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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, 2003
Commission File No. 000-12739 AESP, INC. 
  FLORIDA
    
    59-2327381(State or Other Jurisdiction of
Incorporation or Organization)
    
    (IRS Employer Identification No.)1810 N.E. 144th Street
North Miami, Florida
    
    33181(Address of Principal Executive Offices)
    
    (Zip Code)
 (305) 944-7710 
  SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: Title of Each Class
    
    Name of Each Exchange
On Which RegisteredNone
    
    N/A
 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
 Common Stock $.001 Par Value 
  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 þ NO o 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. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES o NO þ




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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 27, 2003 of $.63 per
share (as reported on the NASDAQ SmallCap Market), was approximately
$2,798,197. There is no non-voting stock. The number of shares of the Companys Common Stock which were outstanding
as of March 26, 2004 was 6,143,596. 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.




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AESP, INC. TABLE OF CONTENTS PageForward Looking Statements
    
    
    2Part I
    
    
    2Item 1. Business
    
    
    3Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Part II
    
    
    21Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    21Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    25Item 7(A). Quantitative and Qualitative Disclosures about Market Risks
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    44Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
    
    
    44Item 9(a) Controls and Procedures
    
    
    44Part III
    
    
    45Item 10. Directors and Executive Officers of the Registrant
    
    
    45Item 11. Executive Compensation
    
    
    48Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    53Item 13. Certain Relationships and Related Transactions
    
    
    55Item 14. Principal Accountant Fees and Services
    
    
    55Part IV
    
    
    55Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    56License AgreementList of SubsidiariesConsent of BDO Seidman LLPSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
  i




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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 about such
matters as our operations, our financial performance and our prospects 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:  
    
    the Companys ability to refinance its remaining U.S.
line of credit, which is currently due April 20, 2004,
    
    competition from other manufacturers and distributors
of computer networking products both nationally and
internationally,
    
    Our ability to generate sales of our products at
sufficient gross margins to operate our business on a cash flow
and profitable basis,
    
    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 identify forward-looking statements.
You should not place undue reliance on these forward-looking statements, which
speak only as of the date made. We undertake no obligation to publicly release
any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events. You should also know that such statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions. Should any of these risks or uncertainties materialize, or should
any of our assumptions prove incorrect, actual results may differ materially
from those included within the forward-looking statements. 2




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PART I 
 ITEM 1. BUSINESS. THE COMPANY AESP, Inc. operates through two operating segments, the U.S. and Western
Europe. The U.S. operating segment distributes two principal products, Signamax
Connectivity Systems (Signamax) and Advanced Electronic Manufacturing
(AEM), both based in North Miami, Florida. The Western
Europe operating segment
principally distributes Signamax products and other manufacturers product
lines through the European Distribution Group, which is based at the offices of
our European subsidiaries. We also distribute our products through exclusive
distributors in Russia and the Ukraine. U.S. OPERATING SEGMENT SIGNAMAX CONNECTIVITY SYSTEMS Signamax is responsible for the worldwide design and development, as well
as the North and South American marketing and sales of Signamax computer
networking products. The Signamax mission is to provide for total end-to-end
network connectivity needs, from the server to the users workstation. Signamax
operates under two product lines, Network Connectivity products (active
networking line) and Premise Connectivity products (passive networking line). The Signamax Network Connectivityline offers a wide range of high
performance, cost-effective options for Ethernet applications, including media
converters, KVM (keyboard, video & mouse) switches and other switches and
network interface cards. This line focuses on the growing demand for
high-speed, high bandwidth connectivity. The Signamax Premise Connectivityline enables the user to build a network
of wiring solutions meeting current industry standards for the equipment room,
distribution cabling and cross-connects to work areas. This line includes patch
panels, wall outlets, patch cords and accessories for a wide range of copper
and fiber optic applications. The Network Connectivity and Premise Connectivity lines have been designed
to work together as a team to offer complete solutions for most network needs. Industry professionals believe that market trends will lead to an
increased demand for networking and computer connectivity products designed to
maximize and enhance the functionality of computers, and thereby create a
continuing substantial market for our products. Signamaxs goal is to design,
manufacture and market computer networking 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 networking equipment
market, and to make the brand name Signamax synonymous with state-of-the-art
hardware in this segment. 3




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ADVANCED ELECTRONIC MANUFACTURING Our AEM group manufactures custom, private labeled products, for U.S.
companies primarily in the communications, computer and medical markets. AEM
works closely with technical and sales personnel at our customers to transform
conceptual designs into viable subassemblies or fully marketable end-products.
Our goal is to become an extension of our customers technical, material
acquisition and production departments, thereby enabling our customer to get to
market faster with higher quality products. WESTERN EUROPE OPERATING SEGMENT EUROPEAN DISTRIBUTION GROUP This group consists of our European subsidiaries in Sweden, Norway,
Germany and the Czech Republic. They offer Signamax and their own branded
product lines. Each subsidiary runs its own sales organization with an in-house
sales force. Primary customers include installers, distributors and mail order
catalogs. We have recently organized a new subsidiary, Signamax GmbH, which is
responsible for coordinating the sales and distribution efforts of our Signamax
line of products throughout Europe, the Middle East and Africa. For both operating segments we arrange with various manufacturers to
manufacture and assemble our products using primarily industry standard design
and manufacturing specifications provided by us (in the case of Signamax and
the European Distribution Group) and based on the requirements of our customers
with respect to products sold by our AEM Group. 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 and Pennsylvania facilities, as well as at the offices of our European
subsidiaries. Typical customers are electrical, datacom and telecom
distributors for Signamax and U.S. manufacturers for AEM. Our networking
products are marketed under the name Signamax Connectivity Systems and our
AEM products are private labeled under the customers name. We generally do
not offer our products to end users. Our strategy is to increase revenues and operating income through organic
growth combined with growth through acquisitions. 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 liquidity is limited,
 the remaining balance of our U.S. bank line of credit is due
shortly and our auditors have placed a going concern modification on
our consolidated financial statements at December 31, 2003. 4




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We had net losses of $2.7 million, $2.3 million and $4.2 million in 2003,
2002 and 2001, respectively. We also have no working capital and
a current ratio of 1.00 at December 31, 2003. Further, our U.S. bank line of
credit in the amount of $631,000 is due on April 20, 2004. While we expect to
have sufficient funds for the purpose of repaying our U.S. bank line of credit
and for working capital, there can be no assurance of this fact. Our failure to
repay our lender (or to obtain additional extensions of the maturity
date of our line of
credit) or to have sufficient working capital to operate our business
could have a material adverse impact on us. We are currently seeking
to raise additional capital through sales of our equity securities to fund repayment of our bank line of
credit and for working capital. There can be no assurance we will be
able to raise additional funds or as to the dilution that may result
from such sales. Our independent certified public
accountants have included an explanatory paragraph in their report
with respect to our consolidated financial statements at December 31,
2003. The paragraph states that our recurring losses from operations,
working capital deficit, failure to maintain compliance with the
financial covenants of our financing arrangements and
maturities during 2004 of our lines of credit with financial
institutions raise substantial doubt about our  ability to continue
as a going concern. See Item 5. Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
and Item 7. Managements Discussion of Financial Position and Results of
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. The computer networking industry is cyclical which could make our revenues more
volatile The computer networking 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 expenditures 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 computer networking 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 computer networking products is one of the fastest
growing segments of the technology industry, the technology industry has
historically experienced 5




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cyclical downturns. Any such downturns, unexpected changes in technology
or shifts in the distribution channel for computer networking 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, which could
materially increase our material costs and/or decrease our revenues 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 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 products sold by
us are available from multiple sources, we may not be able to replace lost
manufacturers of our 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 75 suppliers. No source of supply
accounted for more than 10% of our purchases during 2003, 2002 or 2001. We do
not enter into supply or requirements contracts with our suppliers. We believe
that purchase orders, as opposed to supply or requirement agreements, provide
us with more flexibility in responding quickly to customer demand.
Nevertheless, the loss of one or more of our suppliers could increase our
product costs and negatively affect our revenues by increasing delivery times. 6




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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 with
offices in China and 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 12% of our net sales for
2003, 10% of our net sales in 2002 and 14% of our net sales in 2001. We are
generally sell our products to our Russian distributor on a paid-in-advance
basis. During these same periods, our top ten customers (including our Russian
distributor) accounted for 33%, 33% and 27%, respectively, of our net sales. No
customer (other than our Russian distributor) accounted for more than 10% of
our net sales for the three years ended December 31, 2003. The loss of one or
more significant customers could have a material adverse effect on our cash
flow and results of operations. We maintain significant inventory which puts us at risk for additional
obsolescence write-offs 7




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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 expenses and have a material adverse effect on our
revenues and our results of operations. We recorded provisions for inventory obsolescence totaling approximately
$210,000 in 2003, $538,000 in 2002 and $1,100,000 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 our products in each of our geographic areas of operations. Competitive conditions could increase our costs, reduce our revenues and
otherwise adversely affect our results of operations We compete with many companies that manufacture, distribute and sell
similar 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 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. For our AEM products, we compete with
hundreds of relatively small and several large companies worldwide, including
Aim Electronics, ASKA Communications, Condor Power Supplies and AsiaLink
International Technology. In this market, we compete favorably on quality and
additional services such as product availability and design protection. 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
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. 8




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Our growth strategy includes future acquisitions; we may not be able to
complete any acquisitions on suitable terms, which could adversely affect our
results of operations and future growth 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 agreements,
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 loans. 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, and we may not complete any future
acquisitions. Other than as required by our articles of incorporation, by-laws,
and applicable law, our shareholders generally will not be entitled to vote
upon such acquisitions. We rely on executive officers and key employees Our continued success is dependent to a significant degree upon the
services of our executive officers and key employees throughout our
organization 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 and
key employees 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 1,602,014 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. Control by our principal shareholders may limit shareholders ability to
receive a premium in a change of control transaction, which may adversely
affect the market price of our common stock 9




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Because of their ownership of 26% of our common stock, it is unlikely that
we could, 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. 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 (which has occurred in the past and may occur in the
future), then Nasdaq may delist our common stock. If our shares are delisted,
we cannot assure you 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. 10




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The exercise of a substantial number of warrants would increase the amount of
our common stock in the trading market, which could substantially affect the
market price of our common stock We distributed a warrant dividend to the holders of our common stock as of
the record date of April 10, 2003. We issued to holders of record on the record
date one warrant for each common share which they owned on that date, or an
aggregate of 5,984,000 warrants. The warrants became exercisable September 23,
2003, upon the effectiveness of the registration statement registering our sale
of the shares of common stock underlying the warrants. The warrants expire on
September 23, 2004, unless our board extends the expiration date of the
warrants. We recently reduced the exercise price of the warrants to $1.25 for
the 90 day period ending June 15, 2004. In the event of the exercise of a
substantial number of warrants, 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 Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities. for a
description of the warrant dividend. Anti-takeover provisions may discourage certain transactions 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 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
computer networking market consists of wholesale distributors: and
three resale categories: retail stores, catalog companies and web-based selling
organizations. Our strategy is to market our Signamax branded products to all
four of these customer groups. Distributors of computer networking 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
networking hardware. 11




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In general, the computer networking industry is characterized by rapidly
changing technology. We must continuously update our existing products to keep
them current with changing technology and we must develop new products to take
advantage of new technologies that could render existing products obsolete.
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 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 networking 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 computer networking 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 computer networking hardware has historically been
one of the fastest growing segments of the technology industry, the technology
industry is currently recovering from a cyclical downturn. If this recovery
stalls, or if there are unexpected changes in technology or shifts in the
distribution channel for computer networking equipment, these developments
could have a materially adverse effect on us. Our AEM products are generally sold to U.S. manufacturers who require
superior pricing at equal to or better quality than they are currently
receiving from their U.S. vendors. These customers normally range in annual
sales from $5 million to $100 million. Due to a wider range of industries
served, our AEM business is less dependent on the health of any one industry
and is, therefore, less affected by any particular industry cycle. 12




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Products and Services Our product line consists primarily of two main categories: Signamax
computer networking products and AEM custom, private label products. In our
European operations, we also distribute third party computer networking
products. Computer 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 network
interface cards, media converters and switches. Passive networking products
include patch panels, patch cables and wall outlets. 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. AEM custom, private label products are normally made in partnership with
our customers, whereupon we work closely with technical and sales personnel at
our customers to transform conceptual designs into viable subassemblies or
fully marketable end-products. Manufacturing and Suppliers All our products have been manufactured to our specifications. Those
specifications are derived either from specifications provided to us by our AEM
customers or from industry standard specifications, in the case of Signamax or
European subsidiary products. Due to the high volume and labor intensive nature of manufacturing
computer networking 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 with offices in Taiwan and China 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. We have 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 and
Pennsylvania facilities and at our European subsidiaries. 13




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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 AEM 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 75 suppliers. No source of supply
accounted for more than 10% of our purchases during 2003, 2002 or 2001. We do
not enter into supply or requirements contracts with our suppliers. We believe
that purchase orders, as opposed to supply or requirement agreements, provide
us with more flexibility in responding quickly to customer demand.
Nevertheless, the loss of one or more of our suppliers could have an adverse
impact on us. Most of the components we utilize in the manufacture and assembly of our
products are obtained from foreign countries and a majority of our products are
manufactured or assembled in foreign countries, such as the United Kingdom, the
Peoples Republic of China, 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 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 14




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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 9001
standard. The ISO 9001 standard is an international manufacturing standard
which is becoming more prevalent across numerous industries. Almost all of our
current suppliers are either ISO 9001 compliant or in the process of
implementing ISO 9001 procedures. Customer Base Our customer base is divided into two primary categories: AEM customers
and Signamax and European computer networking customers. AEM customers are
generally manufacturers of computers and computer-related equipment,
communications equipment and medical devices, which use our products as part of
their finished products. Signamax and European computer networking customers
are local and regional resellers, value-added resellers and distributors,
educational institutions, web-based selling organizations and catalog houses.
The resale mass merchandising market 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 AEM customers, wholesale distributors, value added
resellers, mail order companies, computer superstores and dealers. In Europe,
our products are sold through wholesale distributors, installers and mail order
companies, dealers, value added resellers and web-based distributors.
Accordingly, we are dependent on the continued viability and financial
stability of our resale customers. Our resale customers often offer products of
several different companies, including, in many cases, products that are
competitive with our products. Our resale customers may not continue to
purchase our products or provide us with adequate levels of support. The loss
of, or a significant reduction in sales volume to, a significant number of our
resale customers could have a material adverse effect on our results of
operations. See Risk Factors Related to Our Operations. Sales to our exclusive distributor in Russia, AESP-Russia, accounted for
12% of our net sales for 2003, 10% of our net sales for 2002 and 14% of our net
sales for 2001. We generally sell our products to our Russian distributor on a
paid-in-advance basis. Our top 10 customers (including AESP-Russia) accounted
for approximately 33%, 33% and 27% of our net sales for the years ended
December 31, 2003, 2002, and 2001, respectively. Other than AESP-Russia, no
customer accounted for more than 10% of our net sales in 2003, 2002 or 2001.
International sales are a significant portion of our consolidated worldwide
sales. See Note 6 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 networking 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 15




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customers during any particular period could have a material adverse
impact on our future business and results of operations. Marketing and Sales In the U.S. our Signamax 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, 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, managing our roster of manufacturing
representatives, 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. AEM sales are handled by salespersons located in our headquarters in North
Miami, Florida as well as through key independent sales representatives. Our
AEM sales force is responsible for preparing company brochures, marketing and
sales campaigns, generating and responding to customer leads and requests,
providing customer support and visiting customers on a regular basis. All AEM customers receive their shipments from our North Miami warehouse,
California third party warehouse or directly from the factory manufacturing
their products. Signamax sales are generally handled from our headquarters in
North Miami, Florida and from our German, Swedish, Norwegian, and Czech
Republic offices and warehouses. 16




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Competition In our Signamax products, we compete with many companies that manufacture,
distribute and sell computer 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 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. For our AEM products, we compete with hundreds of relatively
small and several large companies worldwide, including Aim Electronics, ASKA
Communications, Condor Power Supplies and AsiaLink International Technology. In
this market, we compete favorably on quality and additional services such as
product availability and design protection. While these companies are largely
fragmented throughout different sectors of our industries, 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 our Operations. Strategy to Increase Signamax Networking Products & AEM 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 U.S., Eastern and
Western Europe and in the future into Latin America, the Middle East and
Africa. 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 17




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alliances in these categories should enable us to achieve operating
leverage on our existing resource base. Our ability to expand by acquisition has been, and will continue to be,
limited by the availability of suitable acquisition candidates, in both the
United States and internationally, and by our financial condition and the
market price of our common stock. Our ability to grow by acquisition is also
impacted by restrictions contained in our credit agreements. 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), and (5) the Finance/Accounting
Department (including MIS). 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 6 of Notes
to the Consolidated Financial Statements for disclosure on our operating
segments. Employees As of December 31, 2003, we employed personnel at the following locations: Number ofLocation
    
    PersonnelNorth Miami, U.S.
    
