51 628,000
- ------------------------------ ------------------------------- ------------------------- -----------------------------
(1) These plans are our 1996 and 2003 Stock Option plans. The 1996 Stock Option
plan was approved by the shareholders in 1996. The 2003 Stock Option plan,
which was adopted by the Board in March 2003, will be submitted to the
shareholders for ratification at the 2003 annual meeting of shareholders.
(2) We have in the past issued stock options outside of a plan to our directors
and principal shareholders. With the adoption of the 2003 Stock option
plan, further options are not expected to be granted outside of a plan.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are parties to a lease with RSB Holdings, Inc., a Florida
corporation ("RSB Holdings"), pursuant to which we lease our corporate
headquarters and warehouse in North Miami, Florida. We make annual payments
under such lease in the amount of approximately $93,600. Messrs. Stein and
Briskin each own 50 percent of the issued and outstanding common stock of RSB
Holdings, and are its sole officers and directors. We have guaranteed RSB
Holdings' debt to the financial institution which holds the mortgage on the
property. The balance outstanding on the mortgage was approximately $181,000 at
December 31, 2002.
In January 2002, we converted $152,000 due to Messrs. Stein and Briskin
into 190,000 shares of our Common Stock (at a conversion price of $.80 per
share, which was the fair market value on the date of conversion). Such debt
related, among other matters, to amounts due Messrs. Stein and Briskin through
the end of 2001 under their employment agreements.
We believe that all the foregoing related-party transactions were on
terms, as a whole, no less favorable to us than could reasonably be obtained
from unaffiliated third parties. All transactions with affiliates have been
approved by a majority of disinterested directors of the Company and on terms no
less favorable to the Company than those that are generally available from
unaffiliated third parties.
ITEM 14. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in its filings
with the Securities and Exchange Commission is recorded, processed, summarized
and reported on a timely basis, we have formalized our disclosure controls and
procedures. Our principal executive officer and principal financial officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c), as of a
date within 90 days prior to the filing date of this report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to material information relating to our Company (and its
consolidated subsidiaries) required to be included in our periodic SEC filings.
Since the Evaluation Date, there have not been any significant changes in our
internal controls, or in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data" for
Financial Statements included with this Annual Report on Form
10-K.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
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)
3.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of AESP, Inc.*
3.6 Articles of Amendment to Articles of Incorporation setting forth Rights,
Preferences and Limitations of Series A Preferred Stock *
4.1 Form of Common Stock Certificate (2)
4.3 Form of Newbridge Warrant Agreement (11)
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 Stock Purchase Agreement among the Company, CCCI and Donald Y. Daily, Jr.
(5)
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)
47
10.18 Stock Purchase Agreement dated August 29, 2001 by and among AESP
Computerzubehor GmbH and Intelek spol. s.r.o. (12)
10.19 Amendment to Loan Agreement between the Company and Commercebank, N.A.
dated as of September 21, 2001
10.20 Selling Agent Agreement dated as of October 28, 2002, by and among AESP,
Inc., Newbridge Securities corporation and View Trade Securities, Inc. *
10.21 Form of Subscription Agreement between AESP, Inc. and the investors in
the AESP, Inc. private placement offering completed in December 2002. *
10.22 Fourth Amendment to Loan Agreement by and between AESP, Inc. and
Commercebank, N.A. dated January 17, 2003. (13)
21 List of Subsidiaries *
23 Consent of BDO Seidman, LLP*
99.1 Certificates of Slav Stein, President and Chief Executive Officer and
John Wilkens, Chief Financial Officer, are being furnished pursuant to
Section 906 of the Sarbanes-Oxley Act. *
* 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 Annual Report on Form 10-K for the
year ended December 31, 2001.
(12) Incorporated by reference to our Current Report on Form 8-K filed
September 7, 2001.
(13) Incorporated by reference to our Current Report on Form 8-K filed
January 27, 2003.
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on November 22, 2002, to report that its
chief financial officer had resigned.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AESP, INC.
By: /s/ Slav Stein
-----------------------------------------
Slav Stein, President and Chief Executive
Officer
Date: March 31, 2003
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.
Signature Title Date
- -------------------------------------- --------------------------------------------------- --------------------
/s/ Slav Stein President, Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer) March 31, 2003
Slav Stein
/s/ Roman Briskin Executive Vice President, Secretary and Director March 31, 2003
- -----------------------
Roman Briskin
/s/ Terrence R. Daidone Director
- -----------------------
Terrence R. Daidone March 31, 2003
/s/ William B. Coldrick Director
- -----------------------
William B. Coldrick March 31, 2003
/s/ Leonard Sokolow Director
- -----------------------
Leonard Sokolow March 31, 2003
/s/ John F. Wilkens Chief Financial Officer
- ----------------------- (Principal Financial and Accounting Officer) March 31, 2003
John F. Wilkens
49
CERTIFICATIONS
I, Slav Stein, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of AESP, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Slav Stein
----------------------------------
Name: Slav Stein
Title: President and Chief Executive
Officer
50
I, John F. Wilkens, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of AESP, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ John F. Wilkens
-----------------------------
Name: John F. Wilkens
Title: Chief Financial Officer
51
AESP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..............................................................F-2
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2002 AND 2001.......................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000......................F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000............F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000......................F-6
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES......................................................................F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................................................................F-14
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS................................................................F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AESP, Inc.
North Miami, Florida
We have audited the accompanying consolidated balance sheets of AESP,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. 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 AESP, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 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.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002.
BDO SEIDMAN, LLP
Miami, Florida
March 12, 2003
F-2
AESP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
ASSETS (NOTE 3)
CURRENT ASSETS:
Cash $ 1,226 $ 1,326
Accounts receivable, net of allowance for doubtful
accounts of
$242 and $233 at December 31, 2002 and 2001,
respectively 4,347 4,094
Inventories 5,500 5,930
Due from employees 35 31
Prepaid expenses and other current assets 372 359
------------------ ------------------
Total current assets 11,480 11,740
Property and equipment, net (Note 2) 646 580
Goodwill, net of $2,191 accumulated amortization (Note 1) 643 643
Deferred tax assets (Note 10) 144 78
Assets of business transferred under contractual arrangement
(Note 1) 682 732
Investment in marketable equity securities (Note 6) 129 270
Other assets 122 200
------------------ ------------------
$ 13,846 $ 14,243
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit (Note 3) $ 2,457 $ 2,000
Accounts payable 4,499 5,203
Accrued expenses 928 358
Accrued salaries and benefits 769 700
Income taxes payable 233 52
Due to shareholders (Note 11) -- 152
Customer deposits and other 820 449
Current portion of long-term debt (Note 4) 34 270
------------------ ------------------
Total current liabilities 9,740 9,184
Long-term debt, less current portion (Note 4) 11 30
------------------ ------------------
Total liabilities 9,751 9,214
Commitments (Notes 8 and 9)
SHAREHOLDERS' EQUITY: (NOTES 11 AND 13)
Preferred stock, $.001 par value; 1,000 shares
authorized, none issued -- --
Common stock, $.001 par value, 20,000 shares
authorized, 5,984 and 4,407 shares issued and
outstanding at December 31, 2002 and 2001, respectively 6 4
Paid-in capital 13,466 12,198
(Deficit) (8,975) (6,684)
Deferred compensation (93) --
Accumulated other comprehensive loss (309) (489)
------------------ ------------------
Total shareholders' equity 4,095 5,029
------------------ ------------------
$ 13,846 $ 14,243
================== ==================
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2002 2001 2000
-------------- --------------- --------------
NET SALES (Note 5) $ 29,664 $ 30,183 $ 30,231
-------------- --------------- --------------
OPERATING EXPENSES:
Cost of sales, including provision for inventory
obsolescence of $538 in 2002 and $1,129 in 2001.
