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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, 2004
Commission File No. 000-12739 AESP, INC. 
 (Exact name of registrant as specified in its charter) FLORIDA
    
    59-2327381(State or Other Jurisdiction of
Incorporation or Organization)
    
    (IRS Employer Identification No.)1810 N.E. 144th StreetNorth 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: Name of Each ExchangeTitle of Each Class
    
    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 The aggregate market value of the voting stock held by non-affiliates of the registrant, based
upon the closing bid price of the Companys common stock, $.001 par value per share (the Common
Stock) as of June 28, 2004 of $.33 per share (as reported on the NASDAQ SmallCap Market), was
approximately $1,498,722. There is no non-voting stock. The number of shares of the Companys Common Stock which were outstanding as of March 25, 2005
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
    
    
    3Item 1. Business
    
    
    3Item 2. Properties
    
    
    18Item 3. Legal Proceedings
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Part II
    
    
    20Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    20Item 6. Selected Financial Data
    
    
    21Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 7(a). Quantitative and Qualitative Disclosures about Market Risks
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    40Item 9(a). Controls and Procedures
    
    
    40Part III
    
    
    41Item 10. Directors and Executive Officers of the Registrant
    
    
    41Item 11. Executive Compensation
    
    
    44Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    49Item 13. Certain Relationships and Related Transactions
    
    
    51Item 14. Principal Accountant Fees and Services
    
    
    51Part IV
    
    
    52Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    52Agreement of Transfer of Ownership InterestAssumption of Guarantee for PaymentTermination Agreement/Slav SteinTermination Agreement/Roman BriskinFirst  Amendment to Account Transfer and Purchase AgreementSecond Amendment to Account Transfer and Purchase AgreementThird  Amendment to Account Transfer and Purchase AgreementFourth Amendment to Account Transfer and Purchase AgreementFirst Amendment to Loan AgreementTermination Agreement/Daidone-Steffens LLCTermination Agreement/Yuri BurshteinList of SubsidiariesSection 302 Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 Chief Executive Officer CertificationSection 906 Chief Financial Officer Certification
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Forward-looking statements Unless the context otherwise requires, references to AESP, Inc., AESP, 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:  
    our ability to refinance the Bendes and Chao term notes, which are currently due
October 27, 2005 and December 31, 2005, respectively,
    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 positive and profitable basis, which is
something we have not done in several years,
    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. distributes products through its two U.S. based businesses, Signamax Connectivity
Systems (Signamax) and Advanced Electronic Manufacturing (AEM). We also distribute our products
through exclusive distributors in Russia and the Ukraine. During 2004, we sold our Swedish and Norwegian distribution operations and closed down our
German based operations. With the sale of our Czech Republic subsidiary in March, 2005, we no
longer operate our Western Europe operating segment which principally distributed Signamax products
and other manufacturers product lines. The operations of our subsidiaries that formerly comprised
our Western Europe operating segment are reported as discontinued operations in our Consolidated
Financial Statements. 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. Recent Developments On April 7, 2005, we announced that we are going to delist our common stock under the
Securities Exchange Act of 1934. See Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities. Continuing Operations 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 sells two product lines, Network Connectivity products (active networking
line) and Premise Connectivity products (passive networking line). The Signamax Network Connectivityproduct line 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 Connectivityproduct line 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. 3




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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. 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. For our Signamax and AEM operations, 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 based on the requirements of our customers with respect
to products sold by our AEM Group. Our manufacturers are located primarily in the Czech Republic
and the Far East. We also assemble a small percentage of our products at our North Miami and
Pennsylvania facilities. 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. Discontinued Operations In 2004, we made a strategic decision to fundamentally change our method of doing business in
Europe. In light of continuing losses incurred by our European subsidiaries, we decided to exit our
ownership positions by disposing of these operations, either through a sale or a winddown of
operations. These subsidiaries sold their own branded and third party networking products, as well
as Signamax branded products in their primarily local markets. Going forward, it is our intention
to sign exclusive and non-exclusive distributor agreements with qualified European distributors to
sell our Signamax line of products. To date, we have signed several such agreements and we are
currently negotiating with additional distributor prospects. In May 2004, the management of Lanse AS, one of our Norwegian subsidiaries, informed us that
they intended to terminate their employment relationship with Lanse. Thereafter, we
entered into negotiations to sell Lanse to these managers. These negotiations were concluded
in 4




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July 2004 when Lanse signed an agreement to sell certain of its assets to a company jointly
owned by the former managers of Lanse and several of Lanses major vendors. The assets sold were
(1) a majority of Lanses inventory, with an original cost of approximately $157,000, sold at cost
with the proceeds required to be used to retire current accounts payable due to the vendors and (2)
the ownership of certain trade names sold for $237,000, payable $145,000 at closing in the form of
additional credits from the vendors, $48,000 in cash due in one year and the remainder, $44,000 in
cash due in two years. We are currently winding down the operations of Lanse, primarily through
collection of accounts receivable and payment of remaining liabilities. In July 2004, we determined that our German subsidiary, AESP GmbH, which has recorded losses
from operations for the last three years, most likely met the criteria for insolvency under German
law. In response, an attorney designated by the German government met with the management of AESP
GmbH and reviewed its financial position, specifically to assess its ability to pay bills when due
and the level of shareholders equity. On September 1, 2004, the German court adjudged AESP GmbH to
be insolvent and at that point, control of the assets and liabilities of AESP GmbH passed from us
to the attorney, acting on behalf of the German government. As such, we have ceased consolidating
AESP GmbH subsequent to August 31, 2004, due to our no longer controlling the entity. We have
accrued $260,000 in costs associated with this insolvency, primarily related to creditor claims,
bank debt and administration fees. While we anticipate that such
amount is sufficient to allow us to settle all outstanding claims with
the attorney (based on all currently available information), since the claims
process is still ongoing, there can be no assurance that the final
amount due and owing will not be higher. In August 2004, we signed an agreement with an unrelated third party to sell 100% of the
outstanding common stock in our other Norwegian subsidiary, Jotec AS, for a nominal sum. In
connection with this sale, we collected approximately $285,000 in overdue accounts receivable from
Jotec and were relieved of any further liability under Jotecs bank line of credit and its facility
lease, which had approximately seven years remaining. In October 2004, we signed an agreement to sell 100% of the outstanding common stock in our
Swedish subsidiary, AESP Sweden, for a nominal sum. In connection with this sale, we were relieved
of any liability under AESP Swedens bank line of credit. As a condition to the sale, we will not
collect approximately $130,000 in accounts receivable that AESP Sweden owed Jotec, which when paid
by AESP Sweden, was to be transferred to us by the new owners of Jotec. In September 2004, we decided to phase out the operations of our second German subsidiary,
Signamax GmbH, by transferring its customer base and sales operations, along with its inventory, to
the operations of our Czech Republic subsidiary, Intelek. We are currently winding down the
operations of Signamax GmbH, primarily through the collection of accounts receivable and the
payment of remaining liabilities. In March 2005, we completed negotiations that had begun in December 2004 by signing an
agreement to sell 100% of the outstanding common stock of our final European subsidiary, Intelek,
in the Czech Republic. The stock was sold to a company controlled by the former owner of Intelek,
who has served as its managing director since its acquisition in 2001. The stock was sold for
$940,000. The initial payment of $375,000 was paid on March 23, 2005 and the balance is primarily
due in eleven quarterly installments commencing July 1, 2005. 5




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As a result of these transactions, we have reflected the operating results of Lanse, AESP
GmbH, Jotec, AESP Sweden, Signamax GmbH and Intelek as well as the estimated losses on disposal, as
discontinued operations in the Consolidated Financial Statements for all periods presented. 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 outstanding balances of our Bendes and Chao term notes are due
shortly and our auditors have placed a going concern modification on our consolidated financial
statements at December 31, 2004 We had net losses of $3.6 million, $2.7 million and $2.3 million in 2004, 2003 and 2002,
respectively. We also have no working capital and a current ratio of .76 at December 31, 2004.
Further, our term note in the amount of $631,000 due to Bendes Investment Ltd. (Bendes) is due on
October 27, 2005 (a six-month extension to October 27, 2005 was signed on April 28, 2005) and our
term note in the amount of $1,493,000 due to Chao Jui Hsia (Chao) is due December 31, 2005. We
do not currently have the funding available to repay the Bendes and Chao term loans. Our failure to
repay Bendes and Chao (or to obtain an extensions of the maturity dates of the term notes) or to
have sufficient working capital to operate our business could have a material adverse impact on us.
Our independent certified public accountants have included an explanatory paragraph in their report
with respect to our consolidated financial statements at December 31, 2004. 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 2005 of our
outstanding debt 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 and Analysis 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 6




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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 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. 7




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Over the past few years, we have progressively expanded our supplier base. Presently, we work with
approximately 75 suppliers. For the years ended December 31, 2004, 2003 and 2002, three suppliers
accounted for greater than 10% of consolidated cost of sales: 2004
    
    
    2003
    
    
    2002Czech Republic  electrical
cabinets
    
    
    17.0
    %
    
    
    11.0
    %
    
    
    Taiwan  Signamax network products
    
    
    10.5
    %
    
    
    11.3
    %
    
    
    Taiwan  Signamax premise products
    
    
    
    
    
    
    15.3
    %
    
    
    14.5
    %
 We do not enter into supply or requirements contracts with our suppliers. We believe that
purchase orders, compared 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 delaying delivery times. We utilize foreign suppliers and manufacturers which may increase our costs Most of the components we utilize in the manufacture and assembly of our products are obtained
from foreign countries and a majority of our products are manufactured or assembled in foreign
countries, such as the Czech Republic, the Republic of 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. See Note 4 of Notes to Consolidated Financial Statements. 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 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. 8