    
    39Pennsylvania, U.S.
    
    
    4Germany
    
    
    9Norway
    
    
    21Sweden
    
    
    7Czech Republic
    
    
    37117
 Company wide, 30 employees work in administration/accounting, 47 employees
work in sales and marketing, and 40 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 18




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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. License Agreement with Developer of Battery Restoration Technology In December 2003, we entered into a license agreement with
Daidone-Steffens, LLC, an entity affiliated with Terrence Daidone, one of our
directors. The license will permit us to use battery restoration technology
currently being developed to revitalize used cell phone batteries and other
battery products and market the restored batteries exclusively in the
southeastern United States and on a non-exclusive basis worldwide. The licensor is presently completing the development process of its
technology and expects to build a battery restoration line at our North Miami,
Florida facility during 2004 (at a cost to us of approximately $150,000). No
upfront fees were paid with respect to this license. However, we agreed;  
    
    To issue a ten year option to the licensor to purchase
300,000 shares of our common stock at an exercise price of $.90
(vesting 100,000 shares once the production line is in place and
thereafter ratably over a four-year period;
    
    To purchase all of our battery requirements from the licensor for cost plus 22%, and
    
    To pay a royalty of $.50 for each battery sold. We intend to market restored batteries in the southeastern United States
and through our existing logistics base in Europe, Russia and the Ukraine. There can be no assurance that the licensors technology will be
commercially feasible or that we can develop a profitable and cash flow
positive operation using the licensed technology. We intend to
raise capital to fund our operations with respect to this project. We
cannot assure you that the required funding will be available to fund
our obligations under this agreement. 19




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ITEM 2. 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, 2003. 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. Under the terms of our credit agreement with
Commercebank, 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 9 of Notes to Consolidated
Financial Statements for information regarding the financial terms of our
leases. FACILITY DESCRIPTION
    
    LOCATION
    
    SQUARE FOOTAGECorporate Headquarters, Product
Assembly and Central Warehouse
    
    North Miami, FL
    
    
    27,000Sales Office and Warehouse
    
    Oslo, Norway
    
    
    18,300Sales Office and Warehouse
    
    Munich, Germany
    
    
    12,000Sales Office and Warehouse
    
    Brno, Czech Republic
    
    
    10,650Sales Office and Manufacturing
    
    Broomall, Pennsylvania
    
    
    5,085Sales Office and Warehouse
    
    Straubing, Germany
    
    
    4,700Sales Office and Warehouse
    
    Prague, Czech Republic
    
    
    4,500Sales Office and Warehouse
    
    Uppsala, Sweden
    
    
    1,200Sales Office
    
    Raubling, Germany
    
    
    1,100
 
 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 2003 fiscal year. 20




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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES 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
    
    IPO WARRANTSHIGH
    
    LOW
    
    HIGH
    
    LOW2002First Quarter
    
    $
    2.40
    
    
    $
    0.71
    
    
    $
    0.01
    
    
    $
    0.01Second Quarter
    
    
    1.43
    
    
    
    0.44
    
    
    ExpiredThird Quarter
    
    
    2.15
    
    
    
    0.72Fourth Quarter
    
    
    2.20
    
    
    
    0.792003First Quarter
    
    
    1.48
    
    
    
    0.50Second Quarter
    
    
    1.03
    
    
    
    0.50Third Quarter
    
    
    0.97
    
    
    
    0.55Fourth Quarter
    
    
    1.47
    
    
    
    0.70
 At March 24, 2004, the number of holders of record of our common stock was
68. However, we estimate that there are also approximately 1,250 beneficial
holders of our common stock. 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. The market price of our common stock has been volatile 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 21




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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 issued
warrants 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 registered for
public resale the shares of common stock and the shares of stock issuable upon
the exercise of the warrants sold in this private placement. 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. 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 2003, we distributed 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). Warrants to
purchase 5,984,000 shares were issued in the warrant distribution. The Warrants
are presently non-transferable and do not currently trade. The Warrant exercise
period commenced on September 23, 2003, which is the date following the date of
effectiveness of a registration statement registering the sale of the shares of
common stock underlying the Warrants and will continue for a period of one-year
thereafter. We recently 22




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reduced the exercise price of the Warrants. The current exercise price of
the Warrants is as follows:  
    
    Until June 15, 2004, the Warrants are exercisable at an
exercise price of $1.25 per share, and  
    
    Thereafter, until September 23, 2004 (the current
expiration date of the warrants), the Warrants are exercisable at
an exercise price of $5.50 per share. Our Board reserves the right at any time to modify the exercise price,
expiration date and any other terms of the Warrants, including the restriction
on transferability. 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. 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. 23




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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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands, except per share data)STATEMENT OF OPERATIONS DATA:Net Sales
    
    $
    31,919
    
    
    $
    29,664
    
    
    $
    30,183
    
    
    $
    30,231
    
    
    $
    26,466Cost of sales
    
    
    22,678
    
    
    
    20,987
    
    
    
    22,114
    
    
    
    18,722
    
    
    
    16,300Operating expenses
    
    
    11,723
    
    
    
    10,955
    
    
    
    12,050
    
    
    
    10,464
    
    
    
    9,267Income (loss) from operations
    
    
    (2,482
    )
    
    
    (2,278
    )
    
    
    (3,981
    )
    
    
    1,045
    
    
    
    899Interest expense and other
    
    
    218
    
    
    
    (188
    )
    
    
    218
    
    
    
    163
    
    
    
    263Income (loss) before income taxes
    
    
    (2,700
    )
    
    
    (2,090
    )
    
    
    (4,199
    )
    
    
    882
    
    
    
    636Income tax expense
    
    
    (23
    )
    
    
    201
    
    
    
    15
    
    
    
    170
    
    
    
    249Net Income (loss)
    
    $
    (2,677
    )
    
    $
    (2,291
    )
    
    $
    (4,214
    )
    
    $
    712
    
    
    $
    387EARNINGS (LOSS) PER SHARE:Basic
    
    $
    (.45
    )
    
    $
    (.49
    )
    
    $
    (1.05
    )
    
    $
    .20
    
    
    $
    .12Diluted
    
    
    (.45
    )
    
    
    (.49
    )
    
    
    (1.05
    )
    
    
    .18
    
    
    
    .10
 As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)BALANCE SHEET DATA:Accounts receivable
    
    $
    3,581
    
    
    $
    4,347
    
    
    $
    4,094
    
    
    $
    3,299
    
    
    $
    3,058Inventories
    
    
    5,700
    
    
    
    5,500
    
    
    
    5,930
    
    
    
    7,411
    
    
    
    5,689Working capital (deficit)
    
    
    (17
    )
    
    
    1,740
    
    
    
    2,556
    
    
    
    4,959
    
    
    
    4,653Total assets
    
    
    12,828
    
    
    
    13,846
    
    
    
    14,243
    
    
    
    15,426
    
    
    
    12,488Lines of credit
    
    
    1,888
    
    
    
    2,457
    
    
    
    2,000
    
    
    
    2,680
    
    
    
    2,409Current liabilities
    
    
    10,924
    
    
    
    9,740
    
    
    
    9,184
    
    
    
    7,884
    
    
    
    6,353Long term debt, less current portion
    
    
    71
    
    
    
    11
    
    
    
    30
    
    
    
    119
    
    
    
    229Shareholders equity
    
    
    1,833
    
    
    
    4,095
    
    
    
    5,029
    
    
    
    7,423
    
    
    
    5,907
 24




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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; going concern Our net (loss) for the 2003, 2002 and 2001 fiscal years was $(2,677,000),
$(2,291,000) and $(4,214,000), 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 independent certified public
accountants have included an explanatory paragraph in their report
with respect to our consolidated financial statements at December 31,
2003. The paragraph states that our recurring losses from operations,
working capital deficit, failure to maintain compliance with the
financial covenants  of our financing arrangements and
maturities during 2004 of our lines of credit with financial
institutions raise substantial doubt about our  ability to continue
as a going concern. 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 financing sources. 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 owe our U.S. lender $631,000 which is due on
April 20, 2004. We are also continuing to incur losses and we cannot assure you
as to when our business will become cash flow positive and profitable. We believe that our cash flow from operations, amounts made available
under our agreement with KBK Financial, as described below, and funds available
under our subsidiaries lines of credit will be sufficient to fund our current
operations for the next twelve months. We are currently seeking to
raise additional capital through sales of our equity securities to
repay our U.S. bank line of credit and provide additional working
capital for our business, including seeking to obtain the exercise of the
warrants issued in the Warrant Dividend. We also hope to raise additional
working capital to better support our operations and to fund future
acquisitions. To the extent that such sales of equity securities are
successfully completed, we can not estimate the dilution that such
sales will cause to our current equity holders. If we are unable to generate sufficient cash flow from
operations, reduce our expenses or obtain additional working capital through
sales of our debt and equity securities, our financial condition and results of
operations will be materially and adversely affected. Our U.S. financing agreements impose restrictions and we are not in compliance
with some of the restrictions; Our U.S. financing agreements could be called if
waivers of financial covenants are not obtained On October 31, 2003, we signed two agreements, one an amendment to our
loan agreement with Commercebank, N.A. (Bank) to extend the maturity date on
our U.S. based line of credit to April 20, 2004, and a second agreement with
KBK Financial, Inc. (KBK). The 25




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funding from KBK was used to fund a permanent reduction in our line of credit
with the Bank to $631,000. See Note 4 of Notes to Consolidated Financial
Statements for information regarding the terms of these agreements. Borrowings
under the Bank agreement is based on specific percentages of inventories and is
secured by liens on U.S. assets, including accounts receivable not otherwise
sold to KBK and inventories. The Bank 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 KBK factoring
agreement, we sell KBK, without recourse, accounts receivable and obtain funding (up to $2 million
at any one time) for those receivables. At December 31, 2003, we had $1,433,000
of uncollected receivables outstanding against payments to us of $1,168,000
from KBK. The KBK factoring agreement is also guaranteed, on a limited basis, with
respect to matters related to the existence and validity of the purchased
receivables, by our principal shareholders. We are obligated to meet certain affirmative, negative and financial
covenants under the financing agreements. Affirmative covenants include a
requirement that we deliver quarterly and annual financial statements and
other reports to our funding sources within prescribed time periods and provide
prompt notice of any material legal proceeding that is brought against us.
Negative covenants include an obligation that our funding sources approve
the creation of new subsidiaries, any liquidations, any change of control
including mergers and disposition of significant assets, any additional
indebtedness for borrowed money over a certain limit, any liens on assets or
any loan guarantees, any acquisitions and any transfers of assets or loans and
advances to an affiliate that would have a material adverse effect. Financial
covenants under the Banks line of credit require us, on a consolidated basis,
to meet a minimum tangible net worth and a maximum debt to tangible net worth
ratio at the end of each fiscal quarter. Financial covenants under the KBK
agreement require our U.S. operations to meet a minimum current ratio and
tangible net worth and not exceed a certain dilution percent on our accounts
receivable at the end of each month. We were not in violation of any of the non-financial affirmative or
negative covenants at December 31, 2003. However, we were in violation at
December 31, 2003 of the tangible net worth and leverage covenants contained in
the Banks line of credit and the tangible net worth covenant under the KBK
agreement, and such violations have been waived by the Bank and KBK. Further,
we have, in a significant number of recent quarters violated one or more of the
required financial covenants, and anticipate that we may continue to violate
such financial covenants in future quarters if our results of operations do not
substantially improve. While there can be no assurance, we believe that our
funding sources will continue to waive such future financial covenant
violations during future periods. If our funding sources dont waive such
future covenant violations, and seek to foreclose on the assets securing the
borrowings, it would have a material and adverse effect on our business. The Bank has advised us that it does not intend to renew our line of credit The Bank has advised us that they will not be renewing our line of credit.
While we expect to be able to find alternative financing or raise funds to
repay the remaining balance in full, or receive an extension of the maturity
date (despite the Banks expressed position) there can be no assurance that we
will be able to do so. In the event that we are unable to find 26




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alternative financing to replace our line of credit and the Bank 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 affected 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. Our operating results may be adversely affected due to the risks inherent in
international sales For the years ended December 31, 2003, 2002 and 2001, international sales
accounted for approximately 65%, 63% and 59%, respectively, of our revenues. We
anticipate that international sales will continue to account for a significant
portion of our sales. Our operating results are subject to the risks inherent
in international sales, including, but not limited to, fluctuations in exchange
rates, as discussed below, regulatory requirements, political and economic
changes and disruptions, geopolitical disputes and war, transportation delays,
difficulties in staffing and managing foreign sales operations and potentially
adverse tax consequences. These risks could have a material adverse effect on
our future international sales and, consequently, on our operating results. 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
2003, 2002 and 2001, our interest expense and loss before taxes would have
increased by $43,400, $44,600 and $32,600, respectively. 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, 2003, 2002 and
2001 in the value of the dollar would have resulted in reduced revenues of $1.7
million, $1.6 million and $1.3 million, respectively. A uniform 10%
strengthening as of December 31, 2003, 2002 and 2001 in the value of the dollar
would have resulted in a reduction of our consolidated net worth by $78,000,
$201,000 and $193,600, 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. 27




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We will not pay dividends on our common stock even if we are profitable, which
could adversely affect the marketplace for our common stock 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.
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 Our discussion and analysis of financial condition and results of
operations are 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 us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. We base these estimates on our experience and on
various other assumptions that we believe to be reasonable under the
circumstances, and these estimates form the basis for our judgments concerning
the carrying values of assets and liabilities that are not readily apparent
from other sources. We periodically evaluate these estimates and judgments
based on available information and experience. Actual results could differ
materially from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. We believe that the accounting policies described below are critical to
understanding our business, results of operations and financial condition
because they involve more significant judgments and estimates used in the
preparation of our consolidated financial statements. An accounting policy is
deemed to be critical if it requires an accounting estimate to be made based on
assumptions about matters that are highly uncertain at the time the estimate is
made, and if different estimates that could have been used, or changes in the
accounting estimates that are reasonably likely to occur periodically, could
materially impact our consolidated financial statements. We have discussed the
development, selection and application of our critical accounting policies with
the audit committee of our board of directors, and our audit committee has
reviewed our disclosure relating to our critical accounting policies in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Other significant accounting policies, primarily those with lower levels
of uncertainty than those discussed below, are also critical to understanding
our consolidated financial statements. The notes to our consolidated financial
statements contain additional information related to our accounting policies
and should be read in conjunction with this discussion. Revenue Recognition We recognize revenue when earned and realized or realizable, which is
generally at the time of product shipment to our customer. At the time of
product shipment to our customer, the 28