(Note 5) 20,987 22,114 18,722
Selling, general and administrative (Notes 5, 6, 8,
and 9) 10,955 10,508 10,464
Impairment of long-lived assets (Note 1) -- 1,542 --
-------------- --------------- --------------
Total operating expenses 31,942 34,164 29,186
-------------- --------------- --------------
(LOSS) INCOME FROM OPERATIONS (2,278) (3,981) 1,045
OTHER INCOME (EXPENSE):
Interest expense (202) (292) (285)
Interest income 51 41 86
Exchange gains (losses) 243 (19) (21)
Other 96 52 57
-------------- --------------- --------------
(Loss) income before income taxes (2,090) (4,199) 882
Provision for income taxes (Note 10) 201 15 170
-------------- --------------- --------------
NET (LOSS) INCOME $ (2,291) $ (4,214) $ 712
============== =============== ==============
Earnings (loss) per common share (Note 12) $ (.49) $ (1.05) $ .20
============== =============== ==============
Earnings (loss) per common share - assuming dilution (Note 12) $ (.49) $ (1.05) $ .18
============== =============== ==============
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
C0MM0N STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER COMPREHENSI TOTAL
SHARES PAR PAID-IN DEFER. COMPREHENSIVE INCOME SHAREHOLDERS'
OUTSTANDING VALUE CAPITAL (DEFICIT) COMP. INCOME(LOSS) (LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 3,234 $4 $ 9,615 $(3,182) $ -- $(530) $ -- $ 5,907
Issuance of common stock in
connection with acquisition
(Note 1) 294 -- 596 -- -- -- -- 596
Issuance of common stock in
connection with exercise of
stock options (Note 13) 153 -- 443 -- -- -- -- 443
Net income -- -- -- 712 -- -- 712 712
Other comprehensive income (loss):
Foreign currency translation
adjustment, net of tax -- -- -- -- -- (235) (235) (235)
--------------
477
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 3,681 4 10,654 (2,470) -- (765) 7,423
Issuance of common stock in
connection with acquisition 140
(Note 1) -- 426 -- -- -- -- 426
Issuance of common stock in
connection with exercise of
stock options (Note 13) 12 -- 20 -- -- -- -- 20
Net loss -- -- -- (4,214) -- -- (4,214) (4,214)
Issuance of common stock, net
(Note 11) 574 -- 937 -- -- -- -- 937
Options issued in connection with
consulting services (Note 13) -- -- 161 -- -- -- -- 161
Other comprehensive income (loss):
Sale of Ukrainian subsidiary (Note 1) -- -- -- -- -- 282 282 282
Unrealized gain on investment in
marketable equity securities,
net of tax -- -- -- -- -- 117 117 117
Foreign currency translation
adjustment, net of tax -- -- -- -- -- (123) (123) (123)
--------------
(3,938)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 4,407 4 12,198 (6,684) -- (489) 5,029
Net loss -- -- -- (2,291) -- -- (2,291) (2,291)
Issuance of common stock, net
(Note 11) 1,187 1 941 -- -- -- -- 942
Issuance of common stock in
connection with conversion of
debt (Note 11) 190 1 151 -- -- -- -- 152
Issuance of common stock in
exchange for services (Note 11) 200 -- 176 -- (93) -- -- 83
Other comprehensive income (loss):
Unrealized (loss) on investment in
marketable equity securities,
net of tax -- -- -- -- -- (86) (86) (86)
Foreign currency translation
adjustment, net of tax -- -- -- -- -- 266 266 266
--------------
(2,111)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 5,984 $ 6 $ 13,466 $ (8,975) $ (93) $ (309) $ 4,095
================================================================================================
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002 2001 2000
---------------------------------------
OPERATING ACTIVITIES:
Net (loss) income $ (2,291) $ (4,214) $ 712
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Provision for losses on accounts receivable 78 232 62
Depreciation and amortization 270 245 252
Amortization of intangibles -- 203 183
Provision for impairment of intangible assets -- 1,542 --
Provision for inventory obsolescence 538 1,129 --
Stock for services 83 -- --
Deferred income taxes (56) (57) (1)
(Increase) decrease, net of acquired and sold businesses, in:
Accounts receivable (257) 40 (84)
Inventories 675 1,044 (1,745)
Prepaid expenses and other current assets 37 6 (84)
Other assets 98 (46) (120)
Increase (decrease), net of acquired and sold businesses, in:
Accounts payable and accrued expenses (762) 338 1,334
Income taxes payable 164 (198) (124)
Customer deposits and other 269 170 (178)
---------- --------- -------
Net cash provided by (used in) operating activities (1,154) 434 207
---------- --------- -------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired -- (394) (687)
Additions to property and equipment (295) (265) (243)
Proceeds from sale of investments 78 -- --
Collections of (advances) on loans due from employees 6 6 410
Collections on note receivable from sale of Ukrainian subsidiary 50 -- --
---------- --------- -------
Net cash (used in) investing activities (161) (653) (520)
---------- --------- -------
FINANCING ACTIVITIES:
Net proceeds from (payments on) borrowings 89 (1,116) 127
Proceeds from the sale of stock, net 942 937 443
---------- --------- -------
Net cash provided by (used in) financing activities 1,031 (179) 570
---------- --------- -------
Net increase (decrease) in cash (284) (398) 257
Effect of exchange rate changes on cash 184 (45) (90)
Cash, at beginning of period 1,326 1,769 1,602
---------- --------- -------
Cash, at end of period $ 1,226 $ 1,326 $ 1,769
========== ========= =======
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002 2001 2000
------- ------- -------
Supplemental information:
Cash paid for:
Interest $ 202 $ 253 $ 285
Taxes 65 197 170
Non-cash transactions:
Fair value of acquired businesses' assets -- $1,909 $2,038
Cash paid for acquired businesses -- 639 890
Common stock issued for acquisitions -- 427 597
Note issued for acquisition -- 213 --
------ ------ ------
Liabilities incurred and assumed $ -- $ 630 $ 551
====== ====== ======
Note in exchange for sale of business $ -- $ 772 $ --
====== ====== ======
Conversion of debt to equity $ 152 $ -- $ --
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AESP, Inc. (AESP) is primarily a
wholesaler of computer cables, accessories,
and networking products whose customers are
computer manufacturers, dealers and
retailers located in the U.S. and foreign
markets. AESP grants credit to customers
without collateral.