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We are dependent on significant customers, the loss of which could decrease revenues Our exclusive distributor in Russia, AESP Russia, accounted for 28% of our net sales for 2004,

24% of our net sales in 2003 and 20% of our net sales in 2002. We 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 64%, 65% and 64%, 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, 2004. 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 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 $366,000 in 2004, $0
in 2003 and $161,000 in 2002 primarily due to a decrease in demand for certain of our Signamax
products because of rapid technological changes in the industry as well as eroding market prices.
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. 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, the key competitive factors are service and
value and 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 seek to compete favorably on factors such as quality, product
availability and design protection. While our competitors are largely fragmented throughout
different sectors of the computer connectivity industry, many of our competitors have greater
assets and possess greater financial and personnel resources than
we do. Some of our 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
affects our business and will likely continue to affect our business and financial condition in the
future. A variety of other potential actions by our competitors, including 9




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increased promotion and
accelerated introduction of new or enhanced products, could also have a material adverse effect on
our results of operations. There can be no assurance that we can compete successfully in our
markets. 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 stock 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 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 has been delisted from the Nasdaq SmallCap Market and we intend to delist under the
Securities Exchange Act of 1934 In August 2004, our common stock was delisted from the Nasdaq SmallCap Market. Since then, our
common stock has traded on the Over-the Counter Bulletin Board maintained by the N.A.S.D.
(OTCBB). We have recently announced our intent to delist our common stock 10




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under the Securities
Exchange Act of 1934. Once we are delisted, which we expect will occur in May 2005, and we are no
longer filing periodic and current reports with the S.E.C., our common stock will no longer be
quoted on the OTCBB. While our common stock may continue to be quoted on the pink sheets, there can
be no assurance that any trading market will continue for our common stock after delisting. If our common stock is deemed a penny stock, its liquidity will be adversely affected During the past year, the market price for our common stock has remained below $1.00 per
share, thereby causing our common stock to be deemed penny stock. As a penny stock, our shares are
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 any 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. These penny stock regulations can have an adverse effect on
the liquidity of our common stock. 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. The ability to issue preferred stock 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 rely
on our 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. 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. 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 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 Republic of China 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 are able to
terminate the arrangement on short notice. However, a principal of the trading company, Chao Jui
Hsia, has in the past advanced payments on our behalf to one
or more of our vendors, and we recently executed a $1.5 million note to Ms. Chao in that
regard. See Note 4 of Notes to Consolidated Financial Statements. We also assemble a small
percentage of our products at our North Miami, Florida and Pennsylvania facilities. 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 past few years, we have progressively expanded our supplier base. Presently, we work with
approximately 75 suppliers. For the years ended December 31, 2004, 2003 and 2002, three suppliers
accounted for greater than 10% of consolidated cost of sales: 2004
    
    
    2003
    
    
    2002Czech Republic  electrical
cabinets
    
    
    17.0
    %
    
    
    11.0
    %
    
    
    Taiwan  Signamax network products
    
    
    10.5
    %
    
    
    11.3
    %
    
    
    Taiwan  Signamax premise products
    
    
    
    
    
    
    15.3
    %
    
    
    14.5
    %
 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 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 14




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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. At this
final stage of quality control, we test a certain percentage of each shipment of products we
receive to ensure the products meet our quality standards. In 1998, we were certified as being in compliance with the ISO 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 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 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. 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 28% of our net sales
for 2004, 24% of our net sales for 2003 and 20% of our net sales for 2002. 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 64%, 65% and 64% of our net sales for the years ended
December 31, 2004, 2003, and 2002, respectively. Other than AESP-Russia, no customer accounted for
more than 10% of our net sales in 2004, 2003 or 2002. International sales are a significant portion
of our consolidated worldwide sales. We believe that due to the nature 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 customers during any
particular period could have a material adverse impact on our future business and results of
operations. 15




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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. 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,
the key competitive factors are service and value and 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. 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
seek to compete on factors such as quality, product availability and design protection. While our
competitors are largely fragmented throughout different sectors of our industries, many of our
competitors have greater assets and possess greater financial and personnel resources than we do.
Some of our 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 affects our business and financial condition in
the future. 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. There can be no assurance that we can compete successfully in our
markets. See Risk Factors Related to Our Operations. 16




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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., Europe and 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. Corporate Organization Our operations are divided into five departments: (1) the Sales and Marketing Department, (2)
the International Sales Department, (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 to our exclusive distributors in Europe, Russia and
Ukraine. Employees As of December 31, 2004, we employed personnel at the following locations: Location
    
    Number of PersonnelNorth Miami, U.S.
    
    29Pennsylvania, U.S.
    
    3Czech Republic
    
    4072
 Company wide, 16 employees work in administration/accounting, 28 employees work in sales and
marketing, and 28 employees work in operations. None of our employees are covered by collective
bargaining agreements. We believe that our relationship with our employees is good. Our Czech Republic operations were sold in March 2005. See Note 2 of Notes to Consolidated
Financial Statements. Government Regulation We are not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and there are currently few laws or regulations
directly applicable to networking and computer connectivity products. There can be no assurance 17




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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 permitted us to use battery
restoration technology 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 fees were ever paid with respect to
this license. To date, the licensor has been unable to develop its technology to a point where it is
commercially feasible. As a result, on May 3, 2005, we signed an
agreement with Daidone-Steffens terminating this license agreement.
In that regard, the ten year option that we granted to the licensor to purchase 300,000 shares of our common stock
at an exercise price of $.90 (vesting 100,000 shares once a production line was in place and
thereafter ratably over a four-year period) has been cancelled. 
 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, 2004. 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. See Note 9 of Notes to Consolidated Financial Statements for
information regarding the financial terms of our leases. squarefacility description
    
    location
    
    footageCorporate Headquarters,
Product Assembly and Central
Warehouse
    
    North Miami, FL
    
    
    27,000Sales Office and Warehouse
    
    Brno, Czech Republic
    
    
    10,650Sales Office and Manufacturing
    
    Broomall, Pennsylvania
    
    
    5,085Sales Office and Warehouse
    
    Prague, Czech Republic
    
    
    4,500Sales Office
    
    Raubling, Germany
    
    
    1,100
 The leases for the two Czech Republic locations were transferred to the buyer as part of the sale
of the Czech Republic operations in March 2005. The lease on the German location, which is in the
name of Signamax GmbH, expires on June 30, 2005 and will not be renewed. 18




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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 2004
fiscal year. 19




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PART II 
 ITEM 5.MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES Market for Common Stock Our common stock has been quoted on the OTCBB since August 19, 2004 under the symbol AESP.
Previously, since February 12, 1997, our stock was quoted on the NASDAQ Small Cap Market. 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 OTCBB and NASDAQ: common stockhigh
    
    
    low2003First Quarter
    
    $
    1.48
    
    
    $
    0.50Second Quarter
    
    
    1.03
    
    
    
    0.50Third Quarter
    
    
    0.97
    
    
    
    0.55Fourth Quarter
    
    
    1.47
    
    
    
    0.702004First Quarter
    
    
    1.38
    
    
    
    0.82Second Quarter
    
    
    0.95
    
    
    
    0.22Third Quarter
    
    
    0.38
    
    
    
    0.08Fourth Quarter
    
    
    0.40
    
    
    
    0.16
 At March 29, 2005, the number of holders of record of our common stock was 63. Intent to Deregister Common Stock On April 7, 2005, we announced that we intend to deregister our common stock under the
Securities Exchange Act of 1934. We are eligible to deregister because we have less than 300
stockholders of record. We
expect to file a Form 15 with the S.E.C. on or about May 13, 2005. Upon the filing of the
Form 15, our obligation to file reports, including Forms 10-K, 10-Q and 8-K will immediately be
suspended. We expect that the deregistration of our common stock will be effective 90 days after we
file the Form 15 with the S.E.C. We anticipate that once we file the Form 15, our common stock will no longer be quoted on the
OTCBB. While we expect that our common stock will continue to be quoted on the pink sheets after we
deregister, there can be no assurance of this fact. There can also be no assurance 20




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as to whether
any brokerage firms will make a market in our common stock after the deregistration. We therefore
cannot assure you as to whether there will be any market for our common stock after we deregister. No Dividends 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 imposed on us by our
financing arrangements, there are no restrictions that limit our ability to pay dividends. 
 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 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except per share data)STATEMENT OF OPERATIONS DATA:Net Sales
    
    $
    15,755
    
    
    $
    15,706
    
    
    $
    14,069
    
    
    $
    17,049
    
    
    $
    17,396(Loss) from continuing operations
    
    
    (1,653
    )
    
    
    (1,258
    )
    
    
    (1,627
    )
    
    
    (2,665
    )
    
    
    (47
    )(LOSS) FROM CONTINUING OPERATIONS PER SHARE:Basic
    
    $
    (.27
    )
    
    $
    (.21
    )
    
    $
    (.35
    )
    
    $
    (.66
    )
    
    $
    (.01
    )Diluted
    
    
    (.27
    )
    
    
    (.21
    )
    
    
    (.35
    )
    
    
    (.66
    )
    
    
    (.01
    )
 As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)BALANCE SHEET DATA:Working capital (deficit)
    
    
    (1,965
    )
    
    
    (17
    )
    
    
    1,740
    
    
    
    2,556
    
    
    
    4,959Total assets
    
    
    7,227
    
    
    
    12,828
    
    
    