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customer has already agreed to purchase the product, is obligated to pay a
fixed, reasonably collectible sales price and ownership and risk of loss has
transferred to the customer. Warranties are provided on certain of our networking products for
periods ranging from five years to lifetime. We establish provisions for estimated returns, as well as other
sales allowances, concurrently with the recognition of revenue. Warranty claims and sales
allowances have historically been nominal. The provisions
are established based upon consideration of a variety of factors, including,
among other things, recent and historical return rates, estimated customer
inventory levels by product, the impact of any new product releases and
projected economic conditions. Actual product returns are, however, dependent
upon future events, including the amount of stock balancing activity by our
customers and the level of customer inventories. We continually monitor the
factors that influence the pricing of our products and customer inventory
levels and make adjustments to these provisions when we believe actual returns
and other allowances could differ from established reserves. Our ability to
recognize revenue upon shipment to our customers is predicated on our ability
to reliably estimate future returns. If actual experience or changes in market
condition impairs our ability to estimate returns, we would be required to
defer the recognition of revenue until the delivery of the product to the
end-user. If market conditions were to decline, we could take actions to
increase our customer incentive offerings, which could result in an incremental
reduction to our revenue at the time the incentive is offered. Inventory We provide a provision for inventory obsolescence based on excess and
obsolete inventories identified through a review of the past 12 months usage and determined primarily by future demand forecasts. The
process to estimate the inventory provision involves the review of the
Companys inventories, in detail, by operations personnel and the Companys
management. At the point of the loss recognition, a new, lower-cost basis for that
inventory is established, and subsequent changes in facts and circumstances do
not result in the restoration or increase in that newly established cost basis. If there were to be a sudden and significant decrease in demand for our
products, or if there were a higher incidence of inventory obsolescence because
of rapidly changing technology and customer requirements, we could be required
to charge our inventory provision and our gross margin could be adversely
affected. Inventory management remains an area of focus as we balance the need
to maintain strategic inventory levels to ensure competitive lead times versus
the risk of inventory obsolescence because of rapidly changing technology and
customer requirements. Goodwill We review annually, or more frequently if indicators of impairment arise,
the carrying value of our goodwill using the terminal value method. At December
31, 2003, we had $643,000 in indefinite lived goodwill primarily related to our
acquisitions of Intelek (Czech Republic) and Lanse (Norway). We operate in two markets, the U.S. and Western Europe. These two geographic regions
constitute our reportable segments. See Note 6 of Notes to our Consolidated 29




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##### Table of Contents



Financial Statements for additional information regarding our geographic
segments. All of our goodwill is associated with two reporting units, both part
of our Western Europe reportable segment. We evaluate goodwill at the
respective reporting unit level. On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets. As a result of adopting SFAS No. 142, our goodwill is no longer
amortized but is subject to an annual impairment test. In accordance with SFAS
No. 142, we ceased amortizing goodwill with a net book value at January 1, 2002
of $643,000. Excluding goodwill, we have no intangible assets deemed to have
indefinite lives. Related Party Transactions We lease our principal executive offices from a related party, RSB
Holdings, Inc. (RSB). RSB is a partnership owned by Slav Stein, our President,
Chief Executive Officer and Director and Roman Briskin, our Executive Vice
President, Secretary/Treasurer and Director. We are currently evaluating
whether RSB is a variable interest entity under the provision of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, as further
interpreted (Interpretation No. 46). We do not guarantee the
mortgage on the property. If we determine that RSB is a variable
interest entity, we may be the primary beneficiary (as defined in
Interpretation No. 46) of RSB and, as such, may be required to consolidate RSB. 30




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Loss Contingencies We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that an asset has
been impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted and whether new accruals
are required. For instance, at December 31, 2003 we have provided an accrual
for severance payments to the former managing director in Norway in
connection with a dispute over his termination. RESULTS OF OPERATIONS The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto. Year Ended December 31, 2003 Compared To Year Ended December 31, 2002 For the year ended December 31, 2003, we recorded net sales of $31.9
million, compared to net sales of $29.7 million for the year ended December 31,
2002, an increase of $2.2 million or approximately 7.4%. A significant portion
of the increase in sales was due to the declining value of the U.S. dollar
which increased sales in our Western European segment when converted from local
currency to U.S. dollars. The following table illustrates our sales by location
and the exchange rate effect on our sales in 2003 (in thousands): 2003ConstantNet sales
    
    Currency effect(a)
    
    dollar sales
    
    2002U.S.
    
    $
    15,706
    
    
    $
    
    
    
    $
    15,706
    
    
    $
    14,071Germany
    
    
    2,512
    
    
    
    (414
    )
    
    
    2,098
    
    
    
    2,173Norway
    
    
    6,202
    
    
    
    (702
    )
    
    
    5,500
    
    
    
    6,478Sweden
    
    
    1,305
    
    
    
    (219
    )
    
    
    1,086
    
    
    
    1,307Czech Rep.
    
    
    6,194
    
    
    
    (814
    )
    
    
    5,380
    
    
    
    5,635Total
    
    $
    31,919
    
    
    $
    (2,149
    )
    
    $
    29,770
    
    
    $
    29,664
 (a)  calculated based on the conversion of 2003 local currency at the 2002 average currency exchange rate into U.S. dollars. 31




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Without the impact of the foreign currency change, revenues would have
increased from $29.7 million in 2002 to $29.8 million in 2003, an increase of
$100,000 or less than 1%. In the U.S. a sales increase of approximately $500,000 was achieved
by our AEM group from several new customers in 2003. The balance of the sales
increase in the U.S. was due primarily to an approximately $950,000 increase in business with
our exclusive distributor in Russia. The Russian economy strengthened in 2003
and AESP-Russia was able to increase its sales by approximately 12%, leading to
a sharp increase in orders for our U.S. operations. U.S. sales of our Signamax
line were relatively flat from 2002 to 2003 as we were able to offset an
approximately 10%-20% drop in selling prices due to pricing pressures in our
markets by increasing our unit sales proportionally. Gross profit percentages
did not decline in tandem with the sales price declines and in fact rose
slightly in the U.S., as we were able to secure lower pricing from our Far East
suppliers. Both our Norwegian and Swedish subsidiaries were negatively impacted
by a very weak Scandanavian economy which hit the computer networking markets
especially hard, causing sales price declines and drops in unit volumes. Norway
was also adversely affected by a competitive situation involving former
employees who established a competing company and management turnover
in 2003. We expect that the factors which impacted our 2003 net sales
may continue to impact our 2004 net sales. Cost of sales for the year ended December 31, 2003, increased to $22.7
million, compared to cost of sales of $21.0 million for the year ended December
31, 2002. Consistent with the rise in sales, this increase of $1.7 million was
primarily the result of the weakening U.S. dollar. As the following table
illustrates, the exchange rate difference resulted in an increase to cost of
sales of approximately $1.5 million in 2003, when compared to 2002, however it
had only a minimal effect on the resulting gross profit percentages (in
thousands): 2003Constant dollarCost of sales
    
    Currency effect(a)
    
    cost of sales
    
    2002U.S.
    
    $
    11,172
    
    
    $
    
    
    
    $
    11,174
    
    
    $
    10,158Germany
    
    
    1,962
    
    
    
    (324
    )
    
    
    1,638
    
    
    
    1,766Norway
    
    
    3,954
    
    
    
    (447
    )
    
    
    3,507
    
    
    
    3,962Sweden
    
    
    907
    
    
    
    (152
    )
    
    
    753
    
    
    
    866Czech Rep.
    
    
    4,683
    
    
    
    (615
    )
    
    
    4,068
    
    
    
    4,165Total
    
    $
    22,678
    
    
    $
    (1,538
    )
    
    $
    21,140
    
    
    $
    20,917Gross profit
    
    $
    9,241
    
    
    $
    (621
    )
    
    $
    8,630
    
    
    $
    8,747Gross profit %
    
    
    29.0
    %
    
    
    
    
    
    
    29.0
    %
    
    
    29.5
    %
 (a)  calculated based on the conversion of 2003 local currency at the 2002 average currency exchange rate into U.S. dollars. Due to the aforementioned economic situation in our markets and the
resulting price pressures, our gross profit percentage fell slightly in 2003 to
29.0% compared to 29.5% in the prior year. The provision for inventory
impairment decreased from $538,000 in 2002 to $210,000 in 2003.
During 2002, and to a lesser extent in 2003, we experienced a relatively sudden and significant
decreases in demand for certain of our products caused by the worldwide
economic slowdown, specifically in the markets for our goods and by an
accelerating technology environment. 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 32




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impairment charges in each year, the gross profit would have been $9.5 million
in 2003 compared to $9.2 million in 2002, while the gross profit percentage
would have decreased from 31.1% in 2002 to 29.6% in 2003. Selling, general and administrative (S,G & A) expenses increased to
$11.7 million for the year ended December 31, 2003, compared to $11.0 million
for the year ended December 31, 2002. Again, consistent with sales and cost of
sales, the increase in S,G & A expenses was primarily due to the change in
value of the U.S. dollar compared to foreign currencies and the effect of that
change when converting to U.S. dollar equivalents: 2003Constant dollarS,G & A
    
    Currency effect(a)
    
    S,G & A
    
    2002U.S.
    
    $
    5,314
    
    
    $
    
    
    
    $
    5,314
    
    
    $
    5,424Germany
    
    
    982
    
    
    
    (160
    )
    
    
    822
    
    
    
    1,137Norway
    
    
    3,351
    
    
    
    (379
    )
    
    
    2,972
    
    
    
    2,539Sweden
    
    
    633
    
    
    
    (107
    )
    
    
    526
    
    
    
    505Czech Rep.
    
    
    1,443
    
    
    
    (190
    )
    
    
    1,253
    
    
    
    1,350Total
    
    $
    11,723
    
    
    $
    (836
    )
    
    $
    10,887
    
    
    $
    10,955
 (a)  calculated based on the conversion of 2003 local currency at the 2002 average currency exchange rate into U.S. dollars. The decrease in U.S. expenses was primarily due to personnel and other cost
reductions instituted in July 2003, which included certain employee
terminations, mandatory salary reductions for a significant number of remaining
employees and cuts in other expenses deemed non-essential. These cost
reductions are expected to reduce our U.S. overhead by approximately $500,000
per annum. In the U.S., included in S,G,  & A expenses in 2003 were approximately
$144,000 of closing costs and fees on our October 31, 2003 Bank and KBK agreements.
 In Germany, headcount reductions accounted for the bulk of the
decrease in S,G & A expenses in 2003. Further, facility consolidations,
including the move of their warehouse from Munich, Germany to Vienna, Austria
in early 2004 are expected to reduce expenses at our German subsidiaries by an
additional $130,000 per annum. The increase in Norwegian S,G & A expenses in
2003 was due to severance payments made to and accrued for the former managing
director of approximately $490,000. We are currently litigating the requested
severance in the Norwegian courts, however, due to the relatively pro-employee
nature of Norwegian labor law, we have accrued the entire potential severance.
On a worldwide basis, we are continuing to closely monitor our S,G & A expenses
and may make additional headcount reductions if consolidated sales levels (net
of currency effects) 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. Pursuant to a License
Agreement signed in December 2003, the Company granted options to
purchase 300,000 shares of its common stock to Daidone-Steffens
LLC, at an exercise price of $0.90 per share. The options vest
over a five year period, beginning on the date the licensed
technology is transferred, under EITF No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services,
the value of the options will be determined on the measurement date,
which is the earlier of the commitment date or the date at which the
counterpartys performance is complete, neither of which has
occurred as of December 31, 2003, in such future periods, the
value of the options will be expensed. 33




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As a result of the above factors, the loss from operations for the year
ended December 31, 2003 was $2,482,000, compared to a loss from operations of
$2,278,000 for the year ended December 31, 2002, a increase in the loss from
operations of $204,000. Interest expense increased from $202,000 in 2002 to $262,000 in 2003 based
on increases in the U.S. of $46,000 and Norway of $15,000. In the U.S., the
increase was due to a rise in the average interest rate from 5.22% in 2002 to
6.92% in 2003 on the Bank line of credit, along with the upfront fee of .8% and
an interest rate of 7% currently on the KBK financing arrangement. See Note 4
to the Notes to Consolidated Financial Statements for further information on
these U.S. financing agreements. In Norway, the additional interest was due to
an increase in the average amount borrowed during 2003 compared to 2002. Due to a material drop in the value of the U.S. dollar in the past two
years, against those foreign currencies where we conduct operations in local
currency, namely Germany, Norway, Sweden and the Czech Republic, we recorded
gains from foreign exchange of $189,000 and $243,000 in the years ended
December 31, 2003 and 2002, respectively. Based on quarterly review of
the note receivable from the buyer  of our former wholly-owned
subsidiary, we believe it is probable that the note is not fully
collectible. Our assessment of the notes collectibility is
based, among other things, on our review of the buyers
financial statements and representations from the buyer on his
financial wherewithal. Accordingly, we recorded a $381,000
impairment, reducing the net balance of the note on our balance sheet
to $240,000 based upon our estimation of future cash flows,
discounted at the effective rate of the transaction. There is not an
observable market price, nor is there a way to expeditiously attain
the fair value of the collateral that underlies the loan. Other income (expense) varied from income of $96,000 in 2002 to income of
$208,000 in 2003. The increase in 2003 was primarily due to
additional realized gains recognized by the U.S. on the sale of stock
and higher rental income in the Czech Republic. The loss before income taxes increased in 2003 to $2,700,000, compared to
$2,090,000 in 2002, as a result of the factors mentioned above. The credit for income taxes recorded for the year ended December 31, 2003
of $23,000 consists primarily of the resolution of a $155,000 provision
recorded in 2002 as a preliminary assessment for an income tax audit at the
Companys German subsidiary. The audit was completed in the second quarter of
2003 and the final assessment of $25,000, which the Company has paid, was less
than anticipated. The remainder of the 2003 amount consists of income taxes
recorded on the Companys Czech Republic operations, which posted a pretax
profit in 2003. For the year ended December 31, 2002 a tax provision was
recorded on those European subsidiaries that recorded profitable operations for
that period, Norway and the Czech Republic, along with the aforementioned tax
provision on the German tax audit. Realization of substantially all of our
deferred tax assets resulting from the available net operating loss
carryforwards and other net temporary differences is not considered more likely
than not and accordingly a valuation allowance has been provided for the full
amount of such assets. We anticipate that our consolidated effective tax rate
in future periods will be impacted by which of our businesses are profitable in
any such future period and if we will be able to take advantage of its U.S. net
operating loss carryforwards to affect taxable income in such periods. 34




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As a result of the foregoing factors, we incurred a net loss of $2.7
million for the year ended December 31, 2003, compared to a net loss of $2.3
million for the year ended December 31, 2002. For the year ended December 31,
2003, the loss per common share, both basic and diluted, was $.45, compared to
a basic and diluted loss per common share of $.49 for the year ended December
31, 2002. Weighted average shares outstanding (basic and diluted) were
5,947,000 in 2003 and 4,686,000 in 2002. 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 U.S. dollar increased sales in Western Europe when converted from local
currency to U.S. dollars in the amount of $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 15.1%. This drop in net sales for our full year operations
reflects the continuing depressed economic conditions in our worldwide markets,
which have resulted in pricing pressures and to a lesser degree, unit
reductions in volume on certain of our products. As a result, we had to adjust
some of our prices downward to meet competitive situations. Gross profit
percentages did not decline as well, as we were able to secure lower pricing
from our suppliers. Overall, we posted net revenue declines in our 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. Our
U.S. market was affected by an approximately 10%  20% drop in selling prices,
but we were 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, our German operations recorded a sales
increase of $500,000 due to the employment in early 2002 of a new sales team
that expanded our customer base and product line in Germany. 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 35




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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. 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
    
    2001Total S,G & A expenses:
    
    
    10,954
    
    
    
    10,508Intelek  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, we 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 36




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##### Table of Contents



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. 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. We anticipate that our consolidated effective tax rate in future
periods will be impacted by which of our businesses are profitable in any such
future period and if we will be able to take advantage of our U.S. net
operating loss carryforwards to affect taxable income in such periods. 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. 37




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Financial Condition, Liquidity and Capital Resources Historically, we have financed our operations primarily with cash flow
from operations and with borrowings under our available lines of credit. Below is a chart setting forth our contractual payment obligations as of
December 31, 2003 which have been aggregated in order to facilitate a basic
understanding of our liquidity (in thousands): Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsLines of credit
    
    $
    1,888
    
    
    $
    1,888
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    116
    
    
    
    45
    
    
    
    71
    
    
    
    
    
    
    
    Purchase
orders
    
    
    5,606
    
    
    
    5,606
    
    
    
    
    
    
    
    
    
    
    