SUBSIDIARIES AND
BASIS OF PRESENTATION AESP and its subsidiaries are based and
operate in the United States, Sweden,
Germany, the Czech Republic and Norway. The
functional and reporting currency for
statutory purposes is the United States
Dollar, Swedish Krona, European Union Euro,
Czech Koruny and Norwegian Krone. The
foreign financial statements have been
translated to United States Dollars (U.S. $)
using a methodology consistent with
Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation. Assets
and liabilities are translated to U.S.
dollars at the rate prevailing on the
balance sheet date and the statements of
operations have been translated from the
functional currency to U.S. dollars using an
average exchange rate for the applicable
period. Results of this translation process
are accumulated as a separate component of
shareholders' equity.
RECLASSIFICATIONS Certain amounts in the 2001 financial
statements have been reclassified to conform
to the 2002 presentation.
PRINCIPLES OF
CONSOLIDATION The accompanying consolidated financial
statements include the accounts of AESP and
its subsidiaries (collectively, the
"Company"). Intercompany transactions and
balances have been eliminated in
consolidation.
ACCOUNTS RECEIVABLE Accounts receivable are customer obligations
due under normal trade terms. The Company
sells its products to distributors and
original equipment manufacturers involved in
a variety of industries including
communications, computers and
high-performance consumer electronics. The
Company performs continuing evaluations of
its customers' financial condition and
although it generally does not require
collateral, letters of credit or deposits
may be required from customers in certain
circumstances.
Senior management reviews accounts
receivable on a monthly basis to determine
if any receivables will potentially be
uncollectible. The Company includes any
accounts receivable balances that are
determined to be uncollectible, along with a
general reserve, in its overall allowance
for doubtful accounts. After all attempts to
collect a receivable have failed, the
receivable is written off against the
allowance. Based on the available
information, the Company believes that its
allowance for doubtful accounts is adequate.
However, actual write-offs might exceed the
recorded allowance.
INVENTORIES Inventories consist of finished goods
available for sale and are stated at the
lower of cost or market using the first-in,
first-out method.
MARKETABLE EQUITY SECURITIES Marketable equity securities are available
for sale and carried at market value.
Unrealized gains or losses are reported, net
of income taxes, as a separate component of
shareholders' equity.
F-8
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT Property and equipment is recorded at cost.
Depreciation and amortization are computed
by the straight-line and accelerated methods
based on the estimated useful lives of the
related assets of 3 to 10 years. Leasehold
improvements and capital leases are
amortized over the shorter of the life of
the asset or the lease.
REVENUE RECOGNITION The Company's customers include original
equipment manufacturers, distributors and
other value added resellers. Sales are
generally not made directly to end-users of
the Company's products.
Revenues are recognized at the time of
shipment to customers, by which time the
customer has agreed to purchase the
merchandise, is obligated to pay the fixed,
reasonably collectible sales price and
ownership and risk of loss has passed to the
customer.
The Company's sales are not subject to
rights of future return. Warranties are
provided on certain of the Company's
networking products for periods ranging from
five years to lifetime. The Company
estimates provisions for sales returns,
allowances, product warranties and losses on
accounts receivable based upon factors
including historical and current experience
and trends.
The Company's aggregate product warranty
provision and changes in the associated
liability during the three year period ended
December 31, 2002 are nominal.
The Company's credit policy provides for an
evaluation of the credit worthiness of new
customers and for continuing evaluations of
customers' financial condition and credit
worthiness. Although the Company generally
does not require collateral, letters of
credit or deposits may be required from
customers.
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, 2002, 2001, and
2000 are shipping and handling fees of
$723,000, $926,000, and $841,000,
respectively.
ADVERTISING COSTS Advertising costs incurred amounted to
$767,000, $1.1 million and $843,000 for the
years ended December 31, 2002, 2001, and
2000 respectively. The Company expenses
advertising costs as incurred.
INCOME TAXES The Company is subject to taxation in the
United States, Germany, Sweden, the Czech
Republic and Norway, and accordingly,
calculates and reports the tax charges in
accordance with applicable statutory
regulations. For the purpose of these
financial statements, the Company has
adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," for all
periods presented. Under the asset and
liability method of SFAS 109, deferred taxes
are recognized for differences between
financial statement and income tax bases of
assets and liabilities.
F-9
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES The preparation of the financial statements
in conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
estimated amounts.
EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed
on the basis of the weighted average number
of common shares outstanding during each
year. Diluted earnings (loss) per share is
computed on the basis of the weighted
average number of common shares and dilutive
securities outstanding. Dilutive securities
having an antidilutive effect on earnings
(loss) per share are excluded from the
calculation.
STOCK-BASED COMPENSATION The Company has granted stock options to key
employees and directors under stock option
plans that are more fully described in Note
13. The Company accounts for these plans
under the recognition and measurement
principles of Accounting Principles Board
Opinion No. 25, "Accounting For Stock Issued
to Employees". Stock-based employee
compensation cost is not reflected in net
income as all options granted under those
plans had an exercise price greater than or
equal to the market value of the underlying
common stock on the date of grant. The
following table illustrates the effect on
net income and earnings per share if the
Company had applied the fair value
recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation",
to stock-based employee compensation (in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 2002 2001 2000
-------------- --------------- ------------
Net income (loss) as reported $ (2,291) $ (4,214) $ 711
Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (443) (581) (585)
-------------- --------------- ------------
Pro forma net income (loss) $ (2,734) $ (4,795) $ 126
-------------- --------------- ------------
Basic income (loss) per share as
reported $ (.49) $ (1.05) $ .20
-------------- --------------- ------------
Basic income (loss) per share - pro
forma $ (.58) $ (1.19) $ .04
-------------- --------------- ------------
Diluted income (loss) per share as
reported $ (.49) $ (1.05) $ .18
-------------- --------------- ------------
Diluted income (loss) per share - pro
forma $ (.58) $ (1.19) $ .03
-------------- --------------- ------------
FASB Statement 123, "Accounting for
Stock-based Compensation," requires the
Company to provide pro forma information
regarding net income and net income per
share as if compensation cost for the
Company's employee stock options had been
determined in accordance with the fair value
based method prescribed in FASB Statement
123. The Company estimates the fair value of
each stock option at the grant date by using
the Black-Scholes option-pricing model with
the following weighted-average assumptions
used for grants in 2002; no dividend yield
F-10
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
percent; expected volatility of 115.0%;
weighted average risk-free interest rates of
approximately 4.8%; and expected lives from
5 to 9 years. The following assumptions were
used for grants in 2001; no dividend yield
percent; expected volatility of 74.0%;
weighted average risk-free interest rates of
approximately 5.0%; and expected lives from
5 to 9 years. The following assumptions were
used for grants in 2000: no dividend yield
percent; expected volatility of 75.0%;
weighted average risk-free interest rates of
approximately 6.0%, and expected lives from
5 to 9 years.
PREFERRED STOCK The Board of Directors of the Company is
expressly authorized to provide for the
issuance of the shares of preferred stock in
one or more series of such stock, and by
filing a certificate pursuant to applicable
law of the State of Florida, to establish or
change from time to time the number of
shares to be included in each such series,
and to fix the designations, powers,
preferences and the relative participating,
optional or other special rights of the
shares of each series and any
qualifications, limitations and restrictions
thereof.