    13,846
    
    
    
    14,243
    
    
    
    15,426Long term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    89
 21




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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 loss from continuing operations for the 2004, 2003 and 2002 fiscal years was $1.7 million,
$1.3 million and $1.6 million, respectively. Further, our net (loss) for the 2004, 2003 and 2002
fiscal years was $3.6 million, $2.7 million and $2.3 million, respectively. We cannot assure you
that we will achieve or sustain profitable operations in the future. Our independent registered public accounting firm has included an explanatory paragraph in
their report with respect to our consolidated financial statements at December 31, 2004. 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 2005 of our debt 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, in the past, raised working capital through private
placements of our securities. We owe $631,000 under a term promissory note which is due on October
27, 2005. We also owe $1,493,000 to Michelle Chao under a promissory note relating to our trade
credit, which is due on December 31, 2005. We are continuing to incur losses and we cannot assure
you as to if or when our business will become cash flow positive and profitable. We cannot assure
you that either promissory note will be extended. We believe that our cash flow from operations and amounts made available under our factoring
agreement with Marquette Commercial Finance, as described below, will be sufficient to fund our
current operations for the next twelve months, assuming we can successfully extend the maturity
date of the notes referred to above. If we are unable to extend the maturity date of our debt (or
otherwise refinance that debt in an acceptable manner), our financial condition and results of
operations will be materially and adversely affected. 22




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Our financing agreement with Marquette Financial and our term note due to Bendes impose
restrictions and we are not in compliance with some of the restrictions; Our agreement with
Marquette Financial could be terminated if waivers of financial covenants are not obtained On October 31, 2003, we signed an agreement with Marquette Commercial
Finance, Inc. (formerly KBK Financial, Inc.) (Marquette). The funding from Marquette was used to
fund a permanent reduction in our former line of credit with a financial institution. The remaining
balance under the bank line of credit was paid in full on April 26, 2004 through the proceeds
received under a term loan agreement with Bendes Investment Ltd. (Bendes). See Note 4 of Notes to
Consolidated Financial Statements for information regarding the terms of these agreements. Under
the Marquette factoring agreement, we sell Marquette, without recourse, accounts receivable and
obtain funding (up to $2 million at any one time) for those receivables. At December 31, 2004, we
had $871,000 of uncollected receivables outstanding against payments to us of $714,000 from
Marquette. The Marquette 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. The Bendes loan is guaranteed by our principal shareholders. We are obligated to meet certain affirmative, negative and financial covenants under our
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 any change of control including
mergers, any disposition of pledged collateral, any additional indebtedness for borrowed money or
any acquisitions over a certain limit, any liens on assets or any loan guarantees and any transfers
of assets or loans and advances to an affiliate that would have a material adverse effect.
Financial covenants under the Marquette agreement require our 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 covenants at December 31,
2004. However, we were in violation at December 31, 2004 of the negative covenant regarding
prohibition on additional indebtedness under the Bendes note, as it related to the Chao note signed
in November 2004. In April 2005, in conjunction with the First Amendment under the Bendes note,
Bendes waived the covenant violation and consented to the Chao note. In addition to the waiver, the First Amendment also extended the due
date of the Bendes note to October 27, 2005. Further, we were in violation at December 31, 2004 of
the minimum current ratio and tangible net worth covenants under the Marquette agreement, and such
violations have been waived by Marquette. 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. 23




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Our independent registered public accounting firm has included an explanatory paragraph in
their report with respect to our consolidated financial statements at December 31, 2004. 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 maturity during
2005 of our Bendes and Chao loans raise substantial doubt about our ability to continue as a going
concern. 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, 2004, 2003 and 2002, international sales from continuing
operations accounted for approximately 34%, 28% and 23%, respectively, of our revenues. Primarily
all of these sales were to our Russian and Ukrainian distributors. We anticipate that international
sales to our Russian and Ukrainian distributors 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, regulatory requirements, political and economic changes and
disruptions, geopolitical disputes and war, transportation delays 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 could negatively affect our results We are exposed to market risk from changes in interest rates. Our earnings are affected by changes in short-term interest rates as a result of our financing
agreements. If short-term interest rates averaged 2% more in 2004, 2003 and 2002, our interest
expense and loss before taxes would have increased by $36,000, $30,000 and $34,000, respectively. 24




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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. financing agreements contain 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 25




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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. However, 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 Due to the sale of our Czech Republic subsidiary, Intelek in the first quarter of 2005, and
the sale of certain assets of our Norwegian subsidiary, Lanse in 2004, (both recorded as
discontinued operations in 2004), we recorded writedowns in 2004 of the goodwill associated with
these two entities. As a result, at December 31, 2004, we only carry goodwill of $109,000 which is
related entirely to Intelek. This amount is included in Non-current Assets of 26




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Discontinued
Operations on our Consolidated Balance Sheets. See Note 2 of Notes to our Consolidated Financial
Statements for additional information regarding our discontinued operations. Excluding goodwill, we have no intangible assets deemed to have indefinite lives. Related Party Transactions We lease our principal executive offices and one of our U.S. warehouse facilities 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 have determined that RSB is not 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. 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. 27




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RESULTS OF OPERATIONS As discussed in Note 2 to Notes to our Consolidated Financial Statements, our European
subsidiaries, Jotec and Lanse in Norway, AESP Sweden in Sweden, AESP GmbH and Signamax GmbH in
Germany and Intelek in the Czech Republic have been accounted for as discontinued operations as of
December 31, 2004. Accordingly, the results of operations for each of the periods presented have
been restated to reflect the results of operations of these entities as discontinued operations. As
a result, we operate in one geographic segment, the United States. The following discussion should
be read in conjunction with our consolidated financial statements and notes thereto. Year Ended December 31, 2004 Compared To Year Ended December 31, 2003 For the year ended December 31, 2004, we recorded net sales of $15.8 million, compared to net
sales of $15.7 million for the year ended December 31, 2003, an increase of $.1 million or
approximately 1%. The following table breaks out the U.S. sales (in thousands) between our two
principal products, Signamax and AEM, along with our U.S. based sales to our exclusive distributors
in Russia and the Ukraine. 2004
    
    
    2003
    
    
    Percent ChangeSignamax
    
    $
    5,383
    
    
    $
    5,992
    
    
    
    -10.2
    %AEM
    
    
    5,029
    
    
    
    5,283
    
    
    
    -4.8
    %Russia/Ukraine
    
    
    5,343
    
    
    
    4,431
    
    
    
    20.6
    %Total
    
    $
    15,755
    
    
    $
    15,706
    
    
    
    0.3
    %
 U.S. sales of our Signamax product line dropped 10% from 2003 to 2004 due to the loss of two major
customers, one in mid 2003, the other in late 2004. Total sales to these two customers were $1.1
million in 2003 and $376,000 in 2004. Our Signamax sales staff is working to overcome the loss of
these two customers through marketing efforts to increase sales with existing customers and sign up
new customers. Our AEM group posted lower sales in 2004 due primarily to pricing pressures from
several customers where sales prices were lowered to retain the business, while at the same time we
encountered price increases from several key vendors due to higher raw material prices in our
industry. The difficulties experienced in our Signamax and AEM lines were offset by significant
sales increases to our distributors in Russia and the Ukraine. Both Eastern European economies
strengthened in 2004 and and each distributor increased their own sales by greater than 15%,
leading to a sharp increase in orders. Cost of sales for the year ended December 31, 2004, increased to $12.2 million, compared to
cost of sales of $11.2 million for the year ended December 31, 2003. In addition, our gross profit
percentage fell in 2004 to 22.8% compared to 28.9% in the prior year. The decrease in gross profit
percent in 2004 was due to a combination of several factors. We recorded a provision for inventory
impairment of $366,000 in 2004. During 2004, we experienced a relatively sudden and significant
decrease in demand for certain of our products caused by an accelerating technology environment and
we encountered an inventory overstock situation on certain of our newer products where expected
demand did not materialize. These provisions were calculated based on the carrying value of
specific inventory items compared to 28




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historical and estimated sales volumes and sales prices. Such
an impairment charge was not required in 2003. Further, as mentioned above, both our Signamax and
AEM lines were impacted by vendor price increases on a wide variety of products, due to significant
worldwide price increases on key raw materials, such as copper, steel and petroleum used in plastic
parts. Additionally, we have experienced an increase in freight costs due to significantly higher
oil prices. Due to the highly competitive nature of many of our markets, we have not been able to
fully pass along these higher costs to our customers. If these raw material costs continue to
increase in 2005, it could have an adverse effect on our cost of sales and therefore, our gross
profit. Selling, general and administrative (S,G & A) expenses declined to $4.8 million for the year
ended December 31, 2004, compared to $5.3 million for the year ended December 31, 2003.
The decrease in U.S. expenses was primarily due to personnel and other cost reductions instituted
in July 2003 and thereafter, 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 reduced our U.S. overhead by approximately $500,000 per annum.
Additionally, included in S,G & A expenses in 2003 were approximately $144,000 of closing costs and
fees on our October 31, 2003 Commercebank and Marquette financing agreements. We are continuing to
closely monitor our S,G & A expenses and may make additional headcount reductions if sales levels
and profitability 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. As a result of the above factors, the loss from operations for the year ended December 31,
2004 was $1,168,000, compared to a loss from operations of $774,000 for the year ended December 31,
2003, an increase in the loss from operations of $394,000. Interest expense increased from $152,000 in 2003 to $272,000 in 2004. The increase was due to
a rise in the average interest rate from 6.92% in 2003 to approximately 13.5% in 2004 on the
Commercebank line of credit and the Bendes loan, along with the upfront fee of 1.25% and an
interest rate of 7% on the Marquette financing arrangement. See Note 4 of Notes to Consolidated
Financial Statements for further information on these financing agreements. Based on our quarterly review of the note receivable from the buyer of our former wholly-owned
subsidiary, AESP Ukraine, we believe it is probable that the note is not collectible. Our
assessment of the notes collectibility is based, among other things, on our review of the buyers
financial statements, collections received in 2004 and representations from
the buyer on his financial wherewithal. Accordingly, we recorded a $222,000 impairment in 2004 and
terminated the note. See Note 15 of Notes to Consolidated Financial Statements. In exchange for
terminating the balance of the loan, we agreed to a higher markup on our sales to this distributor
beginning in 2005. Based on the termination of the note and its restrictive covenants, this
distributor is no longer considered to be a variable interest entity under the provisions of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (Revised December 2003). The loss from continuing operations before income taxes rose in 2004 to $1,653,000, compared
to $1,258,000 in 2003, as a result of the factors mentioned above. 29