    Employment
agreements
    
    
    429
    
    
    
    396
    
    
    
    33
    
    
    
    
    
    
    
    Operating leases
    
    
    2,544
    
    
    
    562
    
    
    
    590
    
    
    
    566
    
    
    
    826Total contractual
cash obligations
    
    $
    10,583
    
    
    $
    8,497
    
    
    $
    694
    
    
    $
    566
    
    
    $
    826
 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, 2003, our working capital was $0, a decrease of
$1.7 million from working capital of $1.7 million at December 31, 2002.
Similarly, our current ratio was 1.00 at December 31, 2003, compared to 1.18 at
December 31, 2002. The balance sheet accounts with the most significant changes
from December 31, 2002 to December 31, 2003 were the following: 2003
    
    2002Accounts receivable
    
    $
    3,581,000
    
    
    $
    4,347,000
 Accounts receivable in the U.S. declined $1.3 million in 2003 due to our new
non-recourse financing agreement with KBK (see Note 4 of Notes to Consolidated Financial
Statements), where invoices purchased by KBK were recognized as a sale and
recorded as a reduction of accounts receivable. This decrease was partially
offset by a $500,000 increase in accounts receivable at Intelek, our Czech
Republic subsidiary, due to higher sales in November and December 2003 of $1.6
million, compared to $1.3 million in November and December 2002. At
December 31, 2003, we had $1,433,000 of uncollected receivables
outstanding against payments to us of $1,168,000 relating to such
receivables from KBK. Because of our agreement with KBK, whereby we
sell them our receivables on a non-recourse basis, these uncollected
receivables and the corresponding amount we have received from KBK
with respect to these receivables are not presented on our balance
sheet. 38




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##### Table of Contents



2003
    
    2002Due from factor
    
    $
    265,000
    
    
    
    
 Under the KBK agreement, KBK advances funds to us at a rate of 82.5% of the
invoice amount purchased by KBK. This difference, or 17.5%, less fixed
fees of 0.8%, is recorded by us as
an amount due from factor (KBK) and is received by us, less fees, when the
invoice is paid by our customer. 2003
    
    2002Inventories
    
    $
    5,700,000
    
    
    $
    5,500,000
 Inventories increased $200,000 or 4% in 2003 which is in proportion to the
relative increases in sales and cost of sales. 2003
    
    2002Other assets
    
    $
    422,000
    
    
    $
    122,000
 Our Norwegian subsidiary, Jotec, renegotiated their warehouse and office lease
in early 2003, obtaining reimbursement of approximately $77,000 in leasehold
improvements from the lessor in exchange for nominally higher monthly payments
over the remaining term of the lease and a security deposit of $280,000, on
which interest accrues to Jotec. 2003
    
    2002Line of credit
    
    $
    1,888,000
    
    
    $
    2,457,000
 Line of credit borrowings decreased primarily as a net result of two series of
transactions. First, the U.S. company used the bulk of the initial and
subsequent proceeds from the KBK financing arrangement to make a $1.2 million
payment against our line of credit with Commercebank, permanently reducing the
outstanding balance under the line to $631,000, which matures on April 20,
2004. This was partially offset by our Norwegian subsidiary, who borrowed
$534,000, net against their line of credit to finance a portion of their losses
incurred in 2003. At
December 31, 2003, we had $1,433,000 of uncollected receivables
outstanding against payments to us of $1,168,000 relating to such
receivables from KBK. Because of our agreement with KBK, whereby we
sell them our receivables on a non-recourse basis, these uncollected
receivables and the corresponding amount we have received from KBK
with respect to these receivables are not presented on our balance
sheet. 39




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##### Table of Contents



2003
    
    2002Accounts payable
    
    $
    6,588,000
    
    
    $
    4,499,000
 In the U.S., accounts payable increased $1.8 million as a result of the
following: in the fourth quarter of 2003, we increased our Signamax product
inventory by $300,000 in anticipation of increased orders, overall our U.S.
inventory increased $600,000 in 2003 and we financed a portion of our 2003 U.S.
losses and slower payments from our European subsidiaries (due to their own
operating losses) through extending payments to certain vendors. 2003
    
    2002Accrued expenses
    
    $
    667,000
    
    
    $
    928,000
 The decrease in accrued expenses is primarily due to additional professional
fee accruals of $190,000 in the U.S. at December 31, 2002, which were paid
during 2003. 2003
    
    2002Income taxes payable
    
    $
    38,000
    
    
    $
    233,000
 At December 31, 2002 we recorded a $155,000 payable as a preliminary assessment
for an income tax audit at our German subsidiary. The audit was completed in
the second quarter of 2003 and the final assessment of $25,000, which we have
paid, was less than anticipated. For
the year ended December 31, 2003, $449,000 of cash was provided by
operations. The primary sources of cash from operations were an increase in
accounts payable and accrued expenses of $1,367,000, a decrease in accounts
receivable of $1,106,000 due to the KBK funding and a provision for impairment
of the note receivable from the sale of our Ukrainian subsidiary. Operational
uses of cash included the net loss of $2,677,000, an increase in other assets
of $420,000 and an increase in due from factor of $265,000. Net cash provided
by investing activities was $163,000, primarily due to proceeds on the sale of
investments of $68,000 and collections on the Ukrainian note receivable of
$60,000, offset by net property and equipment purchases of $80,000. Cash of
$597,000 was used by financing activities primarily from the net decrease in
borrowings of $585,000, based on the KBK proceeds which were used to make a
permanent reduction in the U.S. line of credit, offset by additional borrowings
by our Norwegian subsidiary. As a result of the foregoing, our cash position
decreased $175,000 between December 31, 2002 and December 31, 2003. That
decrease, combined with a decrease of $64,000 attributable to the effects of
exchange rate changes on cash, produced an overall decrease in cash of
$144,000. We are continuing efforts to improve our cash position through
personnel and expense reductions and a reduction in our inventory. In January 2003, we obtained a six month extension, until July 22, 2003 of
a $1.9 million U.S. based line of credit from Commercebank N.A. (Bank). On
August 15, 2003, we signed an agreement with the Bank to extend the maturity
date of the loan until September 30, 2003, with an additional extension until
November 30, 2003 if certain milestones regarding minimum paydowns were
achieved. The extension agreement was retroactive to July 22, 2003. 40




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On October 31, 2003, we signed two agreements, one an amendment with the
Bank to extend the maturity date on its $1.9 million U.S. based line of credit
to April 20, 2004, and an account transfer and purchase agreement with KBK
Financial, Inc. (KBK). The initial and a subsequent funding from KBK was used
to fund a permanent reduction in the Companys line of credit with the Bank.
The initial funding under the KBK agreement was $1,220,000, with $70,000
utilized to cover closing expenses and $1,150,000 applied to the Banks line of
credit. An additional payment of $100,000 from proceeds of the KBK agreement
was made in December 2003, to permanently reduce the available balance under
the Banks line of credit to $631,000 (which is now due and payable on April
20, 2004). Borrowings from the Bank and fundings from KBK are based on
specific percentages of receivables and inventories and are secured by liens on
our U.S. assets, including accounts receivable and inventories. The Bank 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. The KBK factoring agreement is guaranteed, on a limited
basis, with respect to matters related to the existence and validity of the
purchased receivables, by our principal shareholders. Under the terms of the
financing agreements, 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, 2003, we were not in compliance with
the tangible net worth and leverage covenants under the Banks line of credit
and the current ratio and tangible net worth covenants under the KBK
factoring agreement.
However, the Bank and KBK have waived compliance with the financial covenants
as of December 31, 2003. Additionally, we may not meet our financial covenants
in future periods unless our results of operations substantially improve. As of
December 31, 2003 and March 24, 2004, $631,000 was outstanding under the banks
line of credit with no additional borrowing availability. The KBK agreement advances funds to us at a rate of 82.5% of the invoice
amount purchased by KBK. All of our invoices to U.S. customers are available
for sale under this agreement and may be offered to KBK on a daily basis,
subject to a $2,000,000 funding limit. KBK can accept or reject offered
invoices and is not obligated to purchase any invoices. KBK exercises control
over incoming lockbox receipts to ensure that cash received on purchased
invoices is collected. The KBK agreement contains fixed and variable discount
rate pricing components. The fixed discount is 0.8% of the invoice amount and
is payable at the time of funding. The variable rate is KBKs base rate as
established by KBK from time to time (generally the prime rate), plus 2% per
annum and is payable based on the number of days from the sale of the invoice
until collection. Because funds advanced under this facility are considered a
sale of the particular invoices sold, we report funds advanced as a
reduction of accounts receivable in the Consolidated Financial Statements. As
of December 31, 2003, KBK had paid funds on $1,433,000 of
purchased invoices, subject to a
$2,000,000 funding limit. As of March 24, 2004, KBK had advanced net funds of
$1,135,000 on purchased invoices aggregating $1,363,000. We are obligated to meet certain affirmative, negative and financial
covenants under the agreements with its lenders. Affirmative covenants include
a requirement that we deliver quarterly and annual financial statements and
other reports to our lenders within prescribed time periods and provide prompt
notice of any material legal proceeding that is brought against us. Negative
covenants include an obligation that our lender approve the creation of new
subsidiaries, any liquidations, any change of control including mergers and
disposition of significant assets, any additional indebtedness for borrowed
money over a certain limit, any liens 41




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on assets or any loan guarantees, any acquisitions and any transfers of assets
or loans and advances to an affiliate that would have a material adverse
effect. Financial covenants under the Banks line of credit require us, on a
consolidated basis, to meet a minimum tangible net worth and a maximum debt to
tangible net worth ratio at the end of each fiscal quarter. Financial covenants
under the KBK agreement require our U.S. operations to meet a minimum current
ratio and tangible net worth and not exceed a certain dilution percent on its
accounts receivable at the end of each month. We were not in violation of any of the non-financial affirmative or
negative covenants at December 31, 2003. However, we were in violation at
December 31, 2003 of the financial covenants contained in the Banks line of
credit and the KBK agreement, and such violations have been waived by the
lenders. Further, we have, in a significant number of recent quarters violated
one or more of the required financial covenants, and anticipates that we may
continue to violate such financial covenants in future quarters if our results
of operations do not substantially improve. While there can be no assurance, we
believe that our Bank will continue to waive such future financial covenant
violations during future periods. If our Bank doesnt waive such future
covenant violations, and seeks to foreclose on the assets securing the
borrowings, it would likely have a material and adverse effect on our business. Our foreign subsidiaries also have various lines of credit available for
their operations. At December 31, 2003, an aggregate of $1,257,000 was
outstanding under these lines of credit and $854,000 was available for
borrowing under these agreements. These lines of credit are renewable
annually at the creditors option, and are scheduled to mature
principally in April and November 2004. We believe that these, or
substantially similar lines of credit will remain available to us for
borrowings for at least the next 12 months. We have experienced net losses and diminishing working capital for each of
the years ended December 31, 2003, 2002 and 2001. As of December 31, 2003, our
working capital was negative. We are dependent upon generating
sufficient cash flow from operations or financings to repay our liabilities. We believe that internally generated cash flow from operations combined
with funds available under the KBK agreement and our subsidiaries lines of
credit, will be sufficient to meet our financial obligations for the next
twelve months. Additionally, our plans for 2004 and beyond include a gradual
increase in sales, reductions in inventories, and continuing cost reductions,
all designed to enhance cash flow from operations and liquidity. However, we
are continuing to incur losses and can offer no assurance of returning to
profitability. We are also considering selling debt or equity securities,
including shares issuable upon the exercise of the Warrants issued in the
Warrant Dividend, in order to meet current and future working capital
requirements or to fund future acquisitions. There can be no assurance,
however, that such debt or equity financing would be available to us on
favorable terms or at all. If we are unable to generate sufficient cash flow
from operations or in some other fashion, our operations and financial position
will be materially and adversely affected. Our independent certified public
accountants have included an explanatory paragraph in their report
with respect to our consolidated financial statements at December 31,
2003. The paragraph states that our recurring losses from operations,
working capital deficit, failure to maintain compliance with the
financial covenants  of our financing arrangements and
maturities during 2004 of our lines of credit with financial
institutions raise substantial doubt about our  ability to continue
as a going concern. 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. We intend to establish operations under the battery license agreement
(see Item 1. Business) as a separate subsidiary with its own
funding. We intend to raise capital to fund our operations with
respect to this project. There can be no assurance that the capital
required with respect to this project will be available. 42




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Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(Interpretation No. 46). Interpretation No. 46 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 applies immediately to
variable interest entities (VIEs) created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date. The FASB has
deferred the effective date for variable interests in VIEs created before
February 1, 2003, to our quarter ending March 30, 2004. We are currently
evaluating the impact of the adoption of Interpretation No. 46.
The Company has made certain transitional disclosures required by
Interpretation No. 46 in Note 16 to its Consolidated Financial
Statements, regarding potential VIEs. The Companys involvement with these entities began
prior to February 1, 2003. In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133
on Derivative Instruments and Hedging Activities (SFAS
No. 149). This
Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly. The Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The provisions of this Statement generally are to be applied
prospectively only. We have adopted the provisions of SFAS No. 149 effective
July 1, 2003. The adoption of SFAS No. 149 did not have a material effect on
our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or asset in some
circumstances). This Statement is effective for financial instruments created
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. In
November 2003, the FASB deferred the effective date for the
classification and measurement provisions of certain mandatorily
redeemable noncontrolling interests under SFAS No. 150. We have adopted the provisions of SFAS No. 150
that are effective for the year ended December 31, 2003. The adoption of SFAS
No. 150 did not have a material effect on our results of operations or
financial position. In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
Revenue Recognition(SAB No. 104),which codifies, revises and rescinds
certain sections of SAB No. 101, Revenue Recognition,in order to make this
interpretive guidance consistent with current authoritative guidance. The
changes noted in SAB No. 104 did not have a material impact upon the Companys
results of operations and financial position. 43




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Off Balance Sheet
Arrangements We
are not involved in any off-balance sheet arrangements. 
 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, 2003, 2002 and 2001 our interest expense and loss before taxes
would have increased by $43,400, $44,600 and $32,600, respectively. 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 rates on our U.S.
credit facilities in 2004 will increase our interest expense and decrease our
income before taxes by approximately $110,000 in 2004, compared to interest
expense and income before taxes in 2003. 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, 2003, 2002 and
2001 in the value of the dollar would have resulted in reduced revenues of $1.7
million, $1.6 million and $1.3 million, respectively. A uniform 10%
strengthening as of December 31, 2003, 2002 and 2001 in the value of the dollar
would have resulted in a reduction of our consolidated net worth by $78,000,
$201,000 and $194,000, respectively. 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
Consolidated Financial Statements on pages F-1 through F-32. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9(a) CONTROLS AND PROCEDURES In order to ensure that the information we must disclose in our 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-15(e) and
15d-15(e), as of December 31, 2003 (the Evaluation
Date). Based on such 44




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##### Table of Contents



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. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Each of our directors currently holds office until his 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
22, 2004, the members of the Board and their length of service as Directors are
as follows: NAME
    
    AGE
    
    DIRECTOR POSITIONS
    
    SINCESlav Stein
    
    
    59
    
    
    President, Chief Executive Officer and Director
    
    
    1983Roman Briskin
    
    
    54
    
    
    Executive Vice President, Secretary/Treasurer
and Director
    
    
    1984Terrence Daidone (1)(2)
    
    
    44
    
    
    Director
    
    
    1997William B. Coldrick (1)(2)
    
    
    62
    
    
    Director
    
    
    1997Leonard Sokolow (1)(2)
    
    
    47
    
    
    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 and,
Secretary/Treasurer since our IPO. Mr. Briskin is
also one of our principal shareholders. See Item 12 45