GOODWILL In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets."
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. The Company adopted
SFAS 142 during the quarter ended March 31,
2002. The principal effect of adoption of
SFAS 142 was to eliminate amortization of
the Company's goodwill effective January 1,
2002.
IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for long-lived assets
in accordance with the provisions of
Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This
statement requires that long-lived assets
and certain identifiable intangibles be
reviewed for impairment whenever events or
changes in circumstances indicate that the
carrying amount of an asset may not be
recoverable. Recoverability of assets to be
held and used is measured by a comparison of
the carrying amount of an asset to future
net cash flows expected to be generated by
the asset. If such assets are considered to
be impaired, the impairment to be recognized
is measured by the amount by which the
carrying amount of the assets exceeds the
fair value of the assets. Assets to be
disposed of are reported at the lower of the
carrying amount or fair value less costs to
sell.
F-11
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING
PRONOUNCEMENTS In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No.
143, "Accounting For Asset Retirement
Obligations". That standard requires
entities to record the fair value of a
liability for an asset retirement obligation
in the period in which it is incurred. When
the liability is initially recorded, the
entity will capitalize a cost by increasing
the carrying amount of the related
long-lived asset. Over time, the liability
is accreted to its present value each
period, and the capitalized cost is
depreciated over the useful life of the
related asset. Upon settlement of the
liability, an entity either settles the
obligation for its recorded amount or incurs
a gain or loss upon settlement. The standard
is effective for fiscal years beginning
after June 15, 2002, with earlier adoption
permitted. The Company believes that
adoption of SFAS No. 143 will not have a
material effect on its consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and
technical corrections. SFAS No. 145 will
rescind SFAS No. 4, which required all gains
and losses from extinguishment of debt to be
aggregated and, if material, classified as
an extraordinary item, net of related income
tax benefit. As a result of SFAS No. 145,
the criteria in APB No. 30 will now be used
to classify those gains and losses. The new
requirements are effective commencing May
15, 2002, with early application encouraged.
The Company believes that adoption of SFAS
No. 145 will not have a material effect on
its consolidated financial statements.
In July 2002, The FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit
or Disposal Activities". The standard
requires companies to recognize costs
associated with exit (including
restructuring) or disposal activities at
fair value when the related liability is
incurred rather than at the date of a
commitment to an exit or disposal plan under
current practice. Costs covered by the
standard include certain contract
termination costs, certain employee
termination benefits and other costs to
consolidate or close facilities and relocate
employees that are associated with an exit
activity or disposal of long-lived assets.
The new requirements are effective
prospectively for exit or disposal
activities initiated after December 31, 2002
and will be adopted by the Company effective
January 1, 2003. The adoption of SFAS No.
146 is expected to impact the timing of
recognition of costs associated with any
future exit and disposal activities.
In December 2002, the FASB issued SFAS No.
148, "Accounting for Stock-Based
Compensation - Transition and Disclosure".
The Statement amends the transition
provisions of SFAS No. 123 for companies
that choose to adopt the fair value based
method of accounting for stock based
employee compensation. The Statement does
not amend the provisions of SFAS No. 123
which allow for entities to continue to
apply the intrinsic value-based method as
prescribed in APB No. 25, "Accounting for
Stock Issued to Employees", however it does
amend some of the disclosure requirements
regardless of the method used to account for
stock-based employee compensation. See
"Stock-Based Compensation".
F-12
AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In November 2002, the FASB issued
Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation
addresses the disclosures required to be
made by a guarantor in its interim and
annual financial statements. It also
clarifies that a guarantor is required to
recognize at the inception of a guarantee, a
liability for the fair value of the
obligation undertaken in issuing the
guarantee. This interpretation was effective
for disclosure purposes as of December 31,
2002 and the recognition provisions are
effective for all guarantees issued or
modified after December 31, 2002. As of
December 31, 2002 we had no material
guarantees for disclosure purposes.
Interpretation No. 46, "Consolidation of
Variable Interest Entities", clarifies the
application of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements,"
to certain entities in which equity
investors do not have the characteristics of
a controlling financial interest or do not
have sufficient equity at risk for the
entity to finance its activities without
additional subordinated financial support
from other parties. Interpretation No. 46 is
applicable immediately for variable interest
entities created after January 31, 2003. For
variable interest entities created prior to
January 31, 2003, the provisions of
Interpretation No. 46 are applicable no
later than July 1, 2003. We do not expect
this Interpretation to have an effect on the
Company's consolidated financial statements.
F-13
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS In August 2001, the Company completed the
acquisition of Intelek spol. s.r.o., a Czech
Republic manufacturer and distributor of
networking hardware and wireless networking
products, for a purchase price of
$1,065,700, consisting of $426,142 in cash
(including expenses), a $213,000 note (paid
in August 2002) and 139,398 shares of the
Company's common stock (valued at $426,558).
The terms and conditions had been agreed to
by the parties in June 2001. This
acquisition was accounted for under the
purchase method, whereby the purchase price
was allocated to the underlying assets and
liabilities based on their estimated fair
values.
Principal assets and liabilities acquired
approximated the following (in thousands):
Current assets $1,700
Property, plant and equipment 130
Intangible assets 532
----
Total assets $2,362
Current liabilities 1,296
-----
Net assets acquired $1,066
======
The acquisition was undertaken in connection
with the Company's efforts to increase
European market share. As a result of the
acquisition, the Company expects to benefit
from synergies of product lines,
introduction of its existing product lines
into a new geographic market and from the
acquired Company's experience in wireless
technology and fiber optic cable assembly.
The preliminary purchase price allocation
resulted in recording an intangible asset
for the estimated value of the acquired
Company's expected on-going non-contractual,
non-separable, relationships with its
customers of $532,091.
Subsequent operations through December 31,
2001, and continuing thereafter, demonstrate
that the acquired customer relationships and
expected benefits of the acquisition would
not be fully realizable. As further
discussed below, an impairment write-down of
goodwill of $214,000 was recorded in the
accompanying 2001 consolidated statement of
operations.
In January 2001, the Company sold its wholly
owned Ukrainian subsidiary for the
approximate book value of $772,000 in
exchange for a ten year note bearing
interest at eight (8%) per annum,
collateralized by the ownership interest in
the former subsidiary. Until the note is
satisfied, the former subsidiary is required
to purchase all goods from AESP. The Company
has deferred recognition of the sale, and in
the event of losses by the former
subsidiary, the Company will reduce the
carrying value of the note receivable by the
amount of such losses (none in 2001 or
2002), until the promissory note is
satisfied.
F-14
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2000, the Company completed the
acquisition of Lanse AS, a Norwegian
manufacturer and distributor of networking
hardware, for a purchase price of $890,095
in cash (including expenses) and 294,170
shares of the Company's common stock (valued
at $597,000). This acquisition was accounted
for under the purchase method, whereby the
purchase price was allocated to the
underlying assets and liabilities based on
their estimated fair values. Goodwill
amounted to approximately $1.0 million,
amortized over fifteen years.