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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 effective tax rate in future periods will be impacted by our
profitability 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 loss of $1.7 million from continuing
operations for the year ended December 31, 2004, compared to a loss of $1.3 million from continuing
operations for the year ended December 31, 2003. For the year ended December 31, 2004, the loss
per common share from continuing operations, both basic and diluted, was $.27, compared to a basic
and diluted loss per common share from continuing operations of $.21 for the year ended December
31, 2003. Weighted average shares outstanding (basic and diluted) were 6,144,000 in 2004 and
5,947,000 in 2003. The loss from discontinued operations, net of tax, was $811,000 for 2004 and $1,419,000 for
2003. The following table details these results (in thousands) by subsidiary location: 2004
    
    
    2003
    
    
    DifferenceCzech Rep.
    
    $
    (149
    )
    
    $
    134
    
    
    
    (283
    )Norway
    
    
    (108
    )
    
    
    (1,126
    )
    
    
    1,018Germany
    
    
    (479
    )
    
    
    (224
    )
    
    
    (255
    )Sweden
    
    
    (75
    )
    
    
    (203
    )
    
    
    128Total
    
    $
    (811
    )
    
    $
    (1,419
    )
    
    $
    608
 The Czech Republic incurred a loss in 2004 due to higher S, G & A expenses, primarily in marketing
through trade shows and catalogs, along with bad debt writedowns involving several customers.
Norway posted a significantly lower loss due to several factors. First, they continued to incur
losses in 2004, however, with the sales of Lanses assets in July and the sale of Jotec in August
2004, they did not operate for the entire year. Secondly, expenses in 2003 were increased by
severance payments made to and accrued for the former Norwegian managing director of approximately
$490,000. This case was settled in 2004 for an amount lower than expected. As a result,
approximately $250,000 of the accrual set up in 2003 was credited to operations in 2004. The
increased losses in Germany were due primarily to the losses incurred by Signamax GmbH, which began
operations in early 2004 and never reached sales levels that would cover their
expenses. Swedens lower losses were due to expense cuts instituted in late 2003, primarily in the
areas of facility costs and personnel. Further, although Sweden continued to incur losses in 2004,
like Norway, they only operated for part of 2004. The loss on disposal of discontinued operations, net of tax, was $1,157,000 for 2004 and $0 for
2003. The loss on disposal was primarily due to (1) a disposal loss recorded on the sale
of Jotec of approximately $140,000, (2) the write-off of $130,000 in accounts receivable related to
amounts due from Jotec, (3) accruals of $20,000 to cover attorneys fees, (4) reserves and accruals
of $200,000 recorded on Signamax GmbH due to the wind-down of their operations, (5) a $119,000
writedown to its net realizable value of goodwill associated with Lanse, (6) $260,000 30




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in fees and
payments to creditors in the AESP GmbH insolvency and (7) a $146,000 writedown to its net
realizable value of goodwill associated with Intelek. Year Ended December 31, 2003 Compared To Year Ended December 31, 2002 For the year ended December 31, 2003, we recorded net sales of $15.7 million, compared to net
sales of $14.1 million for the year ended December 31, 2002, an increase of $1.6 million or
approximately 12%. The following table breaks out the U.S. sales (in thousands) between our two
principal products, Signamax and AEM, along with our U.S. based sales to our exclusive distributors
in Russia and the Ukraine. 2003
    
    
    2002
    
    
    Percent ChangeSignamax
    
    $
    5,992
    
    
    $
    6,025
    
    
    

    -0.5
    %AEM
    
    
    5,283
    
    
    
    4,781
    
    
    
    10.5
    %Russia/Ukraine
    
    
    4,431
    
    
    
    3,263
    
    
    
    35.8
    %Total
    
    $
    15,706
    
    
    $
    14,069
    
    
    
    11.6
    %
 U.S. sales of our Signamax product 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. A sales increase of approximately $500,000 was achieved
by our AEM group from several new customers in 2003. The balance of the $1.6 million 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. Cost of sales for the year ended December 31, 2003, increased to $11.2 million, compared to
cost of sales of $10.2 million for the year ended December 31, 2002.
However, our gross profit percentage rose slightly in 2003 to 28.9% compared to 27.3% in the prior
year. The increase in gross profit percent in 2003 was due to a combination of several factors. On
the positive side, the reduction of operations at our Pennsylvania facility in late 2002 resulted
in expense savings of approximately $400,000 annually, as this production was transferred to lower
cost suppliers in the Far East. Further, we recorded a provision for inventory impairment of
$161,000 in 2002. During 2002, we experienced a relatively sudden and significant decrease 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. Such an impairment charge was not required in 2003. These
two items were negatively offset by the per unit sales price declines mentioned above, which were
only partially countered by lower pricing from our Far East suppliers. Selling, general and administrative (S,G & A) expenses declined to $5.3 million for the year
ended December 31, 2003, compared to $5.4 million for the year ended December 31, 2002.
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 31




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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.
Conversely, included in S,G & A expenses in 2003 were approximately $144,000 of closing costs and
fees on our October 31, 2003 Commercebank and Marquette agreements. 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. As a result of the above factors, the loss from operations for the year ended December 31,
2003 was $774,000, compared to a loss from operations of $1,584,000 for the year ended December 31,
2002, a decrease in the loss from operations of $810,000. Interest expense increased from $107,000 in 2002 to $152,000 in 2003. The increase was due to
a rise in the average interest rate from 5.22% in 2002 to 6.92% in 2003 on the Commercebank line of
credit, along with the upfront fee of .8% and an interest rate of 7% currently on the Marquette
financing arrangement. See Note 4 to the Notes to Consolidated Financial Statements for further
information on these U.S. financing agreements. Based on our quarterly review of the note receivable from the buyer of our former wholly-owned
subsidiary, AESP Ukraine, we concluded at December 31, 2003 that it was probable that the note was
not fully collectible. Accordingly, at that date, we recorded a $381,000 impairment, reducing the
net balance of the note on our balance sheet to $240,000, based upon our then estimation of future
cash flows, discounted at the effective rate of the transaction. The loss from continuing operations before income taxes declined in 2003 to $1,258,000,
compared to $1,627,000 in 2002, as a result of the factors mentioned above. 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 effective tax rate in future periods will be impacted by our
profitability 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 loss of $1.3 million from continuing
operations for the year ended December 31, 2003, compared to a loss of $1.6 million from continuing
operations for the year ended December 31, 2002. For the year ended December 31, 2003, the loss
per common share from continuing operations, both basic and diluted, was $.21, compared to a basic
and diluted loss per common share from continuing operations of $.35 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. 32




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The loss from discontinued operations, net of tax, was $1,419,000 for 2003 and $664,000 for
2002. The following table details these results (in thousands) by subsidiary location: 2003
    
    
    2002
    
    
    DifferenceCzech Rep.
    
    $

    134
    
    
    $
    184
    
    
    
    (50
    )Norway
    
    
    (1,112
    )
    
    
    37
    
    
    
    (1,149
    )Germany
    
    
    (238
    )
    
    
    (842
    )
    
    
    604Sweden
    
    
    (203
    )
    
    
    (43
    )
    
    
    (160
    )Total
    
    $
    (1,419
    )
    
    $
    (664
    )
    
    $
    (755
    )
 The most significant changes were posted by our Norwegian and German operations. Norway suffered a
significant drop in sales in 2003 as a result of a competitive situation involving former employees
who established a competing company, as well as due to adverse market conditions in a very weak
Scandanavian economy. Norwegian results were also negatively impacted by severance payments made
to and accrued for the former Norwegian managing director of approximately $490,000. The improved
results in Germany were due primarily to two items. The first was expense reductions in late 2002
and 2003, primarily involving headcount reductions. Additionally, a $155,000 provision was recorded
in Germany at December 31, 2002 related to a preliminary assessment for an income tax audit. This
matter was resolved in the second quarter of 2003 with a final assessment of $25,000, which was
less than anticipated. Financial Condition, Liquidity and Capital Resources Historically, we have financed our operations primarily with cash flow from operations and
with borrowings under our available financing arrangements. Below is a chart setting forth our contractual payment obligations as of December 31, 2004
which have been aggregated in order to facilitate a basic understanding of our liquidity (in
thousands): Payments Due by PeriodLess than 1Contractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsBendes and Chao term loans
    
    $
    2,124
    
    
    $
    2,124
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase orders
    
    
    2,905
    
    
    
    2,905
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    429
    
    
    
    396
    
    
    
    33
    
    
    
    
    
    
    
    Operating leases
    
    
    177
    
    
    