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##### Table of Contents



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 CEO since 2003 and Vice President of Sales and Marketing from
January 1996 to 2003 of Fugate and Associates, Inc./ERS Imaging Supplies, Inc.,
a private corporation engaged in the collection and distribution of empty
printer cartridges. From 1993 to 1996, Mr. Daidone served as Director of Mass
Merchant and Other Retail Operations with Nashua Corporation, a public company
engaged in the manufacturing of coated products. See Item 13 Certain
Relationships and Related Transactions. 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, a co-founder, has been CEO, President and a member
of the Board of Directors of vFinance, 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, Inc. 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. 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. Audit
committee The Audit Committee of our
Board of Directors consists of Terrence Diadone, William B. Coldrick
and Leonard Sokolow. At December 31, 2003, Messrs. Coldrick and
Sokolow were independent as defined and as required by the National
Association of Securities Dealers Marketplace Rules. Mr. Daidone met
the independence qualifications under the NASDAQ Marketplace Rules
until December 2003 when we signed a licence agreement with an entity
affiliated with Mr. Diadone. We are currently seeking to add
additional members to the Board of Directors so that the Company will
again have three directors who meet the NASDAQ Marketplace rules
requirements with respect to the composition of its audit committee.
Our directors have also determined that Mr. Sokolow qualifies as an
audit committee financial expert as defined by the rules
promulgated by the Securities and Exchange Commission. 46




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##### Table of Contents



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: NAME
    
    AGE
    
    EXECUTIVE POSITION
    
    OFFICER SINCESlav Stein
    
    
    59
    
    
    President, Chief Executive Officer
    
    
    1983Roman Briskin
    
    
    54
    
    
    Executive Vice President and
Secretary
    
    
    1984Stephen Daily
    
    
    46
    
    
    Vice President / Network Group
    
    
    2000John F. Wilkens
    
    
    45
    
    
    Chief Financial Officer
    
    
    2003
 BUSINESS EXPERIENCE Mr. Stein. See the biographical information contained in Board of
Directors. 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 previous 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 service provider to the
hospitality industry. On February 5, 2003, Hotelworks.com, Inc. filed an
assignment for the benefit of its creditors in the Circuit Court for Miami-Dade
County, Florida. CODE OF ETHICS Our employee manual contains a code of ethical obligations. We are
currently reviewing that code for compliance with the requirements of the
Sarbanes-Oxley Act of 2002. If required, we expect to amend and update our Code
of Ethics in fiscal 2004. FAMILY RELATIONSHIPS There are no family relationships between or among any of our directors
and executive officers. 47




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION The following table shows remuneration paid or accrued by us during the
year ended December 31, 2003 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 CompensationOther
    
    Awards
    
    PayoutsFiscal
    
    
    
    
    
    
    
    
    
    Annual
    
    Restricted
    
    Securities
    
    
    
    
    
    All OtherYear
    
    Salary
    
    Bonus
    
    Compensation
    
    Stock
    
    Underlying
    
    LTIP
    
    CompensationName and Principal Position
    
    Ended
    
    ($)
    
    ($) (1)
    
    ($)
    
    Awards
    
    Options/SARs ($)
    
    Payouts ($)
    
    ($)(2)Slav Stein
    
    
    2003
    
    
    
    220,919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    5,008CEO
    
    
    2002
    
    
    
    242,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    10,3922001
    
    
    
    217,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    10,346Roman Briskin
    
    
    2003
    
    
    
    220,919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    3,438Executive Vice President
    
    
    2002
    
    
    
    242,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    10,3922001
    
    
    
    217,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    10,346Stephen Daily
    
    
    2003
    
    
    
    125,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    1,400Vice President
    
    
    2002
    
    
    
    130,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,6002001
    
    
    
    130,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    2,600John F. Wilkens
    
    
    2003
    
    
    
    131,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    Chief Financial Officer
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    Bonus for Messrs. Stein and Briskin is based on a percentage of
pre-tax income pursuant to current employment agreements. See
Employment Agreements.(2)
    
    Messrs. Stein and Briskin each receive an automobile allowance of
up to $6,000 per year pursuant to the terms of their employment
agreements with the Company. See Employment Agreements. In addition,
Messrs. Stein, Briskin and Daily 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 Mr. Stein. 48




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##### Table of Contents



OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning options granted
under the 2003 Plan during the fiscal year ended December 31, 2003 to the
persons named in the preceding summary compensation table under the caption
Executive Compensation: Potential RealizableValue At Assumed AnnualRates Of Stock PriceAppreciation For OptionIndividual Grants
    
    Term (1)Number of
    
    % of TotalSecurities
    
    Options/SARSUnderlying
    
    Granted toOptions/SARS
    
    Employees in Fiscal
    
    Exercise of BaseName
    
    Granted (#)
    
    Year
    
    Price ($/SH)
    
    Expiration Date
    
    5% ($)
    
    10% ($)Slav Stein
    
    
    75,000
    
    
    
    25.2
    %
    
    $
    0.81
    
    
    
    3/21/13
    
    
    $
    38,200
    
    
    $
    96,750Roman Briskin
    
    
    75,000
    
    
    
    25.2
    %
    
    $
    0.81
    
    
    
    3/21/13
    
    
    $
    38,200
    
    
    $
    96,750Stephen Daily
    
    
    25,000
    
    
    
    8.4
    %
    
    $
    0.81
    
    
    
    3/21/13
    
    
    $
    12,750
    
    
    $
    32,250John F. Wilkens
    
    
    25,000
    
    
    
    8.4
    %
    
    $
    0.81
    
    
    
    3/21/13
    
    
    $
    12,750
    
    
    $
    32,250
   (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 outstanding at the end of the 2003 fiscal year for
the persons named in the preceding summary compensation table under the caption
Executive Compensation: Number of
    
    Value ofSecurities
    
    UnexercisedUnderlying
    
    In-The-MoneyUnexercised
    
    Options/ SARs AtOptions/ SARs At
    
    Fiscal Year-End ($)Fiscal Year-End (#)
    
    (1)Shares Acquired
    
    Value
    
    Exercisable/
    
    Exercisable/Name
    
    On Exercise (#)
    
    Realized ($)
    
    Unexercisable
    
    UnexercisableSlav Stein
    
    
    
    
    
    
    
    
    
    
    675,000/230,250
    
    
    
    2,250/4,500Roman Briskin
    
    
    
    
    
    
    
    
    
    
    675,000/230,250
    
    
    
    2,250/4,500Stephen Daily
    
    
    
    
    
    
    
    
    
    
    83,333/16,667
    
    
    
    750/1,500John F. Wilkens
    
    
    
    
    
    
    
    
    
    
    8,333/16,667
    
    
    
    750/1,500
   (1)
    
    Computed based upon the difference between the closing price of our
common stock at December 31, 2002 ($0.90) and the exercise price of the
outstanding options. No value has been assigned to options which are not
in-the-money. As of March 26, 2004, the closing price of our common stock was
$0.85. 49




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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
are entitled to receive a base salary (calculated at $293,000 for 2004,
however, Messrs. Stein and Briskin have voluntarily reduced their current
salary to $198,000) 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 up to $500 per month
and Mr. Stein with 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), which was ratified in August 2003 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 19, 2004,
options to purchase 243,668 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 directors (or by the compensation committee of our
board of directors) from a class of our 50




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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 were 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 374,900 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
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. 51




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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 597,000 shares of common stock held by consultants, advisors and
licensors; (ii) options to purchase an aggregate of 1,960,500 shares of common
stock held by our principal shareholders; (iii) options to purchase 523,250
shares of common stock held by non-employee directors; and (iv) options to
purchase an aggregate of 553,568 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, 2003, 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 timely filed
their Section 16(a) reports and (ii) no other person who at any time during the
fiscal year ended December 31, 2003 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, 2003. 52




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of March 25, 2004, we had outstanding 6,143,596 shares of our common
stock. The following table sets forth, as of March 25, 2004, 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 OwnershipName and Address
    
    of Common Stock (1)of Beneficial Owner (1)
    
    Shares
    
    PercentSlav Stein (2)
    
    
    1,756,257
    
    
    
    24.7
    %Roman Briskin (2)
    
    
    1,756,257
    
    
    
    24.7
    %Terrence R. Daidone (3)(4)
    
    
    205,000
    
    
    
    3.2
    %William B. Coldrick (3)
    
    
    187,000
    
    
    
    3.0
    %Leonard Sokolow (3)
    
    
    131,250
    
    
    
    2.1
    %Steve Daily (3)(5)
    
    
    100,000
    
    
    
    1.6
    %John Wilkens
(3)(6)
    
    
    25,000
    
    
    
    0.4
    %All directors and executive officers as a group (7 persons)(7)
    
    
    4,060,764
    
    
    
    47.2
    %
   (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 955,250 shares of Common Stock
issuable upon the exercise of vested stock options. Excludes unvested
options to purchase 75,000 shares of Common Stock.(3)
    
    Shares of Common Stock issuable upon the exercise of vested stock
options.(4)
    
    Excludes unvested stock options to purchase 300,000 shares of
Common Stock held by Daidone-Steffens LLC, of which Mr. Daidone is a
principal.(5)
    
    Excludes unvested stock options to purchase 25,000 shares of Common
Stock.(6)
    
    Excludes unvested stock options to purchase 25,000 shares of Common
Stock.(7)
    
    Includes vested stock options to purchase an aggregate of 1,956,583
shares of Common Stock. 53




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##### Table of Contents



EQUITY COMPENSATION PLANS The following table summarizes information, as of March 25, 2004, 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
to be issued upon exerciseof outstanding options,
warrants and rights(a)
    
    Weighted-average
exercise price ofoutstanding options,
warrants and rights(b)
    
    Number of securities
remaining available for futureissuance under equity
compensation plans (excluding
securities reflected in
column (a))(c)Equity compensation
plans approved by security holders(1)
    
    1996 Plan  243,668 shares
2003 Plan  759,900 shares
    
    $$
    1.660.83
    
    
    
    240,100Equity compensation
plans not approved
by security
holders(2)
    
    
    2,330,750
    
    
    $
    1.61
    
    
    
    Total
    
    
    3,334,318
    
    
    $
    1.43
    
    
    
    240,100
  (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, was ratified by
the shareholders 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. 54




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##### Table of Contents



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. 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 have entered into a licensing agreement with Daidone-Steffens LLC to
refurbish batteries and resell them in the Southeastern U.S. and elsewhere. See
Item 1. Business. Mr. Daidone is a principal of the licensor. 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees billed to us by the independent auditors, BDO Seidman,
LLP and its affiliated international firms (BDO) for professional services rendered in connection with the audit of our
financial statements included in this Annual Report on Form 10-K for fiscal
2003, and for review of our statements included in our Quarterly Reports on
Form 10-Q during fiscal 2003, totaled approximately $301,000. The aggregate fees
billed to us by BDO for professional services rendered in
connection with the audit of our financial statements included in our Annual
Report on Form 10-K for fiscal 2002, and for the review of our financial
statements included in our Quarterly Reports on Form 10-Q during fiscal 2002,
totaled approximately $234,000. Audit-Related Fees The aggregate fees billed to us by BDO for assurance and
related services that are reasonably related to the performance of the audit
and review of our financial statements that are not already reported in the
paragraph immediately above totaled approximately $38,000 and $32,000
for
fiscal 2003 and 2002, respectively. These costs primarily related to services
provided in connection with Registration Statements. Tax Fees 55




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##### Table of Contents



The aggregate fees billed to us by BDO for professional services
rendered by BDO for tax compliance totaled approximately
$25,000 and $15,000 for fiscal 2003 and 2002, respectively. These services included
preparation of our foreign and domestic tax returns and review of our domestic tax
compliance information. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report:  (1)
    
    Financial StatementsSee Item 8. Financial Statements and Supplementary Data for
Financial Statements included with this Annual Report on Form 10-K.(2)
    
    Financial Statement SchedulesSee Schedule II Valuation and Qualifying Accounts
included in this Annual Report on Form 10-K.(3)
    
    Exhibits ExhibitNumber
    
    Description3.1
    
    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. (14)3.6
    
    Articles of Amendment to Articles of Incorporation setting forth Rights, Preferences and
Limitations of Series A Preferred Stock (14)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
    
    Reserved10.7
    
    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
    
    Reserved10.11
    
    Reserved10.12
    
    Reserved10.13
    
    Reserved10.14
    
    Stock Purchase Agreement among the Company, CCCI and Donald Y. Daily, Jr. (5)
 56




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##### Table of Contents



ExhibitNumber
    
    Description10.15
    
    Amendment to Loan Agreement between the Company and Commercebank, N.A. dated as of September
2, 2000 (9)10.16
    
    Stock Purchase Agreement dated May 31, 2000 by and among Jotec AESP AS and the shareholders
of Lanse AS (8)10.17
    
    Amendment to Loan Agreement between the Company and Commercebank, N.A. dated March 16, 2001
(10)10.18
    
    Stock Purchase Agreement dated August 29, 2001 by and among AESP Computerzubehor GmbH and
Intelek spol. s.r.o. (12)10.19
    
    Amendment to Loan Agreement between the Company and Commercebank, N.A. dated as of September
21, 200110.20
    
    Selling Agent Agreement dated as of October 28, 2002, by and among AESP, Inc., Newbridge
Securities corporation and View Trade Securities, Inc. (14)10.21
    
    Form of Subscription Agreement between AESP, Inc. and the investors in the AESP, Inc. private
placement offering completed in December 2002. (14)10.22
    
    Fourth Amendment to Loan Agreement by and between AESP, Inc. and Commercebank, N.A. dated
January 17, 2003. (13)10.23
    
    Fifth Amendment to Loan Agreement by and between AESP, Inc. and Commercebank, N.A. dated
August 15, 2003. (15)10.24
    
    Renewal Promissory Note dated August 15, 2003 by and between AESP, Inc. and Commercebank,
N.A.(15)10.25
    
    Account Transfer and Purchase Agreement signed October 31, 2003 by and between AESP, Inc. and
KBK Financial, Inc. (16)10.26
    
    Limited Guaranty signed October 30, 2003 by Slav Stein, President and Chief Executive Officer
and Roman Briskin, Executive Vice President. (16)10.27
    
    Sixth Amendment to Loan Agreement by and between AESP, Inc. and Commercebank, N.A. dated
October 31, 2003. (16)10.28
    
    Renewal Promissory Note dated October 31, 2003 by and between AESP, Inc. and Commercebank,
N.A.(16)10.29
    
    Intercreditor Agreement dated October 31, 2003 by and between KBK Financial, Inc. and
Commercebank N.A. (16)10.30
    
    License Agreement dated December 31, 2003 by and between AESP, Inc. and Daidone-Steffens LLC.
*10.31
    
    2003 Stock Option Plan. (17)21
    
    List of Subsidiaries *23
    
    Consent of BDO Seidman, LLP*31.1
    
    Certification of Slav Stein, President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2
    
    Certification of John Wilkens, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1
    
    Certification of Slav Stein, President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2
    
    Certification of John Wilkens, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
   *
    
    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. 57




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##### Table of Contents



(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.(14)
    
    Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2002.(15)
    
    Incorporated by reference to our Current Report on Form 8-K filed August
18, 2003.(16)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.(17)
    
    Incorporated by reference from our definitive proxy statement dated
June 26, 2003.  (b)
    
    Reports on Form 8-KThe Company filed a Form 8-K on November 21, 2003, to report that it
issued a press release announcing its financial results for the three
months ended September 30, 2003.The Company filed a Form 8-K on December 2, 2003, to report that it
issued a press release announcing that the Company has regained
compliance with the NASDAQ SmallCap Market continuing listing maintenance
standards. 58




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##### Table of Contents



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 STEINSlav Stein, President and Chief
Executive OfficerDate: April 1, 2004
 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
Slav Stein
    
    President, Chief Executive Officer and Director
(Principal Executive Officer)
    
    April 1, 2004/s/ ROMAN BRISKIN
Roman Briskin
    
    Executive Vice President,
Secretary and Director
    
    April 1, 2004/s/ TERRENCE R. DAIDONE
Terrence R. Daidone
    
    Director
    
    April 1, 2004/s/ WILLIAM B. COLDRICK
William B. Coldrick
    
    Director
    
    April 1, 2004/s/ LEONARD SOKOLOW
Leonard Sokolow
    
    Director
    
    April 1, 2004/s/ JOHN F. WILKENS
John F. Wilkens
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    April 1, 2004
 59




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants
    
    
    F-2Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations for the Years Ended December 31, 2003,
2002 and 2001
    