During the year ended December 31, 2001,
based on then 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
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 the
customer relationships of Intelek spol.
s.r.o. The estimated fair value of these
long-lived assets was determined by
calculating the present value of estimated
expected future cash flows using a discount
rate commensurate with the risks involved.
The accompanying consolidated financial
statements include the results of operations
of the acquired businesses since the date of
acquisition. The following unaudited pro
forma information presents the results of
operations of the Company as if these
acquisitions had occurred on January 1 of
the year immediately prior to the actual
purchase dates. (in thousands, except per
share amounts):
YEAR ENDED DECEMBER 31, 2001 2000
---------- --------
Net sales $34,916 $35,691
Net income (loss) (3,978) 697
Net income (loss) per common share $(.99) $.20
Net income (loss) per common
share - assuming dilution $(.99) $.18
F-15
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the provisions of SFAS
No. 142 on January 1, 2002. Upon adoption of
SFAS No. 142, the Company was required to
evaluate its existing intangible assets and
goodwill that were acquired in prior
purchase business combinations and to make
any necessary reclassifications in order to
conform with new criteria for recognition
apart from goodwill.
In connection with the transitional goodwill
impairment evaluation, SFAS No. 142 required
the Company to perform an assessment of
whether there is an indication that goodwill
is impaired as of the date of adoption. To
accomplish this, the Company identified its
reporting units and determined the carrying
value of each reporting unit by assigning
the assets and liabilities, including the
existing goodwill and intangible assets, to
those reporting units as of the date of
adoption. Based on projected future cash
flows of each of the Company's reporting
units and a comparison to each reporting
unit's carrying amount as of January 1,
2002, the Company did not record any
goodwill impairment. In addition, the
Company performed its required annual
impairment test of goodwill as of December
31, 2002 and did not record any goodwill
impairment.
As of December 31, 2002, the Company has
approximately $643,000 of unamortized
goodwill arising from prior years'
acquisitions of Lanse and Intelek, both of
which reported net income in 2002.
Prior to adoption of SFAS No. 142, the
Company amortized goodwill on a
straight-line basis over periods ranging
from 7-15 years.
Had SFAS No. 142 been in effect for the year
ended December 31, 2001 and 2000, net (loss)
income and (loss) earnings per common share
would have been as follows (in thousands,
except per share amounts):
2001 2000
------------ ----------
Net (loss) income as reported $(4,214) $ 712
Add back: Goodwill amortization 93 65
----------- ----------
Adjusted net (loss) income $(4,121) $777
Earnings (loss) per common share as reported $ (1.05) $ .20
Add back: goodwill amortization .03 .02
----------- ----------
Adjusted earnings (loss) per common share $ (1.02) $ .22
Diluted earnings (loss) per common share as reported $ (1.05) $ .18
Add back: goodwill amortization .02 .02
----------- ----------
Adjusted diluted earnings (loss) per common share $ (1.03) $ .20
F-16
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. PROPERTY AND
EQUIPMENT Property and equipment consist of the
following (in thousands):
DECEMBER 31, 2002 2001
------------- -------------
Land and buildings $ 110 $
109
Leasehold improvements 390 346
Capital leases 63 66
Office equipment 931 580
Machinery and equipment 355 341
Furniture and fixtures 212 195
Vehicles 98 96
------------- -------------
2,159 1,733
Less: accumulated depreciation and amortization 1,513 1,153
------------- -------------
$646 $ 580
------------- -------------
3. LINES OF CREDIT Lines of credit are comprised of the
following (dollar amounts in thousands):
2002 2001
-------- ---------
Prime + 1% (5.25% at December 31, 2002) line of
credit with a U.S. financial institution in the
maximum amount of $1,900, due July 23, 2003
collateralized by all U.S. assets; guaranteed
by the Company's principal shareholders $ 1,893 $ 1,546
Variable rate, at the financial institutions
quoted rate, (6.00% at December 31, 2002)
lines of credit with two Czech Republic
financial institutions in the maximum amount
of $824, due November 2003 collateralized by
all assets of the Company's Czech Republic
subsidiary; guaranteed by the Company's
German subsidiary 540 353
Variable rate, at the financial institutions
quoted rate, (9.75% at December 31, 2002)
line of credit with a German financial
institution in the maximum amount of $114,
due December, 2003, collateralized
by all assets of the Company's German subsidiary 19 --
Variable rate, at the financial institutions
quoted rate, (8.45% at December 31, 2002)
line of credit with a Swedish financial institution
in the maximum amount of $286, due June 2003
collateralized by all assets of the Company's
Swedish subsidiary 5 101
-------- ---------
$2,457 $2,000
======== =========
F-17
The agreement governing the U.S. line of
credit contains covenants that impose
limitations on the Company (including the
requirement that any acquisitions be
approved by the financial institution),
limits the Company's borrowings based upon a
borrowing base formula tied to the carrying
value of the Company's accounts receivable
and inventory from time to time, and
requires the Company to be in compliance
with certain financial covenants. If the
Company fails to make required payments, or
if the Company fails to comply with the
various covenants contained in its credit
agreement, the lender may be able to
accelerate the maturity of any outstanding
indebtedness. As of December 31, 2002, the
Company was not in compliance with the
financial net worth and leverage covenants
contained in the U.S. line of credit
agreement and the lender has waived
compliance with such covenants at December
31, 2002.
Additionally, the Company will likely not
meet its financial covenants in future
periods unless the results of operations
substantially improve. While there can be no
assurance, the Company expects that the
lender will continue to waive covenant
violations during future periods. Further,
the lender has advised that at this time it
is unlikely that it will renew the line of
credit, although it has indicated that it
intends to continue to extend the line of
credit for limited periods of time to allow
the Company to obtain alternative financing
from another lender. While the Company
expects to be able to find alternative
financing, there can be no assurance that it
will be able to do so. The Company believes
that its internally generated cash flow from
operations including expected operating cost
reductions, combined with its lines of
credit, will be sufficient to fund current
operations for the next twelve months,
provided efforts to increase working capital
and to obtain a replacement U.S. line of
credit are successful. The Company may also
consider selling debt or equity securities
in order to meet current and future working
capital requirements or to fund future
acquisitions. If the Company is unable to
generate sufficient cash flow from
operations or in some other fashion, or
reduce expenses, its operations will be
materially and adversely affected.
The Company also maintains a variable rate,
at the financial institutions quoted rate,
line of credit with a Norwegian financial
institution in the maximum amount of $647,
due December 2003, collateralized by all
assets of the Company's Norwegian
subsidiary, Jotec. There were no outstanding
borrowings under this line of credit at
December 31, 2002 or 2001.
4. LONG-TERM DEBT Long-term debt comprised the following
(dollar amounts in thousands):
2002 2001
-------- ---------
9.5% capital leases, payable $1 monthly through
December 2006 45 50
Note payable to former shareholder of CCCI, interest
at 8% a year, paid April 2002 -- 37
Non-interest bearing unsecured note payable
issued in connection with acquisition of
Intelek spol. s.r.o., paid August 2002. -- 213
-------- ---------
45 300
Less current portion 34 270
-------- ---------
$11 $30
======== =========
At December 31, 2002, scheduled maturities
of long-term debt, are (in thousands):
2003 $ 34
2004 4
2005 4
2006 3
--------------
$ 45
==============
F-18
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OPERATING SEGMENTS The Company's operations, consisting of
sales of network and connectivity products,
are handled by each of its subsidiaries
operating in their respective countries.