    86
    
    
    
    65
    
    
    
    26
    
    
    
    Total contractual cash obligations
    
    $
    5,635
    
    
    $
    5,511
    
    
    $
    98
    
    
    $
    26
    
    
    $
    
 We 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. These employment agreements were terminated subsequent
to December 31, 2004, although these two officers remain as at-will employees of our company. See
Item 11, Executive Compensation  Employment Agreements. 33




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##### Table of Contents



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, 2004, our working capital deficiency was ($1,900,000), compared to a working
capital deficiency of ($17,000) at December 31, 2003. Similarly, our current ratio was .77 at
December 31, 2004, compared to 1.00 at December 31, 2003. The balance sheet accounts with the most
significant changes from December 31, 2003 to December 31, 2004 were the following: 2004
    
    
    2003Cash
    
    $
    256,000
    
    
    $
    1,082,000
 Cash at December 31, 2003 included $52,000 held by Sweden, $318,000 held by Norway, $203,000 held
by Intelek, $18,000 held by Germany and $491,000 held by our U.S. operations. During 2004, Sweden
and Jotec in Norway were sold and Lanse in Norway and Signamax GmbH (Germany) are being wound-down,
eliminating or significantly decreasing cash balances at those entities. For Intelek and the U.S.,
cash was used to fund operating losses during 2004. 2004
    
    
    2003Accounts receivable
    
    $
    311,000
    
    
    $
    469,000Due from factor
    
    
    157,000
    
    
    
    265,000
 Accounts receivable are invoices not purchased by Marquette. Under the Marquette agreement,
Marquette advances funds to us at a rate of 82.5% of the invoice amount purchased by Marquette.
This difference, or 17.5%, is recorded by us as an amount due from factor (Marquette) and is
received by us, less fees, when the invoice is paid by our customer. Both items declined at
December 31, 2004 due to a lower level of sales in November and December of 2004, compared to the
same period in 2003. At December 31, 2004, we had $871,000 of purchased invoices (uncollected receivables) outstanding
against payments to us of $714,000 relating to such invoices (receivables) from
Marquette. Because of our agreement with Marquette, whereby we sell them our receivables on a
non-recourse basis, these uncollected receivables and the corresponding amount we have received
from Marquette with respect to these receivables are not presented on our balance sheet. 2004
    
    
    2003Inventories
    
    $
    1,752,000
    
    
    $
    3,028,000
 Inventories decreased $1,300,000 or 42% in 2004 due to efforts began in late 2003 to increase cash
flow through improved inventory management. Funds generated from these efforts were used to pay
down certain liabilities and fund operating losses. Additionally, we recorded a provision for
inventory impairment of $366,000 in 2004, further reducing our inventory balance. 34




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##### Table of Contents



2004
    
    
    2003Current assets of disc. ops.
    
    $
    3,910,000
    
    
    $
    5,994,000Non-current assets of disc. ops.
    
    
    727,000
    
    
    
    1,529,000Current liabilities of disc. ops.
    
    
    3,251,000
    
    
    
    5,412,000Non-current liabilities of disc. ops.
    
    
    126,000
    
    
    
    71,000
 The decrease in the discontinued operations accounts is primarily due to the sale of certain assets
of our Norwegian subsidiary, Lanse, in July, 2004, the sale of 100% of the common stock of our
other Norwegian subsidiary, Jotec in August 2004, the insolvency filing of our German subsidiary,
AESP GmbH in August 2004 and the sale of 100% of the common stock of our Swedish subsidiary in
September 2004. As a result, assets and liabilities relating to these entities were not
consolidated, and therefore not included in the above line items at December 31, 2004. See Note 2
to the Consolidated Financial Statements. 2004
    
    
    2003Assets of business transferred under
contractual arrangement
    
    $
    
    
    
    $
    240,000
 This asset was a note receivable from the buyer of our former subsidiary, AESP Ukraine.
Based on our quarterly review of the note receivable, we believe it is probable that the
note is not collectible. Our assessment of the notes collectibility is based, among other things,
on our review of the buyers financial statements, collections received in 2004 and representations
from the buyer on his financial wherewithal. Accordingly, we recorded a $222,000 impairment in 2004
and terminated the note. 2004
    
    
    2003Line of credit
    
    $
    
    
    
    $
    631,000Notes payable
    
    
    2,124,000
    
    
    
    
 In April, 2004 the balance remaining of $631,000 under our line of credit with Commercebank N.A.
was paid in full through the proceeds received under a new one-year term loan agreement with
Bendes. The Bendes loan, which is also $631,000, is classified as a note payable in our
Consolidated Balance Sheets. Further, in November 2004, we signed a $1,493,000 promissory
note to Chao Jui Hsia, in exchange for payments that she made on our behalf to certain of our Far
East suppliers. The Chao loan is also classified as a note payable in our Consolidated Balance
Sheets. 2004
    
    
    2003Accounts payable
    
    $
    2,404,000
    
    
    $
    4,111,000Customer deposits
    
    
    218,000
    
    
    
    430,000
 As described above, in November 2004 we signed a $1,493,000 promissory note with Chao Jui Hsia, in
exchange for payments made by her on our behalf to certain of our Far East suppliers, which was
recorded as a reduction in accounts payable. Also, as described above, cash generated from the
decrease in inventory was utilized during 2004 to make additional payments to vendors and other
creditors, thereby reducing those balances as of December 31, 2004. 35




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For the year ended December 31, 2004, $220,000 of cash was used in continuing operations. The
primary use of cash in continuing operations was the loss from continuing operations of $1,653,000
which was offset by inventory reductions, including obsolescence, totaling $1,277,000 . Cash
provided by continuing operations included a reduction of inventory of $911,000 coupled with a
provision for inventory obsolescence of $366,000. Net cash used in investing activities of
continuing operations was $42,000, primarily due to net property and equipment purchases of
$62,000. As a result of the foregoing, our cash position decreased $1,065,000 between December 31,
2003 and December 31, 2004. That decrease, combined with an increase of $239,000 attributable to
the effects of exchange rate changes on cash, produced an overall decrease in cash of $826,000. 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. 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 Marquette Commercial Finance, Inc. (formerly KBK Financial,
Inc.) (Marquette). The initial and a subsequent funding from Marquette was used to fund a
permanent reduction in our 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 Marquette
agreement was made in December 2003, to permanently reduce the available balance under the Banks
line of credit to $631,000. This balance was paid in full on April 26, 2004 through the proceeds
received by us under a new one-year term loan agreement with Bendes Investment Ltd. (Bendes). On
November 22, 2004, we signed a promissory note in the amount of $1,493,400 with Chao Jui Hsia
(Chao), who owns the unaffiliated trading company in Taiwan that acts as our liaison with our Far
East suppliers. The note is in exchange
for payments made on our behalf by Ms. Chao on our trade accounts payable with certain of our
Far East suppliers. The Bendes and Chao loans and fundings from Marquette are secured by liens on
our U.S. assets, including accounts receivable and inventories. The Bendes loan is guaranteed by
our principal shareholders. The Marquette 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. At December 31, 2004, we were in violation of the negative covenant
regarding prohibition on additional indebtedness under the Bendes note, as it related to the Chao
note signed in November 2004. In April 2005, in conjunction with the First Amendment under the
Bendes note, Bendes extended the maturity date of its note until
October 22, 2005, waived the covenant violation and consented to the Chao
note. As of December 31, 2004, we were not in compliance with
the current ratio and tangible net worth covenants under the Marquette factoring agreement.
However, Marquette has waived compliance with the financial covenants as of December 31, 2004.
Additionally, we may not meet our financial covenants in future periods unless our results of
operations substantially improve. 36




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The Marquette agreement advances funds to us at a rate of 82.5% of the invoice amount
purchased by Marquette. All of our invoices to U.S. customers are available for sale under this
agreement and may be offered to Marquette on a daily basis, subject to a $2,000,000 funding limit.
Marquette can accept or reject offered invoices and is not obligated to purchase any invoices.
Marquette exercises control over incoming lockbox receipts to ensure that cash received on
purchased invoices is collected. The Marquette agreement contains fixed and variable discount rate
pricing components. The fixed discount is 1.25% of the invoice amount and is payable at the time of
funding. The variable rate is Marquettes base rate as established by Marquette 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, 2004, Marquette had paid
funds on $871,000 of purchased invoices, subject to a $2,000,000
funding limit. As of May 9,
2005, Marquette had advanced net funds of $920,000 on purchases
aggregating $1,143,000. We are obligated to meet certain affirmative, negative and financial
covenants under our agreements with our 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
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
Marquette agreement require our 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 covenants at December
31, 2004. However, at December 31, 2004, we were in violation of the negative covenant regarding
prohibition on additional indebtedness under the Bendes note, as it related to the Chao note signed
in November 2004. In April 2005, in conjunction with the First Amendment under the Bendes note,
Bendes waived the violation and consented to the Chao note. Further, we were in violation at December 31, 2004 of the financial
covenants contained in the Marquette agreement, and such violations have been waived by Marquette.
Further, we have, in a significant number of recent months 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 Marquette will continue to waive such future financial covenant
violations during future periods. If Marquette 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 Czech Republic subsidiary, Intelek, had two lines of credit available for their
operations. At December 31, 2004, an aggregate of $922,000 was outstanding under these lines of
credit and $19,000 was available for borrowing under these agreements. As of March 2005, 37