    
    F-4Consolidated Statements of Shareholders Equity for the Years Ended December
31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001
    
    
    F-6Summary of Significant Accounting Policies
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-14Schedule II  Valuation and Qualifying Accounts
    
    
    F-32




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##### Table of Contents



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, 2003 and 2002, and the related consolidated
statements of operations, shareholders equity and cash flows for each of the
three years in the period ended December 31, 2003. We have also audited the
financial statement 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 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. The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses, has a working capital deficit,
failed to maintain compliance with the financial covenants of its
financing  arrangements and the Companys lines of credit with
financial institutions mature during 2004. These conditions raise
substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty. As discussed in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets on January 1, 2002. Miami, Florida
March 23, 2004 F-2


BDO SEIDMAN, LLP



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)(NOTE 1) December 31, 2003
    
    December 31, 2002ASSETS (Note 4)CURRENT ASSETS:Cash
    
    $
    1,082
    
    
    $
    1,226Accounts receivable, net of allowance for doubtful accounts of
$345 and $297 at December 31, 2003 and 2002, respectively
    
    
    3,581
    
    
    
    4,347Due from factor (Note 4)
    
    
    265
    
    
    
    Inventories
    
    
    5,700
    
    
    
    5,500Due from employees
    
    
    21
    
    
    
    35Prepaid expenses and other current assets
    
    
    258
    
    
    
    372Total current assets
    
    
    10,907
    
    
    
    11,480Property and equipment, net (Note 3)
    
    
    535
    
    
    
    646Goodwill (Note 2)
    
    
    643
    
    
    
    643Deferred tax assets (Note 11)
    
    
    81
    
    
    
    144Assets of business transferred under contractual arrangement (Note 2)
    
    
    240
    
    
    
    682Investment in marketable equity securities (Note 7)
    
    
    
    
    
    
    129Other assets
    
    
    422
    
    
    
    122$
    12,828
    
    
    $
    13,846LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Lines of credit (Note 4)
    
    $
    1,888
    
    
    $
    2,457Accounts payable
    
    
    6,588
    
    
    
    4,499Accrued expenses
    
    
    667
    
    
    
    928Accrued salaries and benefits
    
    
    703
    
    
    
    769Income taxes payable
    
    
    38
    
    
    
    233Customer deposits and other
    
    
    995
    
    
    
    820Current portion of long-term debt (Note 5)
    
    
    45
    
    
    
    34Total current liabilities
    
    
    10,924
    
    
    
    9,740Long-term debt, less current portion (Note 5)
    
    
    71
    
    
    
    11Total liabilities
    
    
    10,995
    
    
    
    9,751Commitments and contingencies (Notes 1, 9 and 10)SHAREHOLDERS
EQUITY: (Notes 12 and 14)Preferred stock, $.001 par value; 1,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.001 par value, 20,000 shares authorized, 6,144 and
5,984 shares issued and outstanding at December 31, 2003 and 2002,
respectively
    
    
    6
    
    
    
    6Paid-in capital
    
    
    13,546
    
    
    
    13,466(Deficit)
    
    
    (11,664
    )
    
    
    (8,975
    )Deferred compensation
    
    
    
    
    
    
    (93
    )Accumulated other comprehensive (loss)
    
    
    (55
    )
    
    
    (309
    )Total shareholders equity
    
    
    1,833
    
    
    
    4,095$
    12,828
    
    
    $
    13,846
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Years ended December 31,
    
    2003
    
    2002
    
    2001NET SALES (Note 6)
    
    $
    31,919
    
    
    $
    29,664
    
    
    $
    30,183OPERATING EXPENSES:Cost of sales, including provision for inventory
obsolescence of $210 in 2003, $538 in 2002 and $1,129 in
2001. (Note 6)
    
    
    22,678
    
    
    
    20,987
    
    
    
    22,114Selling, general and administrative (Notes 6, 7, 9, and 10)
    
    
    11,723
    
    
    
    10,955
    
    
    
    10,508Impairment of long-lived assets (Note 2)
    
    
    
    
    
    
    
    
    
    
    1,542Total operating expenses
    
    
    34,401
    
    
    
    31,942
    
    
    
    34,164(LOSS) FROM OPERATIONS
    
    
    (2,482
    )
    
    
    (2,278
    )
    
    
    (3,981
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (262
    )
    
    
    (202
    )
    
    
    (292
    )Interest income
    
    
    28
    
    
    
    51
    
    
    
    41Exchange gains (losses)
    
    
    189
    
    
    
    243
    
    
    
    (19
    )Impairment of note receivable (Note 2)
    
    
    (381
    )
    
    
    
    
    
    
    Other
    
    
    208
    
    
    
    96
    
    
    
    52(Loss) before income taxes
    
    
    (2,700
    )
    
    
    (2,090
    )
    
    
    (4,199
    )(Benefit) provision for income taxes (Note 11)
    
    
    (23
    )
    
    
    201
    
    
    
    15NET (LOSS)
    
    $
    (2,677
    )
    
    $
    (2,291
    )
    
    $
    (4,214
    )(Loss) per common share (Note 13)
    
    $
    (.45
    )
    
    $
    (.49
    )
    
    $
    (1.05
    )(Loss) per common share  assuming dilution (Note 13)
    
    $
    (.45
    )
    
    $
    (.49
    )
    
    $
    (1.05
    )
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (IN THOUSANDS) Preferred Stock
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Compre-
    
    TotalAdditional
    
    
    
    
    
    Defer-
    
    Other
    
    hensive
    
    Share-Shares
    
    Par
    
    Shares
    
    Par
    
    Paid-in
    
    
    
    
    
    red
    
    Comprehensive
    
    Income
    
    holdersOutstand.
    
    Value
    
    Outstand.
    
    Value
    
    Capital
    
    (Deficit)
    
    Comp.
    
    Income (Loss)
    
    (Loss)
    
    EquityBalance at December 31, 2000
    
    
    
    
    
    $
    
    
    
    
    3,681
    
    
    $
    4
    
    
    $
    10,654
    
    
    $
    (2,470
    )
    
    $
    
    
    
    $
    (765
    )
    
    
    
    
    
    $
    7,423Issue common stock in connection
with acquisition (Note 2)
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426Issue common
stock in connection with exercise of stock options (Note
14)
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Issue common stock, net (Note 12)
    
    
    
    
    
    
    
    
    
    
    574
    
    
    
    
    
    
    
    937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    937Options issued in connection with
consulting services (Note 14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161Other comprehensive income (loss):Sale of Ukrainian subsidiary (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    282
    
    
    
    282Unrealized gain on investment in
marketable equity securities, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    117
    
    
    
    117Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    (123
    )
    
    
    (123
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,214
    )
    
    
    
    
    
    
    
    
    
    
    (4,214
    )
    
    
    (4,214
    )(3,938
    )Balance at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    4,407
    
    
    
    4
    
    
    
    12,198
    
    
    
    (6,684
    )
    
    
    
    
    
    
    (489
    )
    
    
    
    
    
    
    5,029Issue common stock, net (Note 12)
    
    
    
    
    
    
    
    
    
    
    1,187
    
    
    
    1
    
    
    
    941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    942Issue common stock in connection
with conversion of debt (Note 12)
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    1
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152Issue common stock in exchange for
services (Note 12)
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    83Other 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
    
    
    
    266Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,291
    )
    
    
    
    
    
    
    
    
    
    
    (2,291
    )
    
    
    (2,291
    )(2,111
    )Balance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    5,984
    
    
    
    6
    
    
    
    13,466
    
    
    
    (8,975
    )
    
    
    (93
    )
    
    
    (309
    )
    
    
    
    
    
    
    4,095Conversion of common stock (Note 12)
    
    
    230
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of preferred stock (Note
12)
    
    
    (230
    )
    
    
    
    
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue common stock, net
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue common stock in exchange for
services (Notes 11 and 13)
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    93Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Other comprehensive income (loss):Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254
    
    
    
    254
    
    
    
    254Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,677
    )
    
    
    
    
    
    
    
    
    
    
    (2,677
    )
    
    
    (2,677
    )(2,423
    )Balance at December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    6,144
    
    
    $
    6
    
    
    $
    13,546
    
    
    $
    (11,664
    )
    
    $
    
    
    
    $
    (55
    )
    
    
    
    
    
    $
    1,833
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5




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##### Table of Contents



AESP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years ended December 31,
    
    2003
    
    2002
    
    2001OPERATING ACTIVITIES:Net (loss)
    
    $
    (2,677
    )
    
    $
    (2,291
    )
    
    $
    (4,214
    )Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:Provision for losses on accounts receivable
    
    
    70
    
    
    
    78
    
    
    
    232Depreciation and amortization
    
    
    273
    
    
    
    270
    
    
    
    245Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    203Gain on sale of securities
    
    
    (39
    )Provision for impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    1,542Provision for impairment of note receivable from sale of Ukrainian subsidiary
    
    
    381
    
    
    
    
    
    
    
    Provision for inventory obsolescence
    
    
    210
    
    
    
    538
    
    
    
    1,129Equity instruments issued in exchange for services
    
    
    80
    
    
    
    83
    
    
    
    Amortization of deferred compensation
    
    
    93
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    2
    
    
    
    (56
    )
    
    
    (57
    )(Increase) decrease, net of acquired and sold businesses, in:Accounts receivable
    
    
    1,106
    
    
    
    (257
    )
    
    
    40Due from factor
    
    
    (265
    )
    
    
    
    
    
    
    Inventories
    
    
    35
    
    
    
    675
    
    
    
    1,044Prepaid expenses and other current assets
    
    
    241
    
    
    
    37
    
    
    
    6Other assets
    
    
    (420
    )
    
    
    98
    
    
    
    (46
    )Increase (decrease), net of acquired and sold businesses, in:Accounts payable and accrued expenses
    
    
    1,367
    
    
    
    (762
    )
    
    
    338Income taxes payable
    
    
    (125
    )
    
    
    164
    
    
    
    (198
    )Customer deposits and other
    
    
    117
    
    
    
    269
    
    
    
    170Net cash provided by (used in) operating activities
    
    
    449
    
    
    
    (1,154
    )
    
    
    434INVESTING ACTIVITIES:Acquisitions of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (394
    )Additions to property and equipment
    
    
    (175
    )
    
    
    (295
    )
    
    
    (265
    )Proceeds from sale of investments
    
    
    168
    
    
    
    78
    
    
    
    Collections of loans due from employees
    
    
    15
    
    
    
    6
    
    
    
    6Collections on note receivable from sale of Ukrainian subsidiary
    
    
    60
    
    
    
    50
    
    
    
    Net cash provided by (used in) investing activities
    
    
    68
    
    
    
    (161
    )
    
    
    (653
    )FINANCING ACTIVITIES:Net proceeds from (payments on) lines of credit
    
    
    (585
    )
    
    
    89
    
    
    
    (1,116
    )Payment of preferred stock dividend
    
    
    (12
    )Proceeds from the sale of stock, net
    
    
    
    
    
    
    942
    
    
    
    937Net cash provided by (used in) financing activities
    
    
    (597
    )
    
    
    1,031
    
    
    
    (179
    )Net (decrease) in cash
    
    
    (80
    )
    
    
    (284
    )
    
    
    (398
    )Effect of exchange rate changes on cash
    
    
    (64
    )
    
    
    184
    
    
    
    (45
    )Cash, at beginning of period
    
    
    1,226
    
    
    
    1,326
    
    
    
    1,769Cash, at end of period
    
    $
    1,082
    
    
    $
    1,226
    
    
    $
    1,326
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years ended December 31,
    
    2003
    
    2002
    
    2001Supplemental information:Cash paid for:Interest
    
    $
    241
    
    
    $
    202
    
    
    $
    253Taxes
    
    
    107
    
    
    
    65
    
    
    
    197Non-cash transactions:Fair value of acquired businesses assets
    
    
    
    
    
    
    
    
    
    $
    1,909Cash paid for acquired businesses
    
    
    
    
    
    
    
    
    
    
    639Common stock issued for acquisitions
    
    
    
    
    
    
    
    
    
    
    427Note issued for acquisition
    
    
    
    
    
    
    
    
    
    
    213Liabilities incurred and assumed
    
    $
    
    
    
    $
    
    
    
    $
    630Note in exchange for sale of business
    
    $
    
    
    
    $
    
    
    
    $
    772Conversion of debt to equity
    
    $
    
    
    
    $
    152
    
    
    $
    
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS
    
    AESP, Inc. (AESP) is primarily a wholesaler of
computer networking products whose customers are
computer distributors, dealers and retailers, as
well as a manufacturer of custom, private labeled
products to the communications, medical and
computer markets. AESPs customers are principally located in
the U.S. and Western and Eastern Europe. AESP generally 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 2002 and 2001 financial
statements have been reclassified to conform to the 2003
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.
 F-8




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 in other comprehensive income, as a separate component of shareholders equity.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 term of 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 generally 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 the
lifetime of the product. 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,
2003 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, 2003,
2002, and 2001 are shipping and handling fees of
$741,000, $723,000, and $926,000, respectively.ADVERTISING COSTS
    
    Advertising costs incurred amounted to $573,000,
$767,000 and $1,100,000 for the three years
ended December 31, 2003, 2002 and 2001,
respectively. The Company expenses advertising
costs as incurred.
 F-9




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. The
Company does not expect to remit earnings from
its foreign subsidiaries. Accordingly, during
2003, 2002 and 2001, the Company did not provide for
deferred taxes on unremitted foreign earnings.USE OF ESTIMATES
    
    The preparation of the financial statements in
conformity with generally accepted accounting
principles in the United States of America
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, executive officers and directors under stock option plans that
are more fully described in Note 14. 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, as
interpreted by FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation. 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, as amended,
(SFAS 123) to stock-based employee compensation (in thousands, except
per share amounts):
 F-10




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES YEAR ENDED DECEMBER 31,
    
    2003
    
    2002
    
    2001Net (loss)
available to common shareholders  as reported
    
    $
    (2,689
    )
    
    $
    (2,291
    )
    
    $
    (4,214
    )Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (276
    )
    
    
    (443
    )
    
    
    (581
    )Pro forma
net (loss) available to common shareholders
    
    $
    (2,965
    )
    
    $
    (2,734
    )
    
    $
    (4,795
    )Basic (loss) per share as reported
    
    $
    (.45
    )
    
    $
    (.49
    )
    
    $
    (1.05
    )Basic (loss) per share  pro forma
    
    $
    (.50
    )
    
    $
    (.58
    )
    
    $
    (1.19
    )Diluted (loss) per share as reported
    
    $
    (.45
    )
    
    $
    (.49
    )
    
    $
    (1.05
    )Diluted (loss) per share  pro forma
    
    $
    (.50
    )
    
    $
    (.58
    )
    
    $
    (1.19
    )
 SFAS 123 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 SFAS 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
2003; no dividend yield percent; expected
volatility of 112.0%; weighted average risk-free
interest rates of approximately 4.75%; and
an expected life of 10 years. The following
assumptions were used for grants in 2002; no
dividend yield 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.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).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
 F-11




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##### Table of Contents

\

AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES guidance in SFAS 142. The Company adopted SFAS
142 during the quarter ended March 31, 2002. The
principal effect of the 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
undiscounted 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.RECENT ACCOUNTING
PRONOUNCEMENTS
    
    In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (Interpretation No. 46).
Interpretation No. 46 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 applies
immediately to variable interest entities
(VIEs) created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest
after that date. The FASB has deferred the
effective date for variable interests in VIEs
created before February 1, 2003, to our quarter
ending March 30, 2004. We are currently
evaluating the impact of the adoption of
Interpretation No. 46. The Company has made certain transitional
disclosures required by the Interpretation No. 46 in Note 16 to its
Consolidated Financial Statements. The
Companys involvement with these entities began
prior to February 1, 2003.In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS
No.149). This Statement amends and clarifies
financial accounting and reporting for derivative
instruments, including certain derivative
instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 requires that
contracts with comparable characteristics be
accounted for similarly. The Statement is
effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships
designated after June 30,
 F-12