Accordingly, management operates its
business based on a geographic basis,
whereby sales and related data is attributed
to the AESP entity that generates such
revenues. Segment information is presented
below for each significant geographic region
(in thousands).
WESTERN EASTERN
UNITED STATES EUROPE EUROPE ELIMINATION TOTAL
-------------- ------------- ------------ ------------- ---------------
YEAR ENDED DECEMBER 31, 2002:
Sales to unaffiliated customers $ 14,070 $ 15,594 $ -- $ -- $ 29,664
Transfers between
geographical areas 2,081 509 -- (2,590) --
-------------- ------------- ------------ ------------- ---------------
Total sales 16,103 -- (2,590)
16,151 29,664
-------------- ------------- ------------ ------------- ---------------
Operating income (loss) (1,586) (694) -- 2 (2,278)
Income (loss) before income
taxes (1,628) (464) -- 2 (2,090)
Identifiable assets 7,241 8,053 -- (1,448) 13,846
YEAR ENDED DECEMBER 31, 2001: $
Sales to unaffiliated customers $17,048 $13,135 $ -- $ -- $ 30,183
Transfers between
geographic areas 2,041 -- -- (2,041) --
-------------- ------------- ------------ ------------- ---------------
Total sales 19,089 -- (2,041)
13,135 30,183
-------------- ------------- ------------ ------------- ---------------
Operating income (2,461) (1,673) -- 153 (3,981)
Income (loss) before income
taxes (2,665) (1,687) -- 153 (4,199)
Identifiable assets 7,825 7,525 -- (1,107) 14,243
YEAR ENDED DECEMBER 31, 2000:
Sales to unaffiliated customers $ 17,396 $11,335 $ 1,500 $ -- $30,231
Transfers between
geographic areas 4,849 -- -- (4,849) --
-------------- ------------- ------------ ------------- ---------------
Total sales 22,245 11,335 1,500 (4,849) 30,231
-------------- ------------- ------------ ------------- ---------------
Operating income (loss) 122 780 28 115 1,045
Income (loss) before income
taxes (47) 789 25 115 882
Identifiable assets 9,826 6,853 780 (2,034) 15,426
Identifiable assets are those assets, that
are identified with the operations based in
each geographic area. Foreign sales,
including foreign sales of AESP, for the
years ended December 31, 2002, 2001 and 2000
approximated 63%, 59% and 54%, respectively,
of consolidated revenues.
The Company has one supplier located in
China which supplied approximately 8% of
2002 consolidated purchases, 9% of 2001
consolidated purchases and 14% of 2000
consolidated purchases. No other supplier
accounted for more than 10% of purchases in
2002, 2001 or 2000.
F-19
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales by the Company's United States
business segment to the exclusive
distributor in Russia, AESP-Russia, amounted
to approximately 10% of net sales for 2002,
14% of net sales for 2001 and 12% of net
sales for 2000.
During the year ended December 31, 2002, the
Company recorded a $538,000 provision for
inventory obsolescence for certain specific
inventory items in the U.S. of $162,000 and
in Western Europe $376,000 in order to
reduce the items to their estimated
realizable value. During the year ended
December 31, 2001, the Company recorded a
$1,129,000 provision for inventory
obsolescence for certain specific inventory
items in the U.S. of $635,000, and in
Western Europe $494,000 in order to reduce
the items to estimated realizable value.
6. RELATED PARTY TRANSACTIONS During the year ended December 31, 2001, the
Company settled a contractual dispute with
Focus Enhancements, Inc. (Focus) and
received 150,000 shares of Focus common
stock, recorded upon receipt at an estimated
market/cost of $153,000. During the year
ended December 31, 2002, the Company sold an
aggregate of 54,000 shares, realizing
proceeds of $78,000 and recording a realized
gain of $23,000. Unrealized subsequent
appreciation in market value amounted to
$31,000 and $117,000 at December 31, 2002
and 2001, respectively. A member of the
Company's Board of Directors is also a
director of Focus.
The Company has guaranteed a mortgage on
property owned by an entity owned by the
Company's principal shareholders. See Note
8.
7. FINANCIAL INSTRUMENTS The carrying amounts of financial
instruments including accounts receivable,
note receivable, accounts payable and debt
approximated fair value due to the
relatively short maturity, the interest rate
and other terms of the note receivable, and
the variable interest rate based on the
prime rate for most of the debt. Marketable
equity securities are carried at market
value.
8. COMMITMENTS The Company has entered into employment
agreements, expiring in February 2004, with
its two principal shareholders which include
minimum annual individual compensation for
2003 of $266,000 plus performance bonuses.
The agreements provide for annual increases,
as defined. In the event of a change in
control of the Company (as defined) the
shareholders may terminate their employment
with the Company for a lump sum payment of
$750,000 to each. In addition, the Company
provides them with an automobile allowance.
F-20
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company rents office space and warehouse
under non-cancelable leases. The minimum
future rental commitment for leases in
effect at December 31, 2002, including
leases to related parties, approximates the
following (in thousands):
Years Ending December 31,
2003 $ 627
2004 488
2005 391
2006 264
2007 264
Thereafter 1,034
---------------------
$ 3,068
=====================
The Company leases, under a lease expiring
in July 2004, office and warehouse space
from an entity owned by the principal
shareholders of the Company at $7,800 per
month. The mortgage on the property has been
guaranteed by the Company. The balance
outstanding on the mortgage was
approximately $181,000 at December 31, 2002.
Rent expense in 2002, 2001 and 2000
aggregated approximately $651,000, $497,000
and $405,000, respectively, including
$93,600, $93,600 and $93,600 for the years
2002, 2001 and 2000, respectively, paid to
related parties.
9. EMPLOYEE BENEFIT
PLAN The Company has a defined contribution plan
for its U.S. employees established pursuant
to Section 401(k) of the Internal Revenue
Code. Employees contribute to the plan a
percentage of their salaries, subject to
certain dollar limitations and the Company
matches a portion of the employees'
contributions. The Company's contributions
to the plan for the years ended December 31,
2002, 2001 and 2000 aggregated $29,479,
$45,263 and $32,039, respectively.
F-21
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES The following are the components of income
tax expense (benefit), in thousands:
Year Ended December 31
----------- -- ------------ -- -------------
2002 2001 2000
----------- ------------ -------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign 257 72 169
----------- ------------ -------------
257 72 169
=========== ============ =============
Deferred:
Federal -- -- --
State -- -- --
Foreign (56) (57) 1
----------- ------------ -------------
(56) (57) 1
----------- ------------ -------------
$ 201 $ 15 $ 170
=========== ============ =============
The Company intends to invest the
undistributed earnings of the foreign
subsidiaries in their respective countries.
Accordingly, no provision for United States
income taxes on undistributed earnings is
required.