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the buyer of Intelek has now assumed responsibility for these lines of credit. We have experienced net losses and diminishing working capital for each of the years ended
December 31, 2004, 2003 and 2002. As of December 31, 2004, our working capital was negative. We are
dependent upon generating sufficient cash flow from operations or financings to repay our
liabilities. Assuming we can extend the maturity dates of the Bendes and Chao loans, we believe that
internally generated cash flow from operations combined with funds available under the Marquette
agreement, will be sufficient to meet our financial obligations for the next twelve months.
Additionally, our plans for 2005 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 as to if and when
we can become profitable. If available, we may also sell debt or equity securities, in order to
meet current and future working capital requirements or we may agree
to convert debt into equity. There can be no assurance, however, that any
such debt or equity financing will 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, and/or if we
cannot extend the maturity dates of our outstanding debt, 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, 2004. 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 2005 of
our term loans 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 the
majority of our increased costs in the form of adjustments to the prices we charge to our
customers. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS Statement No. 123 (R),
Share-Based Payment, a revision of SFAS Statement No. 123 that will significantly change the
accounting for employee stock options and other equity-based compensation. The standard requires
companies to expense the fair value of stock options on the grant date and is effective for interim
or annual periods beginning after June 15, 2005. In accordance with the revised statements, we
will be required to recognize the expense attributable 38




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to stock options granted or vested subsequent to July 1, 2005. We are currently assessing the
potential impact of SFAS No. 123 upon our financial statements. In November 2004, the Financial Standards Board issued SFAS No. 151, Inventory Costs  An
Amendment of ARB No. 43, Chapter 4(SFAS No. 151).SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). This Statement requires that
those items be recognized as current-period charges regardless of whether they meet the criterion
of so abnormal. In addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
This Statement is effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Management does not believe that the adoption of SFAS No. 151 will have a material
impact upon our financial statements. In December 2004, the Financial Standards Board issued SFAS No. 153, Exchanges of Nonmonetary
Assets  An Amendment of APB Opinion No. 29 (SFAS No. 153). SFAS No. 153 amends Opinion 29 to
eliminate the exception to fair value for exchanges of similar productive assets and replaces it
with a general exception for exchange transactions that do not have commercial substancethat is,
transactions that are not expected to result in significant changes in the cash flows of the
reporting entity. This Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Management does not believe that the adoption of SFAS No.
153 will have a material impact upon our financial statements. 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. Our results of operations are affected by changes in short-term interest rates as a result of
the variable interest rate contained in our Bendes loan and Marquette factoring agreement. If
short-term interest rates averaged 2% more in the years ended December 31, 2004, 2003 and 2002 our
interest expense and loss before taxes would have increased by $36,000, $30,000 and $34,000,
respectively. In the event of a change of such magnitude, management would likely take actions to
mitigate our exposure to change. 39




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ITEM 8.
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements on pages F-1 through F-31. 
  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE. On December 20, 2004, the Audit Committee of the Board of Directors of the Company dismissed
BDO Seidman LLP (BDO) as its independent auditors. BDOs report on the Companys consolidated
financial statements for each of the fiscal years ended December 31, 2003 and 2002 did not contain
an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. However, BDOs report on the Companys financial statements
at December 31, 2003 included a going concern modification and an explanatory paragraph on the
adoption of a new accounting pronouncement. There were no other reportable events or disagreements
with BDO to report in response to Item 304 of Regulation S-K. On December 20, 2004, the Audit Committee of the Board of Directors of the Company engaged
Rachlin, Cohen & Holtz LLP as independent auditors to the Company. 
 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, 2004 (the
Evaluation Date). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to
material information relating to our Company (and its consolidated subsidiaries) required to be
included in our periodic SEC filings. Since the Evaluation Date, there have not been any
significant changes in our internal controls, or in other factors that could significantly affect
these controls subsequent to the Evaluation Date. 40




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##### Table of Contents



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 May 9, 2005, the members of the Board and their
length of service as Directors are as follows: NAME
    
    AGE
    
    DIRECTOR POSITIONS
    
    SINCESlav Stein
    
    
    60
    
    
    President, Chief Executive Officer and Director
    
    
    1983Roman Briskin
    
    
    55
    
    
    Executive Vice President, Secretary/Treasurer
and Director
    
    
    1984Terrence Daidone (1)(2)
    
    
    45
    
    
    Director
    
    
    1997William B. Coldrick (1)(2)
    
    
    63
    
    
    Director
    
    
    1997Leonard Sokolow (1)(2)
    
    
    48
    
    
    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 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 41




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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 consists of three outside directors, Leonard Sokolow,
who qualifies as an audited committee financial expert
under the rules promulgated by the SEC, William B. Coldrick and
Terrence Daidone. While the NASDAQ Marketplace Rules no longer apply
to us (since our common stock has been delisted from the NASDAQ),
Messrs. Sokolow and Coldrick meet the definition of independent
directors under such rules. 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
    
    
    60
    
    
    President, Chief Executive Officer
    
    
    1983Roman Briskin
    
    
    55
    
    
    Executive Vice President and
Secretary
    
    
    1984Stephen Daily
    
    
    47
    
    
    Vice President / Network Group
    
    
    2000John F. Wilkens
    
    
    46
    
    
    Chief Financial Officer
    
    
    2003
 42




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##### Table of Contents



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 CONDUCT Our
employee manual contains a code of ethical obligations. FAMILY RELATIONSHIPS There are no family relationships between or among any of our directors and executive
officers. 43




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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, 2004 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 CompensationAwards
    
    
    PayoutsSecuritiesFiscal
    
    
    
    
    
    
    
    
    
    
    Other Annual
    
    
    Restricted
    
    
    Underlying
    
    
    LTIP
    
    
    All OtherYear
    
    
    Salary
    
    
    Bonus
    
    
    Compensation
    
    
    Stock
    
    
    Options/ SARs
    
    
    Payouts
    
    
    CompensationName and Principal Position
    
    Ended
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    Awards
    
    
    ($)
    
    
    ($)
    
    
    ($) (2)Slav Stein
    
    
    2004
    
    
    
    205,256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    2,634CEO(1)
    
    
    2003
    
    
    
    220,919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    5,0082002
    
    
    
    242,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    10,392Roman Briskin
    
    
    2004
    
    
    
    205,256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    2,397Executive
Vice President(1)
    
    
    2003
    
    
    
    220,919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    3,4382002
    
    
    
    242,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    10,392Stephen Daily
    
    
    2004
    
    
    
    125,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    Vice President
    
    
    2003
    
    
    
    125,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    1,4002002
    
    
    
    130,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600John F. Wilkens
    
    
    2004
    
    
    
    140,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    Chief Financial Officer
    
    
    2003
    
    
    
    131,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    On March 31, 2005, the Company and Messrs. Stein and
Briskin agreed to a termination of their employment agreements.
Messrs. Stein and Briskin remain at will employees at their current
salary and benefit levels. See Employment Agreements.(2)
    Messrs. Stein and Briskin each receive an automobile
allowance of up to $6,000 per year.
In addition, during 2002 and 2003, 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 policies which the Company purchases for the benefit of
Messrs. Stein and Briskin. 44




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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, 2004 to the persons named in the preceding summary
compensation table under the caption Executive Compensation: Potential Realizable Value At AssumedAnnual Rates Of Stock PriceIndividual Grants
    
    
    Appreciation For Option Term (1)Number of
    
    
    % of TotalSecurities
    
    
    Options/SARSUnderlying
    
    
    Granted to
    
    
    Exercise ofOptions/SARS
    
    
    Employees in
    
    
    Base Price
    
    
    ExpirationName
    
    Granted (#)
    
    
    Fiscal Year
    
    
    ($/SH)
    
    
    Date
    
    
    5% ($)
    
    
    10% ($)Slav Stein
    
    
    75,000
    
    
    
    31.0
    %
    
    $
    0.90
    
    
    
    3/25/14
    
    
    $
    42,450
    
    
    $
    107,550Roman Briskin
    
    
    75,000
    
    
    
    31.0
    %
    
    $
    0.90
    
    
    
    3/25/14
    
    
    $
    42,450
    
    
    $
    107,550Stephen Daily
    
    
    25,000
    
    
    
    10.3
    %
    
    $
    0.90
    
    
    
    3/25/14
    
    
    $
    14,150
    
    
    $
    35,850John F. Wilkens
    
    
    25,000
    
    
    
    10.3
    %
    
    $
    0.90
    
    
    
    3/25/14
    
    
    $
    14,150
    
    
    $
    35,850
    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 2004 fiscal year for the persons named in the preceding summary
compensation table under the caption Executive Compensation: Number of Securities
    
    
    Value of Unexercised In-Underlying Unexercised
    
    
    The-Money Options/Shares
    
    
    
    
    
    Options/ SARs At Fiscal
    
    
    SARs At Fiscal Year-EndAcquired On
    
    
    Value
    
    
    Year-End (#)
    
    
    ($) (1)Name
    
    Exercise (#)
    
    
    Realized ($)
    
    
    Exercisable/Unexercisable
    

    
    Exercisable/UnexercisableSlav Stein
    
    
    
    
    
    
    
    
    
    
    905,250/75,000
    
    
    
    --/--Roman Briskin
    
    
    
    
    
    
    
    
    
    
    905,250/75,000
    
    
    
    --/--Stephen Daily
    
    
    
    
    
    
    
    
    
    
    100,000/25,000
    
    
    
    --/--John F. Wilkens
    
    
    
    
    
    
    
    
    
    
    25,000/25,000
    
    
    