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2003. The provisions of this Statement generally
are to be applied prospectively only. We have
adopted the provisions of SFAS No. 149 effective
July 1, 2003. The adoption of SFAS No. 149 did
not have a material effect on our results of
operations or financial position.In May 2003, the FASB issued SFAS No. 150
Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity (SFAS No. 150). SFAS No. 150 requires
that an issuer classify a financial instrument
that is within its scope as a liability (or asset
in some circumstances). This Statement is
effective for financial instruments created or
modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim
period beginning after June 15, 2003. We have
adopted the provisions of SFAS No. 150 that are
effective for the year ended December 31, 2003.
The adoption of SFAS No. 150 did not have a
material effect on our results of operations or
financial position.In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition(SAB No.
104),which codifies, revises and rescinds
certain sections of SAB No. 101, Revenue
Recognition,in order to make this interpretive
guidance consistent with current authoritative
guidance. The changes noted in SAB No. 104 did
not have a material impact upon the Companys
results of operations and financial position.
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.
GOING CONCERN
    
    The Company has experienced net losses and diminishing
working capital for each of the years ended December 31, 2003, 2002 and
2001. As of December 31, 2003, the Company had a working
capital deficit of approximately $17,000. The Company is dependent upon generating sufficient
cash flow from operations or financings to repay its liabilities.During 2003, the Company obtained extensions of
the maturity of its $1.9 million U.S. based Bank
line of credit agreement, which currently matures
on April 20, 2004. The Bank line of credit is
collateralized by all U.S. assets, except
accounts receivable sold under the KBK agreement
discussed below, and is also guaranteed by the
Companys principal shareholders, who have
pledged a portion of the shares of the Companys
common stock that they own to secure their
respective guarantees. Under the terms of the
agreement, the Company is required to comply with
certain affirmative and negative covenants and to
maintain certain financial benchmarks and ratios.
As of December 31, 2003, the Company was not in
compliance with the tangible net worth and
leverage covenants under the Bank line of credit.
However, the Bank has waived compliance with the
financial covenants as of December 31, 2003. As
of December 31, 2003, $631,000 was outstanding
under the Bank line of credit with no
availability for additional borrowing based on
applicable borrowing base formulas. The line of
credit matures and is payable in full on April 20, 2004. The Bank has advised the Company that it
will not be renewing the line of credit. If the
Bank seeks to foreclose on the assets securing
the borrowings, it would have a material and
adverse effect on the Companys business.On October 31, 2003, the Company entered into
an account transfer and purchase agreement with
KBK Financial, Inc. (KBK). KBK advances funds
to the Company at a rate of 82.5% of the invoice
amount purchased by KBK. All of the Companys
invoices to U.S. customers are available for sale
under this agreement and may be offered to KBK on
a daily basis, subject to a $2,000,000 funding
limit. KBK can accept or reject offered invoices
and is not obligated to purchase any invoices.
The KBK agreement expires in October 2005,
subject to cancellation by either party upon 30
days notice. The initial and a subsequent funding
from KBK was used to fund the partial paydowns on
the Bank line of credit. Financial covenants
under the KBK agreement require the Companys
U.S. operations to meet a minimum current ratio
and tangible net worth. As of December 31,
2003, the Company was not in compliance with the
tangible net worth covenant under the KBK
agreement. However, KBK has waived compliance
with the financial covenant as of December 31,
2003. Additionally, the Company may not meet its
financial covenants in future periods unless its
results of operations
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS substantially improve. As of December 31, 2003,
KBK had paid funds on $1,433,000 of purchased invoices, subject to
a $2,000,000 funding limit.The Companys foreign subsidiaries also have
various lines of credit available for their
operations. At December 31, 2003, an aggregate of
$1,257,000 was outstanding under these lines of
credit and $854,000 was available for borrowing
under these agreements. Although these lines of credit mature during
2004, the Company believes that the lines will be renewed on
substantially the same terms.The Company has, in a significant number of recent
quarters violated one or more of the required
financial covenants, and anticipates that it may
continue to violate such financial covenants in
future quarters if its results of operations do not
substantially improve. While there can be no
assurance, the Company believes that its funding
sources will continue to waive such financial
covenant violations during future periods. If the
Companys lenders dont waive such future covenant
violations, and seek to foreclose on the assets
securing the borrowings, it would have a material
and adverse effect on the Companys business.The Company believes that internally generated cash
flow from operations combined with funds available
under the KBK agreement and its subsidiaries lines
of credit, will be sufficient to meet its financial
obligations for the next twelve months.
Additionally, the Companys plans for 2004 and
beyond include a gradual increase in sales,
reductions in inventories, and continuing cost
reductions, all designed to enhance cash flow from
operations and liquidity. However, the Company is
continuing to incur losses and can offer no
assurance of returning to profitability. The
Companys lessor, RSB Holdings (a related party) may
loan funds to the Company through borrowing against
its equity in the Companys corporate facility. The
Company is also considering selling debt or equity
securities, including shares issuable upon the
exercise of the warrants issued in the Warrant
Dividend, in order to meet current and future
working capital requirements or to fund future
acquisitions. There can be no assurance, however,
that such debt or equity financing would be
available to the Company on favorable terms or at
all. If the Company is unable to generate sufficient
cash flow from operations or in some other fashion,
its operations and financial position will be
materially and adversely affected.The Companys recurring
losses, working capital deficit, failure to maintain compliance with
the financial covenants of its financing arrangements and maturity
during 2004 of its lines of credit with financial institutions raise
substantial doubt about its ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.2.
ACQUISITIONS AND DIVESTITURES
    
    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.
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
 Principal assets and liabilities acquired
approximated the following (in thousands): Current assets
    
    $
    1,700Property, plant and equipment
    
    
    130Intangible assets
    
    
    532Total assets
    
    $
    2,362Current liabilities
    
    
    1,296Net 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 expected 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. The accompanying consolidated financial
statements include the results of operations of
the acquired business since the date of
acquisition. The following unaudited pro forma
information presents the results of operations of
the Company as if the Intelek acquisition had
occurred on January 1 of the year immediately
prior to the actual purchase date. (in thousands,
except per share amounts): YEAR ENDED DECEMBER 31,
    
    2001Pro Forma net sales
    
    $
    34,916Pro Forma net (loss)
    
    
    (3,978
    )Pro Forma net (loss) per common share
    
    $
    (.99
    )Pro Forma net (loss) per common share  assuming dilution
    
    $
    (.99
    )
 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. At December 31, 2003,
based on the recent historical trends of the
financial results of the former subsidiary and a
present value analysis of projected undiscounted
cash flows from expected future note payments,
the Company determined that the carrying value of
the note receivable may not be fully recoverable.
Accordingly, an impairment of $381,000 was
recorded against this note. 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
Accounting for the Impairment of Long-Lived
Assets and for Long-lived Assets to Be Disposed
Of, 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
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   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.
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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 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, 2003 and 2002 and did not record any
goodwill impairment. As of December 31, 2003, the Company has approximately
$643,000 of goodwill arising from prior years
acquisitions of Lanse and Intelek, both of which
reported net income in 2003. 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, net (loss) income and (loss)
earnings per common share would have been as follows
(in thousands, except per share amounts): 2001Net (loss) income as reported
    
    $
    (4,214
    )Add back: Goodwill amortization
    
    
    93Adjusted net (loss) income
    
    $
    (4,121
    )Earnings (loss) per common share as reported
    
    $
    (1.05
    )Add back: goodwill amortization
    
    
    .03Adjusted earnings (loss) per common share
    
    $
    (1.02
    )Diluted earnings (loss) per common share as reported
    
    $
    (1.05
    )Add back: goodwill amortization
    
    
    .03Adjusted diluted earnings (loss) per common share
    
    $
    (1.02
    )
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. PROPERTY AND EQUIPMENT
    
    Property and equipment consists of the following (in thousands):
 DECEMBER 31,
    
    2003
    
    2002Land and buildings
    
    $
    143
    
    
    $
    110Leasehold improvements
    
    
    326
    
    
    
    390Capital leases
    
    
    141
    
    
    
    63Office equipment
    
    
    970
    
    
    
    931Machinery and equipment
    
    
    389
    
    
    
    355Furniture and fixtures
    
    
    212
    
    
    
    212Vehicles
    
    
    98
    
    
    
    982,279
    
    
    
    2,159Less: accumulated depreciation and amortization
    
    
    1,744
    
    
    
    1,513$
    535
    
    
    $
    646
 4. LINES OF CREDIT AND OTHER FINANCING ARRANGEMENTS Lines of credit are comprised of the following (dollar amounts in
thousands): 2003
    
    2002Prime + 7% (11.00% at December 31, 2003) line of
credit with a U.S. financial institution in the
maximum amount of $631 at December 31, 2003 and
$1,900 at December 31, 2002, due April 20, 2004,
collateralized by all U.S. assets except certain
accounts receivable; guaranteed by the Companys
principal shareholders
    
    $
    631
    
    
    $
    1,893Variable rate, at the financial institutions quoted
rate, (5.25% at December 31, 2003) lines of credit
with two Czech Republic financial institutions in the
maximum amount of $952 (reduced to $789 on January
31, 2004), due November 2004 collateralized by all
assets of the Companys Czech Republic subsidiary;
guaranteed by one of the Companys German
subsidiaries
    
    
    421
    
    
    
    540Variable rate, at the financial institutions quoted
rate, (9.00% - 10.97% at December 31, 2003) lines of
credit with two German financial institutions in the
maximum amount of $143, due December, 2004,
collateralized by all assets of the Companys German
subsidiaries
    
    
    52
    
    
    
    19Variable rate, at the financial institutions quoted
rate, (6.70% at December 31, 2003) line of credit
with a Norwegian financial institution in the maximum
amount of $671, due March 31, 2004 collateralized by
all assets of the Companys Jotec subsidiary
    
    
    534
    
    
    
    Variable rate, at the financial institutions quoted
rate, (8.35% at December 31, 2003) line of credit
with a Swedish financial institution in the maximum
amount of $345, due June 2004 collateralized by all
assets of the Companys Swedish subsidiary
    
    
    250
    
    
    
    5$
    1,888
    
    
    $
    2,457
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On October 31, 2003, the Company signed two agreements,
one an amendment with its U.S. financial institution
(Bank) to extend the maturity date on its $1.9
million U.S. based line of credit to April 20, 2004,
and an account transfer and purchase agreement with KBK
Financial, Inc. (KBK). The initial and a subsequent
funding from KBK was used to fund a permanent reduction
in the Companys line of credit with the Bank. The
initial funding under the KBK agreement was $1,220,000,
with $70,000 utilized to cover closing expenses and
$1,150,000 applied to the Banks line of credit. An
additional payment of $100,000 from proceeds of the KBK
agreement was made in December 2003, to permanently
reduce the available balance under the Banks line of
credit to $631,000 (which is due and payable on April
20, 2004). Borrowings from the Bank are secured by
liens on the Companys U.S. assets, including
non-factored accounts receivable and inventories. The Bank line of
credit is also guaranteed by the Companys principal
shareholders, who have pledged a portion of the shares
of the Companys common stock that they own to secure
their respective guarantees. The KBK factoring agreement is
guaranteed, on a limited basis, with respect to matters
related to the existence and validity of purchased
receivables, by the Companys principal shareholders.
Under the terms of the agreements, the Company is
required to comply with certain affirmative and
negative covenants and to maintain certain financial
benchmarks and ratios during future periods. As of
December 31, 2003, the Company was not in compliance
with the tangible net worth and leverage covenants
under the Banks line of credit and the current ratio
and tangible net worth covenants under the KBK
factoring agreement. However, the Bank and KBK have waived
compliance with the financial covenants as of December
31, 2003. Additionally, the Company may not meet its
financial covenants in future periods unless its
results of operations substantially improve.In connection with the most recent Bank line of credit
extension, the interest rate on the line of credit was
prime + 7% for the period between December 31, 2003 and
January 31, 2004, prime + 8% for the period between
February 1, 2004 and March 31, 2004 and will be prime +
9% for the period between April 1, 2004 and April 20,
2004. The Company is currently seeking new financing to
replace the remaining balance on the Banks line of
credit. However, while the Company expects to be able
to repay the remaining balance on the line of credit,
there can be no assurance that it will be able to do
so.The KBK agreement advances funds to the Company at a
rate of 82.5% of the invoice amount purchased by KBK.
The portion of the invoices not advanced to the Company
are recorded as a due from factor until the invoice is
paid by the customer, at which point the Company
receives the remaining proceeds, less fees. All of the
Companys invoices to U.S. customers are available for
sale under this agreement and may be offered to KBK on
a daily basis, subject to a $2,000,000 funding limit.
KBK can accept or reject offered invoices and is not
obligated to purchase any invoices. KBK exercises
control over incoming lockbox receipts to ensure that
cash received on purchased invoices is collected. The
KBK agreement contains fixed and variable discount rate
pricing components. The fixed discount is 0.8% of the
invoice amount and is payable at the time of funding.
The variable rate is KBKs base rate as established by
KBK from time to time (generally the prime rate), plus
2% per annum and is payable based on the number of days
from the sale of the invoice until collection. The
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreement is terminable by either party upon 30 days
notice and immediately by KBK upon default by the
Company. In the event of termination by the Company
prior to November 2005, a termination fee of up to
$40,000 may be due. The Bank and KBK have entered into
an intercreditor agreement governing their respective
priorities in the assets of the Company securing their
respective financings. Because funds advanced under
this facility are considered a sale of the particular
invoices sold, the Company reports funds advanced as a
reduction of accounts receivable in the Consolidated
Financial Statements.In connection with the KBK agreement, the Company
expensed a $40,000 cash fee and the $80,000 market value of the 100,000
shares of its common stock issued to
Newbridge Securities for services in connection with
that transaction.The Company will likely not meet its financial
covenants in future periods unless its results of
operations substantially improve. While there can be no
assurance, the Company expects that its lenders will
continue to waive covenant violations during future
periods. The Bank has advised that at this time it will
not renew the line of credit. 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 operating cost reductions,
combined with its lines of credit and the KBK
agreement, 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 (including amounts due on the currently
outstanding debt with the Bank) 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.
 5. LONG-TERM DEBT     
Long-term debt comprised the following (dollar amounts in thousands): 2003
    
    20028.5% capital leases, payable $5 monthly through August
2006
    
    
    116
    
    
    
    45Less current portion
    
    
    45
    
    
    
    34$
    71
    
    
    $
    11
 At December 31, 2003, scheduled maturities of long-term
debt, are (in thousands):
 2004
    
    $
    452005
    
    
    452006
    
    
    26$
    116
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. OPERATING SEGMENTS
    
    The Companys operations, consisting primarily of
sales of computer networking 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).
 WesternUnited States
    
    Europe
    
    Elimination
    
    TotalYear ended December 31, 2003:Sales to unaffiliated
customers
    
    $
    15,706
    
    
    $
    16,213
    
    
    $
    
    
    
    $
    31,919Transfers between
geographical areas
    
    
    2,337
    
    
    
    
    
    
    
    (2,337
    )
    
    
    Total sales
    
    
    18,043
    
    
    
    16,213
    
    
    
    (2,337
    )
    
    
    31,919Operating income (loss)
    
    
    (807
    )
    
    
    (1,735
    )
    
    
    60
    
    
    
    (2,482
    )Income (loss) before
income taxes
    
    
    (1,293
    )
    
    
    (1,467
    )
    
    
    60
    
    
    
    (2,700
    )Identifiable assets
    
    
    6,182
    
    
    
    8,109
    
    
    
    (1,463
    )
    
    
    12,828Year ended December 31, 2002:Sales to unaffiliated
customers
    
    $
    14,070
    
    
    $
    15,594
    
    
    $
    
    
    
    $
    29,664Transfers between
geographic areas
    
    
    2,081
    
    
    
    
    
    
    
    (2,081
    )
    
    
    Total sales
    
    
    16,151
    
    
    
    15,594
    
    
    
    (2,081
    )
    
    
    29,664Operating income
    
    
    (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
    )
    
    
    13,846Year ended December 31, 2001:Sales to unaffiliated
customers
    
    $
    17,048
    
    
    $
    13,135
    
    
    $
    
    
    
    $
    30,183Transfers between
geographic areas
    
    
    2,041
    
    
    
    
    
    
    
    (2,041
    )
    
    
    Total sales
    
    
    19,089
    
    
    
    13,135
    
    
    
    (2,041
    )
    
    
    30,183Operating income (loss)
    
    
    (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
 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,
2003, 2002 and 2001 approximated 65%, 63% and
59%, respectively, of consolidated revenues.No supplier accounted for more than 10% of
purchases in 2003, 2002 or 2001.Sales by the Companys United States business
segment to the exclusive distributor in Russia,
AESP-Russia, amounted to approximately 12% of net
sales for 2003, 10% of net sales for 2002 and 14%
of net sales for 2001.During the years ended December 31, 2003, 2002
and 2001, the Company recorded provisions for
inventory obsolescence for certain specific
inventory items in the U.S. and Western Europe to
reduce the
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

items to their estimated realizable value in the
following amounts (in thousands):


2003
    
    2002
    
    2001U.S.
    