The reconciliation of income tax computed at
the United States federal statutory tax rate
of 34% to income tax expense (benefit) is as
follows (in thousands):
Year Ended December 31
-----------------------------------
2002 2001 2000
--------- --------- ---------
Tax (benefit) at the United States statutory rate $ (711) $(1,428) $ 300
State income tax (benefit) net of federal
benefit (76) (152) --
Differences in effective income tax rates of
other countries 118 (17) (146)
Other permanent differences, net (35) 25 28
Valuation allowance adjustment 905 1,741 (12)
--------- ---------- ---------
Total $201 $ 15 $ 170
========= ========== =========
The provision for foreign income taxes
relates to Norway, Sweden, Germany and Czech
Republic. The statutory tax rates in Norway,
Sweden, Germany and the Czech Republic range
from 35% to 28%.
F-22
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax
effect of temporary differences between
carrying amounts of assets and liabilities
for financial reporting purposes and the
amounts used for income tax purposes.
Significant components of the Company's
deferred tax assets and liabilities at
December 31 are as follows (in thousands):
Deferred Tax Assets 2002 2001
----------- ---------
Allowance for doubtful accounts $ 91 $ 88
Inventory 653 425
Net operating loss carry forward 2,764 1,978
Depreciation 81 56
Intangible assets 723 825
Compensation related to options granted for
services 291 260
----------- ---------
4,603 3,632
Valuation allowance (4,459) (3,554)
----------- ---------
Total deferred tax asset, net $ 144 $ 78
=========== =========
Realization of substantially all of the
Company's deferred tax asset at December 31,
2002 is not considered to be more likely
than not and accordingly a $4,459 valuation
allowance has been provided.
F-23
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMON STOCK
During the year ended December 31, 2002, the
Company sold 1,187,500 shares of its common
stock in a private placement at a gross
purchase price of $1.00 per share. The net
proceeds of the placement ($942,000) were
used for working capital. In connection with
the placement, the Company agreed to issue a
warrant to designees of Newbridge Securities
Corporation and View Trade Securities Inc.,
who acted as the placement agents, to
purchase 118,750 shares at a purchase price
of $1.10 per share.
In March 2002, the Company's board of
directors approved the conversion of
$152,000 owed to the two principal
shareholders into 190,000 shares of common
stock . The conversion price was $.80 per
share, based on the market price of the
common stock at the time of the conversion.
Pursuant to two Financial Advisory
Agreements signed in July 2002, the Company
issued an aggregate of 200,000 shares of its
common stock to Newbridge Securities
Corporation and View Trade Securities Inc.,
in exchange for investment advisory
services. The shares vest over a twelve
month period as to 100,000 shares and over
an eighteen month period for the remaining
100,000 shares. The $176,000 estimated fair
value of these shares at the date the
Company committed to issue them is initially
recorded as deferred compensation in the
accompanying consolidated balance sheet and
amortized to selling, general and
administrative expenses during the eighteen
month period in which the investment bankers
have agreed to provide services. At December
31, 2002, an aggregate of 93,332 of these
shares had vested in accordance with the
agreements.
During the year ended December 31, 2001, the
Company sold 573,900 shares of its common
stock in a 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
spol. s.r.o. and for working capital. In
connection with the placement, the Company
issued a warrant to designees of Newbridge
Securities Corporation, which acted as the
placement agent, to purchase 57,390 shares
at a purchase price of $2.20 per share.
In connection with its initial public
offering in 1997, the Company sold an
aggregate of 920,000 redeemable common stock
purchase warrants of the Company at $.125
per warrant. The warrants, which expired by
their terms in February 2002, provided for
the holders of such warrants to purchase
shares of common stock of the Company at
$6.90 a share. In addition, the Company
issued options, to each of its two principal
shareholders, to purchase 180,250 shares of
common stock at the initial public offering
price of $6.00 per share (subsequently
repriced in 1998 to $1.50 a share); such
options shall vest seven years after the
date of grant, with provision for earlier
vesting based upon future earnings per
share, net income or trading prices of the
Company's common stock (all as defined).
F-24
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER SHARE The following reconciles the components of
the earnings (loss) per share (EPS)
computation (in thousands, except per share
amount):
FOR THE YEARS ENDED
DECEMBER 31, 2002 2001 2000
------------------------------------- ----------------------------------- ----------------------------------
Loss Shares Per-Share Loss Shares Per-Share Income Shares Per-Share
(Numerator (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------- ------------- --------- ----------- ------------ ------ ----------- ------------- ------
Earnings (loss) per
common share
Net income (Loss) $(2,291) 4,686 $(.49) $(4,214) 4,028 $(1.05) $712 3,528 $ .20
Effect of Dilutive
Securities:
Stock options 445
---------- ------------- --------- ----------- ------------ ------ ----------- ------------- ------
Net income (loss)
applicable to common
shareholders plus
assumed conversions $(2,291) 4,686 $(.49) $(4,214) 4,028 $(1.05) $712 3,973 $ .18
---------- ------------- --------- ----------- ------------ ------ ----------- ------------- ------
Options to purchase 10,000 shares of common
stock at $3.69 per share were outstanding
during 2000, but not included in the
computation of diluted EPS as the options
were anti-dilutive. All 2,711,000 and
2,290,000 outstanding options are excluded
for the computation for 2002 and 2001,
respectively, as they are anti-dilutive due
to the Company's losses.
13. STOCK OPTIONS At December 31, 2002, the Company has a
fixed stock option plan and non-plan options
which are described below. The Company
applies APB Opinion 25, Accounting for Stock
Issued to Employees, and related
interpretations in accounting for employee
stock options. Under APB Opinion 25, because
the exercise price of the Company's employee
stock options equals or exceeds the market
price of the underlying stock on the date of
grant, no compensation cost is recognized.
Pursuant to the Plan, the Company may grant
incentive stock options and nonqualified
stock options. The exercise price of options
granted is required to be at least equal to
the per share fair market value of the
common stock on the date of the grant.
Options granted have maximum terms of not
more than 10 years and are not transferable.
Incentive stock options granted to an
individual owning more than 10 percent of
the total combined voting power of all
classes of stock issued by the Company must
be equal to 110 percent of the fair market
value of the shares issuable on the date of
the grant; such options are not exercisable
more than five years after the grant date.
Generally, options are exercisable one-third
upon grant, one-third on the first
anniversary of such grant and the final
one-third on the second anniversary of such
grant. However, options granted under the
Plan shall become immediately exercisable if
the holder of such options is terminated by
the Company or is no longer a director of
the Company, as the case may be, and
subsequent to certain events which are
deemed to be a "change in control" of the
Company.
Incentive stock options granted under the
Plan are subject to the restriction that the
aggregate fair market value (determined as
of the date of grant) of options which first
become exercisable in any calendar year
cannot exceed $100,000.
F-25
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan provides for adjustments in the
number and type of shares covered by the
Plan and options granted thereunder in the
event of any reorganization, merger,
recapitalization or certain other
transactions involving the Company.