    --/--
    45




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##### Table of Contents



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 was to continue for successive one-year terms unless canceled by
either party. During the term of such employment agreements, Messrs. Stein and Briskin were
entitled to receive a base salary (calculated at $331,000 for 2005, 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 a term life insurance policy in the amount of $500,000.
Additionally, the employment agreements provided that upon a change in control not approved by our
Board of Directors, Messrs. Stein and Briskin would receive certain benefits. On March 31, 2005, we and Messrs. Stein and Briskin agreed to terminate their employment
agreements, effective immediately. Messrs. Stein and Briskin remain as at-will employees at their
current salary and benefit levels. 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 18, 2005, options to
purchase 226,601 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
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 46




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##### Table of Contents



Form 10-K, options to purchase 656,500 shares of our common stock at an average exercise price
of $0.85 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. 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. 47




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##### Table of Contents



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 433,101 shares of common stock held by current and former employees. All
of our options are out-of-the-money as of the date of this Form 10-K. 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, 2004, 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, 2004
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, 2004. 48




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##### Table of Contents



ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS As of March 25, 2005, we had outstanding 6,143,596 shares of our common stock. The following
table sets forth, as of March 25, 2005, 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 Ownershipof Common Stock (1)Name and Address of Beneficial Owner (1)
    
    Shares
    
    
    PercentSlav Stein (2)
    
    
    1,706,257
    
    
    
    24.2
    %Roman Briskin (2)
    
    
    1,706,257
    
    
    
    24.2
    %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 905,250 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 2,458,750 shares of Common
Stock. 49




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##### Table of Contents



EQUITY COMPENSATION PLANS The following table summarizes information, as of March 25, 2005, 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. Number of securitiesremaining available forNumber of securities
    
    
    Weighted-average
    
    
    
    future issuance underto be issued upon exercise of
    
    
    exercise price of
    
    
    
    equity compensationoutstanding options,
    
    
    outstanding options,
    
    
    
    plans (excluding securitieswarrants and rights
    
    
    warrants and rights
    
    
    
    reflected in column (a))Plan category
    
    
    (a)
    
    
    (b)
    
    
    
    (c)Equity compensation
plans approved by
    
    
    1996 Plan  226,601 shares
    
    
    $
    1.66
    
    
    
    
    security holders(1)
    
    
    2003 Plan  656,500 shares
    
    
    $
    0.85
    
    
    
    
    343,500Equity compensation
plans not approved
by security
holders(2)
    
    
    2,330,750
    
    
    $
    1.61
    
    
    
    
    Total
    
    
    3,213,851
    
    
    $
    1.46
    
    
    
    
    343,500
   (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. 50




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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. In December 2003, we entered into a licensing agreement with Daidone-Steffens LLC to refurbish
batteries and resell them in the Southeastern U.S. and elsewhere. In May 2005, this agreement was
terminated. 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 our independent auditors, Rachlin, Cohen & Holtz, LLP
(Rachlin) for professional services rendered in connection with the audit of our financial
statements included in this Annual Report on Form 10-K for fiscal 2004, totaled approximately
$85,000.


The aggregate fees billed to us by our prior 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 2004,
totaled approximately $153,000. 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 2003, and for the review of our financial statements included in our Quarterly
Reports on Form 10-Q during fiscal 2003, totaled approximately $301,000. 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 $ 0 and $38,000 for fiscal 2004
and 2003, respectively. These costs primarily related to services provided in connection with
certain registration statements that we filed. 51




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##### Table of Contents



Tax Fees The aggregate fees billed to us by BDO for professional services rendered by BDO for tax compliance
totaled approximately $17,000 and $25,000 for fiscal 2004 and 2003, respectively. These services
included preparation of our foreign 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 Statements See Item 8. Financial Statements and Supplementary Data for Financial Statements
included with this Annual Report on Form 10-K.  (2)
    Financial Statement Schedules See 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
    
    
    Reserved
 52




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##### Table of Contents



ExhibitNumber
    
    Description10.12
    
    
    Reserved10.13
    
    
    Reserved10.14
    
    
    Stock Purchase Agreement among the Company, CCCI and Donald Y. Daily, Jr. (5)10.15
    
    
    Amendment to Loan Agreement between the Company and Commercebank, N.A. dated as of September
2, 2000 (9)10.16
    
    
    Stock Purchase Agreement dated May 31, 2000 by and among Jotec AESP AS and the shareholders of
Lanse AS (8)10.17
    
    
    Amendment to Loan Agreement between the Company and Commercebank, N.A. dated March 16, 2001
(10)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 September21, 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.
(18)10.31
    
    
    2003 Stock Option Plan. (17)10.32
    
    
    Loan Agreement, dated April 27, 2004, between Bendes Investment Ltd., AESP, Inc., Slav Stein
and Roman Briskin. (19)10.33
    
    
    Secured Promissory Note made by AESP, Inc. on April 27, 2004 in favor of Bendes Investment
Ltd. (19)10.34
    
    
    Security Agreement, dated April 27, 2004, between AESP, Inc. and Bendes Investment Ltd. (19)10.35
    
    
    Guartanty, dated April 27, 2004, between Bendes Investment Ltd., AESP, Inc., Slav Stein and
Roman Briskin. (19)10.36
    
    
    Intercreditor Agreement between Bendes Investment Ltd. and Marquette Commercial Finance, Inc.
(f/k/a KBK Financial, Inc.). (19)10.37
    
    
    Agreement  Regarding the Transfer of Parts of Undertaking (i.e. the Sales Business) from
Lanse AESP AS to 3-Play AS, dated July 16, 2004. (20)10.38
    
    
    Share Purchase Agreement relating to all shares representing the total share capital of Jotec
AESP AS, dated August 25, 2004. (20)10.39
    
    
    Sale and purchase Agreement by and between AESP, Inc. and Intronics Barneveld B.V. in respect
of the shares in Advanced Electronic Support Products Computertillbehor I Sweden AB, dated
October 14, 2004. (20)10.40
    
    
    Promissory Note executed by AESP, Inc. on November 22, 2004, in favor of Chao Jui Hsia. (21)10.41
    
    
    Agreement on Transfer of Ownership Interest concluded between Apron s.r.o. and AESP, Inc.
dated March 4, 2005. *10.42
    
    
    Assumption of Guarantee for Payment of Consideration for the Transfer of Ownership Interest
between Ing. Ivo Kravacek and AESP, Inc. dated March 4, 2005. *10.43
    
    
    Termination Agreement dated March 31, 2005, between Slav Stein and the Company. *10.44
    
    
    Termination Agreement dated March 31, 2005, between Roman Briskin and the Company. *
 53




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##### Table of Contents



ExhibitNumber
    
    Description10.45
    
    
    First Amendment to Account Transfer and Purchase Agreement dated March 23, 2004 between
Marquette Commercial Finance, Inc. (formerly KBK Financial, Inc.) and the Company. *10.46
    
    
    Second Amendment to Account Transfer and Purchase Agreement dated April 21, 2004 between
Marquette Commercial Finance, Inc. (formerly KBK Financial, Inc.) and the Company. *10.47
    
    
    Third Amendment to Account Transfer and Purchase Agreement dated August 12, 2004 between
Marquette Commercial Finance, Inc. (formerly KBK Financial, Inc.) and the Company. *10.48
    
    
    Fourth Amendment to Account Transfer and Purchase Agreement dated March 30, 2005 between
Marquette Commercial Finance, Inc. (formerly KBK Financial, Inc.) and the Company. *10.49
    
    
    First Amendment to Loan Agreement and Note, Waiver and Consent Dated April 28, 2005 between
Bendes Investment Ltd., AESP, Inc., Slav Stein and Roman Briskin. *10.50
    
    

Termination
Agreement, dated May 3, 2005, between Daidone-Steffens, LLC and
the Company. *10.51
    
    

Termination
Agreement, dated December 30, 2004, between the Company, Yuri
Burshtein and AESP Ukraine. *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.(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.(18)
    Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31,
2003.(19)
    Incorporated by reference to our Current Report on Form 8-K filed April 27, 2004.(20)
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2004.(21)
    Incorporated by reference to our Current Report on Form 8-K filed December 21, 2004. 54




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(b)
    Reports on Form 8-KThe Company filed a Form 8-K on November 17, 2004, to report that it issued a press release
announcing its financial results for the three months ended September 30, 2004.The Company filed a Form 8-K on December 21, 2004, to report that it signed a promissory
note in favor of Chao Jui Hsia on November 22, 2004.The Company filed a Form 8-K on December 23, 2004, to report that the Audit Committee of its
Board of Directors approved a change in its independent accountants.The Company filed a Form 8-K on April 8, 2005, to report the termination of employment
agreements between the Company and Slav Stein and Roman Briskin and to report the issuance
of a press release announcing the Companys intent to voluntarily deregister its common
stock. 55




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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: May 10, 2005
 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)
    
    May 10, 2005/s/ ROMAN BRISKIN

Roman Briskin
    
    Executive Vice President,
Secretary and Director
    
    May 10, 2005/s/ TERRENCE R. DAIDONE

Terrence R. Daidone
    
    Director
    
    May 10, 2005/s/ WILLIAM B. COLDRICK

William B. Coldrick
    
    Director
    
    May 10, 2005/s/ LEONARD SOKOLOW

Leonard Sokolow
    
    Director
    
    May 10, 2005/s/ JOHN F. WILKENS

John F. Wilkens
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    May 10, 2005
 56




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firms
    
    
    F-2, F-3Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003
and 2002
    
    
    F-5Consolidated Statements of Shareholders Equity (Deficiency) for the Years Ended
December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003
and 2002
    
    
    F-7Summary of Significant Accounting Policies
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-15Schedule II  Valuation and Qualifying Accounts
    