    $
    
    
    
    $
    162
    
    
    $
    635Western Europe
    
    $
    210
    
    
    
    376
    
    
    
    494$
    210
    
    
    $
    538
    
    
    $
    1,129


7. 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 at
December 31, 2002. During the year ended December 31, 2003, the Company
sold its remaining 96,000 shares, realizing proceeds of $168,000 and
recording a realized gain of $39,000. A member of the Companys Board of
Directors is also a director of Focus.In December 2003, the Company entered into a license
agreement with an entity affiliated with one of
its directors. The license will permit the Company to use
battery restoration technology currently being
developed to revitalize used cell phone batteries
and other battery products and market the
restored batteries exclusively in the
southeastern United States and on a non-exclusive
basis worldwide.No upfront fees were paid with respect to
this license. However, the Company agreed:




| |  | To issue a ten year option to the licensor to
purchase 300,000 shares of our common stock at an
exercise price of $.90 (vesting 100,000 shares
once the production line is in place and
thereafter ratably over a four-year period),
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To purchase all of our battery requirements from the licensor for
cost plus 22%, and
|- |  | ------------------------------------------------------------------------------------



| |  | To pay a royalty of $.50 for each battery sold.
|- |  | -----------------------------------------------

In accordance with
EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with
Selling Goods or Services, the value of the
options will be determined on the measurement
date, which is the earlier of the commitment date
or the date at which the counterpartys performance is complete, neither
of which has occurred as of December 31, 2003. There can be no assurance that the licensors
technology will be commercially feasible or that
we can develop a profitable and cash flow
positive operation using the licensed technology.8. FINANCIAL INSTRUMENTS
    
    The carrying amounts of financial instruments
including accounts receivable, due from factor, 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.
 F-23




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9.
 COMMITMENTS
              AND
    CONTINGENCIES
    
    The Company has entered into employment agreements, expiring
in February 2005, with its two principal shareholders which include
minimum annual individual compensation for 2004 of $293,000 (voluntarily
reduced to a current salary of $198,000 for 2004) 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.The Company rents office space and warehouse
under non-cancelable leases. The minimum future
rental commitment for leases in effect at
December 31, 2003, including leases to related
parties, approximates the following (in
thousands):
 Years Ending December 31,
2004
    
    $
    5622005
    
    
    3072006
    
    
    2832007
    
    
    2832008
    
    
    283Thereafter
    
    
    826$
    2,544
 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.Rent expense in 2003, 2002 and 2001 aggregated
approximately $672,000, $651,000 and $497,000,
respectively, including $93,600, $93,600 and
$93,600 for the years 2003, 2002 and 2001,
respectively, paid to related parties.10. 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, 2003, 2002 and 2001 aggregated
$16,829, $29,479 and $45,263, respectively.
 F-24




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES
    
    The following are the components of income tax expense
(benefit), in thousands:
 Year Ended December 312003
    
    2002
    
    2001Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    (86
    )
    
    
    257
    
    
    
    72(86
    )
    
    
    257
    
    
    
    72Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    63
    
    
    
    (56
    )
    
    
    (57
    )63
    
    
    
    (56
    )
    
    
    (57
    )$
    (23
    )
    
    $
    201
    
    
    $
    15
 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 312003
    
    2002
    
    2001Tax (benefit) at the United States statutory rate
    
    $
    (918
    )
    
    $
    (711
    )
    
    $
    (1,428
    )State income tax (benefit) net of federal benefit
    
    
    (98
    )
    
    
    (76
    )
    
    
    (152
    )Differences in effective income tax rates of
other countries
    
    
    (53
    )
    
    
    118
    
    
    
    (171
    )Other permanent differences, net
    
    
    (41
    )
    
    
    (35
    )
    
    
    25Valuation allowance adjustment
    
    
    1,087
    
    
    
    905
    
    
    
    1,741Total
    
    $
    (23
    )
    
    $
    201
    
    
    $
    15
 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%.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):
 F-25




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2003
    
    2002Deferred Tax AssetsAllowance for doubtful accounts
    
    $
    130
    
    
    $
    91Inventory
    
    
    739
    
    
    
    653Net operating loss carry forward
    
    
    3,667
    
    
    
    2,764Depreciation
    
    
    86
    
    
    
    81Intangible assets
    
    
    684
    
    
    
    723Stock issued
in exchange for services
    
    
    321
    
    
    
    2915,627
    
    
    
    4,603Valuation allowance
    
    
    (5,546
    )
    
    
    (4,459
    )Total deferred tax asset, net
    
    $
    81
    
    
    $
    144
 Realization of substantially all of the Companys
deferred tax asset at December 31, 2003 is not
considered to be more likely than not and
accordingly a $5,546 valuation allowance has been
provided.As of December 31, 2003, the Company has
available net operating loss carryforwards of
approximately $10,000,000 principally for U.S.
purposes expiring from 2018 through 2023.
 12. COMMON STOCK
    
    In June 2003, the Company distributed to the holders of its
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). Warrants to purchase 5,984,000 shares were issued
in the Warrant Dividend. The Warrants are non-transferable. The
Warrant exercise period commenced on September 23, 2003, which is the date
following the date of effectiveness of a registration statement
registering the sale of the shares of common stock underlying the Warrants
and will continue for a period of one-year thereafter, unless the
Companys Board of Directors extends the period further. In March 2004 the
Company reduced the exercise price of the warrants from $2.50 per
share. The current exercise
price of the Warrants is as follows:
 Until June 15, 2004, the Warrants are
exercisable at an exercise
price of $1.25 per share, andThereafter, until September 23, 2004 (the
current expiration date of the warrants),
the Warrants are 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 to
repay the Bank on its line of credit, for general
working capital purposes or for acquisitions.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.
 F-26




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 vested 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 was 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, 2003,
all shares had vested in accordance with the
agreements.In connection with its initial public
offering in 1997, 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 vest seven years after the date of
grant (February 2004), 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-27




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. 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 ENDEDDECEMBER 31,
    
    2003
    
    2002
    
    2001Loss
    
    Shares
    
    Per-Share
    
    Loss
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    Amount(Loss) per common shareNet (Loss)
    
    $
    (2,677
    )
    
    
    5,947
    
    
    $
    (.45
    )
    
    $
    (2,291
    )
    
    
    4,686
    
    
    $
    (.49
    )
    
    $
    (4,214
    )
    
    
    4,028
    
    
    $
    (1.05
    )Preferred stock dividends
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) applicable to
common shareholders
    
    
    (2,689
    )
    
    
    5,947
    
    
    
    (.45
    )
    
    
    (2,291
    )
    
    
    4,686
    
    
    
    (.49
    )
    
    
    (4,214
    )
    
    
    4,028
    
    
    
    (1.05
    )Effect of Dilutive Securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) applicable to
common shareholders plus
assumed conversions
    
    $
    (2,689
    )
    
    
    5,947
    
    
    $
    (.45
    )
    
    $
    (2,291
    )
    
    
    4,686
    
    
    $
    (.49
    )
    
    $
    (4,214
    )
    
    
    4,028
    
    
    $
    (1.05
    )
 All 3,249,000, 2,711,000 and 2,290,000 stock
options outstanding at December 31, 2003, 2002
and 2001, respectively, are excluded for the
computation as they are anti-dilutive due to the
Companys losses.14. STOCK OPTIONS
    
    At December 31, 2003, the Company has two fixed stock
option plans and non-plan options which are described below. The Company
applies APB Opinion 25, Accounting for Stock Issued to Employees, as
amended by FASB Interpretation No. 44 Accounting for Certain Transactions
involving Stock Compensation (APB 25), 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 plans, 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-28




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##### Table of Contents



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 2001, 117,800 options exercisable at
$1.625, 19,000 options exercisable at $2.86 and
141,700 options exercisable at $1.65 were issued
to employees. These options vested 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 per share
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. In
2003, 149,900 options exercisable at $0.81 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, with a term of ten years.During 2003, the two principal shareholders, as
employees, received an aggregate of 150,000
options at an exercise price of $0.81 vesting
one-third upon the date of grant and one-third
each upon the next two anniversaries of the date
of grant, 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. During 2003, the Company granted options
to purchase 75,000 shares of its common stock at
an exercise price of $0.81 per share to its
directors vesting immediately with a term of ten
years.Pursuant to a License Agreement signed in
December 2003, the Company granted options to
purchase 300,000 shares of its common stock to
Daidone-Steffens LLC, at an exercise price of
$0.90 per share. The options vest over a five
year period, beginning on the date the licensed
technology is transferred to the Company and a
production line is installed. In accordance with
EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with
Selling Goods or Services, the value of the
options will be determined on the measurement
date, which is the earlier of the commitment date
or the date at which the
 F-29




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS counterpartys performance is complete, neither
of which has occurred as of December 31, 2003.A summary of the status of the Companys fixed
stock option plan and non-plan options as of
December 31, 2003, 2002 and 2001, and changes
during the years then ended is presented below
(in thousands, except exercise price per option):
 DECEMBER 31, 2003
    
    DECEMBER 31, 2002
    
    DECEMBER 31, 2001WEIGHTED AVERAGE
    
    WEIGHTED AVERAGE
    
    WEIGHTED AVERAGEEXERCISE
    
    EXERCISE
    
    EXERCISESHARES
    
    PRICE
    
    SHARES
    
    PRICE
    
    SHARES
    
    PRICEOutstanding at beginning of year
    
    
    2,414
    
    
    $
    1.44
    
    
    
    1,993
    
    
    $
    1.56
    
    
    
    1,648
    
    
    $
    1.53Granted
    
    
    375
    
    
    
    0.81
    
    
    
    475
    
    
    
    0.93
    
    
    
    504
    
    
    
    1.69Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    1.70Forfeited
    
    
    (137
    )
    
    
    1.79
    
    
    
    (54
    )
    
    
    1.72
    
    
    
    (147
    )
    
    
    1.53Outstanding at end of year
    
    
    2,652
    
    
    $
    1.33
    
    
    
    2,414
    
    
    $
    1.44
    
    
    
    1,993
    
    
    $
    1.56Options exercisable at year-end
    
    
    2,092
    
    
    $
    1.42
    
    
    
    1,969
    
    
    $
    1.41
    
    
    
    353
    
    
    $
    1.57Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    0.81
    
    
    
    
    
    
    $
    0.93
    
    
    
    
    
    
    $
    1.69
 The following table summarizes information about
fixed stock options and non-plan options
outstanding at December 31, 2003 (in thousands, except per share
amounts):
 Weighted-AverageRange of Average
    
    Number Outstanding
    
    Remaining
    
    Weighted-Average
    
    Number Exercisable
    
    Weighted-AverageExercise Price
    
    at 12/31/03
    
    Contractual Life
    
    Exercise Price
    
    at 12/31/03
    
    Exercise Price$0.81 - $1.08
    
    
    1,050
    
    
    
    8.73
    
    
    $
    0.91
    
    
    
    850
    
    
    $
    0.94$1.47 - $2.13
    
    
    1,602
    
    
    
    5.42
    
    
    $
    1.61
    
    
    
    1,242
    
    
    $
    1.64
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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Results for the quarterly periods in the years ended December 31, 2003 and
2002 are as follows: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except earnings per share)2003:Net Sales
    
    $
    8,103
    
    
    $
    7,401
    
    
    $
    7,706
    
    
    $
    8,709Total operating expenses (A)
    
    
    8,121
    
    
    
    8,076
    
    
    
    8,151
    
    
    
    10,053(Loss) from operations
    
    
    (18
    )
    
    
    (675
    )
    
    
    (445
    )
    
    
    (1,344
    )Net (Loss)
    
    
    (69
    )
    
    
    (499
    )
    
    
    (466
    )
    
    
    (1,643
    )Net (Loss) per share
    
    $
    (.01
    )
    
    $
    (.08
    )
    
    $
    (.08
    )
    
    $
    (.27
    )Diluted net (Loss) per share
    
    $
    (.01
    )
    
    $
    (.08
    )
    
    $
    (.08
    )
    
    $
    (.27
    )
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except earnings per share)2002:Net Sales
    
    $
    7,486
    
    
    $
    6,795
    
    
    $
    6,888
    
    
    $
    8,495Total operating expenses (B)
    
    
    7,416
    
    
    
    7,524
    
    
    
    7,681
    
    
    
    9,320Income (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
    )
 (A)
    
    During the fourth quarter of 2003, a provision of $210 was
recorded for inventory obsolescence and an accrual of $340 was
recorded for termination costs in regard to the former managing
director of the Companys Norwegian subsidiaries.(B)
    
    During the fourth quarter of 2002, a provision of $384 was recorded
for inventory obsolescence.
 16. TRANSITION DISCLOSURES FOR VARIABLE INTEREST ENTITIES  The Company is evaluating its interest in AESP Ukraine (Ukraine), an entity
created before February 1, 2003 that may be deemed a variable interest entity
under the provisions of Interpretation No. 46. Ukraine was a wholly-owned
subsidiary, which the Company sold to a thinly capitalized entity in January
2001. The Company is also considering whether RSB Holdings, Inc. (RSB), a
related party, is a variable interest entity. If the Company determines that either Ukraine or RSB (or both) is (are) a
variable interest entity, the Company may be the primary beneficiary
(as defined in Interpretation No. 46) of the respective entity(ies) and, as
such, may be required to consolidate the entity(ies) into its consolidated financial
statements as of March 31, 2004. The Company is currently evaluating the effect
that Interpretation No. 46 will have on its consolidated financial statements. F-31




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##### Table of Contents



SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2003
(In thousands) AdditionsBalance at
    
    charged tobeginning
    
    cost and
    
    
    
    
    
    
    
    
    
    Balance atDescription
    
    of year
    
    expenses
    
    Other
    
    Deductions
    
    end of yearAllowance for doubtful accounts receivable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (A
    )Year ended December 31,2003
    
    $
    297
    
    
    $
    70
    
    
    $
    
    
    
    $
    22
    
    
    $
    3452002
    
    
    233
    
    
    
    78
    
    
    
    
    
    
    
    14
    
    
    
    2972001
    
    
    125
    
    
    
    232
    
    
    
    
    
    
    
    124
    
    
    
    233Valuation allowance on deferred tax assets:Year ended December 31,2003
    
    $
    4,459
    
    
    $
    1,087
    
    
    $
    
    
    
    $
    
    
    
    $
    5,5462002
    
    
    3,554
    
    
    
    905
    
    
    
    
    
    
    
    
    
    
    
    4,4592001
    
    
    1,813
    
    
    
    1,741
    
    
    
    
    
    
    
    
    
    
    
    3,554Valuation
allowance for assets of business
transferred under contractual arrangement:Year ended December 31,2003
    
    $
    
    
    
    $
    381
    
    
    $
    
    
    
    $
    
    
    
    $
    3812002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (A)
    
    Represents accounts receivable written-off. F-32




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##### Table of Contents



EXHIBIT INDEX EXHIBIT
    
    DESCRIPTION10.30
    
    License Agreement dated December 31, 2003 by and between AESP,
Inc. and Daidone-Steffens LLC.21
    
    List of Subsidiaries23
    
    Consent of BDO Seidman, LLP31.1
    
    Certification of Slav Stein, President and
Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of John Wilkens, Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Slav Stein, President and
Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of John Wilkens, Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.