In 2000, 102,000 options exercisable at
$1.75, 2,400 options exercisable at $2.00
and 18,500 options exercisable at $1.47 were
issued to employees. These options vest
one-third upon the date of grant and
one-third each upon the next two
anniversaries of the date of grant. During
2000, the two principal shareholders, as
employees, received an aggregate of 150,000
and 200,000 options at an exercise price of
$1.75 and $1.08 per share, respectively,
vesting immediately with a term of ten
years. In 2001, 117,800 options exercisable
at $1.625 per share, 19,000 options
exercisable at $2.86 per share and 141,700
options exercisable at $1.65 per share were
issued to employees. These options vest
one-third upon the date of grant and
one-third each upon the next two
anniversaries of the date of grant. During
2001, the two principal shareholders, as
employees, received an aggregate of 150,000
options at an exercise price of $1.625
vesting immediately with a term of ten
years. In addition, during 2001, the Company
granted options to purchase 250,000 shares
of its common stock at an exercise price of
$1.65 vesting immediately with a term of two
years to its investment banker for services.
The $161,000 estimated fair value of the
investment banker's stock options is
included in selling, general, and
administrative expenses in the accompanying
consolidated statement of operations. The
fair value of the options to the investment
banker was determined based on the
Black-Scholes method. During 2002, the two
principal shareholders, as employees,
received an aggregate of 400,000 options at
an exercise price of $0.93 per share vesting
immediately with a term of ten years.
During 2000, the Company granted options to
purchase 90,000 shares of its common stock
at an exercise price of $1.75 per share to
its directors, vesting immediately with a
term of ten years. During 2001, the Company
granted options to purchase 75,000 shares of
its common stock at an exercise price of
$1.625 per share to its directors, vesting
immediately with a term of ten years. During
2002, the Company granted options to
purchase 75,000 shares of its common stock
at an exercise price of $0.93 per share to
its directors vesting immediately with a
term of ten years.
F-26
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's
fixed stock option plan and non-plan options
as of December 31, 2002, 2001 and 2000, and
changes during the years then ended is
presented below (in thousands, except
exercise price per option):
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------- ----------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE EXERCISE
------------------------- -------------- -------------- -------------------------
SHARES PRICE SHARES PRICE SHARES PRICE
------------------------- -------------- -------------- ---------- -----------
Outstanding at beginning of year 2,290 $ 1.60 1,695 $ 1.57 1,295 $1.72
Granted 475 0.93 754 1.68 563 1.50
Exercised -- -- (12) 1.70 (153) 2.65
Forfeited (54) 1.72 (147) 1.53 (10) 1.86
------------------------- -------------- -------------- ------------ ------------
Outstanding at end of year 2,711 $ 1.48 2,290 $ 1.60 1,695 $1.57
------------------------- -------------- -------------- ------------ ------------
Options exercisable at year-end 2,266 $ 1.47 650 $ 1.69 638 $1.69
Weighted average fair value of
options granted during the year $ 0.93 $ 1.67 $1.50
-------------- -------------- ------------
The following table summarizes information
about fixed stock options and non-plan
options outstanding at December 31, 2002:
Range of Average Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Price Outstanding Remaining Exercise Price Exercisable Exercise
at 12/31/02 Contractual Life at 12/31/02 Price
- ----------------------- ------------- -------------------- --------------- -------------- --------------
$0.93 - $1.08 675 8.86 $0.97 675 $0.97
$1.47 - $2.13 2,001 6.81 $1.62 1,561 $1.65
$2.86 - $3.69 35 6.03 $3.33 30 $3.41
14. SUBSEQUENT EVENT The Company intends to distribute to the
holders of its outstanding common stock (the
"Warrant Dividend"), as of a record date to
be established early in the second quarter
of 2003, on a pro-rata basis, common stock
purchase warrants to purchase one share of
common stock for each share owned as of the
record date (the "Warrants"). The Warrants
will be non-transferable. The Warrant
exercise period will commence on the date
following the effectiveness of a
F-27
AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
registration statement registering the sale
of the shares of common stock underlying the
Warrants (the "Warrant Effective Date") and
will continue for a period of one-year
thereafter. The exercise price of the
Warrants will be as follows:
o For the 90 day period following the Warrant
Effective Date, the Warrants will be
exercisable at an exercise price of $1.50
per share,
o For the subsequent 90 day period following
the completion of the 90 day period referred
to above, the Warrants will be exercisable
at an exercise price of $2.50 per share, and
o For the balance of the term of the Warrants,
the Warrants will be exercisable at an
exercise price of $5.50 per share.
Any proceeds received by the Company from
the exercise of the Warrants will be used
for general working capital purposes or for
acquisitions.
F-28
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Results for the quarterly periods in the years ended December 31, 2002
and 2001 are as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
2002:
Net Sales........................................... $ 7,486 $ 6,795 $ 6,888 $ 8,495
Total operating expenses (A)......................... 7,416 7,524 7,681 9,320
Income (loss) from operations........................ 70 (729) (793) (826)
Net Income (loss).................................... 5 (712) (710) (874)
Net Income (loss) per share ........................ $ .00 $ (.15) $ (.15) $ (.17)
Diluted net income (loss) per share................. $ .00 $ (.15) $ (.15) $ (.17)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ---------- ----------- -----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
2001:
Net Sales............................................ $ 8,211 $ 6,511 $ 6,406 $ 9,055
Total operating expenses (B)......................... 8,085 7,677 7,152 11,250
Income from operations............................... 126 (1,166) (746) (2,195)
Net Income........................................... 22 (1,174) (787) (2,275)
Net Income per share ................................ .01 (.32) (.18) (.56)
Diluted net income per share......................... .01 (.32) (.18) (.56)
(A) During the fourth quarter of 2002, a provision of $384 was recorded
for inventory obsolescence.
(B) 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.
F-29
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2002
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COST AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER (A) DEDUCTIONS END OF YEAR
- ----------------------------------------- -------------- ------------- ------------ ------------ -------------
Allowance for doubtful accounts receivable:
Year ended December 31,
2002.................................. $ 233 $ 78 $ -- $ 69 (B) $ 242
2001.................................. 125 232 -- 124(B) 233
2000.................................. 60 62 3 -- 125
Valuation allowance on deferred tax assets:
Year ended December 31,
2002.................................. $ 3,554 $ 905 $ -- $ -- $ 4,459
2001.................................. 1,813 1,741 -- -- 3,554
2000.................................. 1,851 (12) -- 26(C) 1,813
- ------------------
(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.
F-30
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ----------------- -----------------------------------------------------------
3.5 Articles of Amendment to the Amended and Restated Articles
of Incorporation of AESP, Inc.
3.6 Articles of Amendment to Articles of Incorporation setting
forth Rights, Preferences and Limitations of Series A
Preferred Stock
10.20 Selling Agent Agreement dated as of October 28, 2002, by
and among AESP, Inc., Newbridge Securities Corporation and
View Trade Securities, Inc.
10.21 Form of Subscription Agreement between AESP, Inc. and the
investors in the AESP, Inc. private placement offering
completed in December 2002.
21 List of Subsidiaries
23 Consent of BDO Seidman, LLP
99.1 Certificates of Slav Stein, President and Chief Executive
Officer and John Wilkens, Chief Financial Officer, are
being furnished pursuant to Section 906 of the
Sarbanes-Oxley Act.