    
    F-32




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
AESP, Inc.
North Miami, Florida We have audited the accompanying consolidated balance sheet of AESP, Inc. and subsidiaries as
of December 31, 2004, and the related consolidated statements of operations, shareholders equity
(deficiency) and cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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 financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AESP, Inc. and subsidiaries as of
December 31, 2004, and the results of their operations and their cash flows for the year then ended
in conformity with U.S. generally accepted accounting principles. The accompanying 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 financing arrangements
mature during 2005. 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. We have also audited the financial statement schedule listed in the accompanying index for the
year ended December 31, 2004. In our opinion, the schedule presents fairly, in all material
respects, the information set forth therein for the year ended December 31, 2004. RACHLIN COHEN & HOLTZ LLP Miami, Florida
May 4, 2005 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AESP, Inc.
North Miami, Florida We have audited the accompanying consolidated balance sheet of AESP, Inc. and subsidiaries as
of December 31, 2003, and the related consolidated statements of operations, shareholders equity
and cash flows for each of the two years in the period ended December 31, 2003. We have also
audited the financial statement schedule listed in the accompanying index for each of the two years
in the period ended December 31, 2003. 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 the standards of the Public Company Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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 the results of their operations and their cash flows for each of the two 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 for each of the two years in the period ended December 31, 2003. The accompanying 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. As
discussed in Note 2 to the consolidated financial statements, the accompanying 2002 and 2003 financial
statements have been restated for the reporting of discontinued
operations. BDO SEIDMAN, LLP Miami, Florida
March 23, 2004 (March 28, 2005 as to Note 2) F-3




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, 2004
    
    
    December 31, 2003ASSETSCURRENT ASSETS:Cash
    
    $
    256
    
    
    $
    1,082Accounts receivable, net of allowance for doubtful accounts of
$106 and $65 at December 31, 2004 and 2003, respectively
    
    
    261
    
    
    
    469Due from factor
    
    
    157
    
    
    
    265Inventories
    
    
    1,752
    
    
    
    3,028Due from employees
    
    
    
    
    
    
    2Prepaid expenses and other current assets
    
    
    45
    
    
    
    67Current assets of discontinued operations
    
    
    3,910
    
    
    
    5,994Total current assets
    
    
    6,381
    
    
    
    10,907Property and equipment, net
    
    
    119
    
    
    
    152Assets of business transferred under contractual arrangement
    
    
    
    
    
    
    240Non-current assets of discontinued operations
    
    
    727
    
    
    
    1,529$
    7,227
    
    
    $
    12,828LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Line of credit
    
    $
    
    
    
    $
    631Accounts payable
    
    
    2,404
    
    
    
    4,111Accrued expenses
    
    
    215
    
    
    
    148Accrued salaries and benefits
    
    
    134
    
    
    
    192Customer deposits and other
    
    
    218
    
    
    
    430Notes payable
    
    
    2,124
    
    
    
    Current liabilities of discontinued operations
    
    
    3,251
    
    
    
    5,412Total current liabilities
    
    
    8,346
    
    
    
    10,924Non-current liabilities of discontinued operations
    
    
    126
    
    
    
    71Total liabilities
    
    
    8,472
    
    
    
    10,995Commitments and contingenciesSHAREHOLDERS EQUITY (DEFICIENCY):Preferred stock, $.001 par value; 1,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.001 par value, 20,000 shares authorized, 6,144 shares
issued and outstanding at December 31, 2004 and 2003
    
    
    6
    
    
    
    6Paid-in capital
    
    
    13,546
    
    
    
    13,546(Deficit)
    
    
    (15,285
    )
    
    
    (11,664
    )Accumulated other comprehensive income (loss)
    
    
    488
    
    
    
    (55
    )Total shareholders equity (deficiency)
    
    
    (1,245
    )
    
    
    1,833$
    7,227
    
    
    $
    12,828
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002NET SALES
    
    $
    15,755
    
    
    $
    15,706
    
    
    $
    14,069OPERATING EXPENSES:Cost of sales, including provision for inventory
obsolescence of $366 in 2004, $0 in 2003 and $161 in
2002
    
    
    12,156
    
    
    
    11,166
    
    
    
    10,230Selling, general and administrative
    
    
    4,767
    
    
    
    5,314
    
    
    
    5,423Total operating expenses
    
    
    16,923
    
    
    
    16,480
    
    
    
    15,653(LOSS) FROM OPERATIONS
    
    
    (1,168
    )
    
    
    (774
    )
    
    
    (1,584
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (272
    )
    
    
    (152
    )
    
    
    (107
    )Interest income
    
    
    
    
    
    
    5
    
    
    
    16Impairment of note receivable
    
    
    (222
    )
    
    
    (381
    )
    
    
    Other
    
    
    9
    
    
    
    44
    
    
    
    48(Loss) from continuing operations before income taxes
    
    
    (1,653
    )
    
    
    (1,258
    )
    
    
    (1,627
    )(Benefit) provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (Loss) from continuing operations
    
    
    (1,653
    )
    
    
    (1,258
    )
    
    
    (1,627
    )(Loss) from discontinued operations, net of tax
    
    
    (811
    )
    
    
    (1,419
    )
    
    
    (664
    )(Loss) on disposal of discontinued operations, net of tax
    
    
    (1,157
    )
    
    
    
    
    
    
    Net (loss)
    
    
    (3,621
    )
    
    
    (2,677
    )
    
    
    (2,291
    )Preferred stock dividends
    
    
    
    
    
    
    (12
    )
    
    
    Net (loss) applicable to common shareholders
    
    
    (3,621
    )
    
    $
    (2,689
    )
    
    $
    (2,291
    )Basic and diluted loss per common share:(Loss) from continuing operations
    
    
    (.27
    )
    
    $
    (.21
    )
    
    $
    (.35
    )(Loss) from discontinued operations, net of tax
    
    
    (.13
    )
    
    
    (.24
    )
    
    
    (.14
    )(Loss) on disposal of discontinued operations, net of tax
    
    
    (.19
    )
    
    
    
    
    
    
    $
    (.59
    )
    
    $
    (.45
    )
    
    $
    (.49
    )Weighted average shares, basic and diluted
    
    
    6,144
    
    
    
    5,947
    
    
    
    4,686
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY) (IN THOUSANDS) Preferred
    
    
    Stock
    
    
    Common
    
    
    Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    Compre-
    
    
    TotalAdditional
    
    
    
    
    
    
    Defer-
    
    
    Other
    
    
    hensive
    
    
    ShareholdersShares
    
    
    Par
    
    
    Shares
    
    
    Par
    
    
    Paid-in
    
    
    
    
    
    
    red
    
    
    Comprehensive
    
    
    Income
    
    
    EquityOutstand.
    
    
    Value
    
    
    Outstand.
    
    
    Value
    
    
    Capital
    
    
    (Deficit)
    
    
    Comp.
    
    
    Income (Loss)
    
    
    (Loss)
    
    
    (Deficiency)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 gain 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
    )
    
    
    
    
    
    
    1,833Other comprehensive income
(loss):Foreign currency
translation adjustment, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    543
    
    
    
    543
    
    
    
    543Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,621
    )
    
    
    
    
    
    
    
    
    
    
    (3,621
    )
    
    
    (3,621
    )(3,078
    )Balance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    6,144
    
    
    $
    6
    
    
    $
    13,546
    
    
    $
    (15,285
    )
    
    $
    
    
    
    $
    488
    
    
    
    
    
    
    $
    (1,245
    )
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIES:Net (loss)
    
    $
    (3,621
    )
    
    $
    (2,677
    )
    
    $
    (2,291
    )Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:Provision, net of losses on accounts receivable
    
    
    
    
    
    
    6
    
    
    
    5Loss from discontinued operations
    
    
    811
    
    
    
    1,419
    
    
    
    664Loss on disposal of discontinued operations
    
    
    1,157
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    94
    
    
    
    67
    
    
    
    94Gain on sale of securities
    
    
    
    
    
    
    (39
    )
    
    
    Provision for impairment of note receivable from sale of Ukrainian subsidiary
    
    
    222
    
    
    
    381
    
    
    
    Provision for inventory obsolescence
    
    
    366
    
    
    
    
    
    
    
    161Equity instruments issued in exchange for services
    
    
    
    
    
    
    80
    
    
    
    83Amortization of deferred compensation
    
    
    
    
    
    
    93
    
    
    
    (Increase) decrease in:Accounts receivable
    
    
    208
    
    
    
    1,295
    
    
    
    (249
    )Due from factor
    
    
    108
    
    
    
    (265
    )
    
    
    Inventories
    
    
    911
    
    
    
    (574
    )
    
    
    163Prepaid expenses and other current assets
    
    
    30
    
    
    
    2
    
    
    
    13Other assets
    
    
    
    
    
    
    (281
    )
    
    
    98Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (294
    )
    
    
    1,379
    
    
    
    (513
    )Customer deposits and other
    
    
    (212
    )
    
    
    (26
    )
    
    
    290Net cash provided by (used in) operating activities of continuing operations
    
    
    (220
    )
    
    
    860
    
    
    
    (1,482
    )Net cash provided by (used in) operating activities of discontinued operations
    
    
    (117
    )
    
    
    (411
    )
    
    
    328INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (62
    )
    
    
    (69
    )
    
    
    (37
    )Proceeds from sale of investments
    
    
    
    
    
    
    168
    
    
    
    78Collections of (loans to) employees
    
    
    2
    
    
    
    (2
    )
    
    
    Collections on note receivable from sale of Ukrainian subsidiary
    
    
    18
    
    
    
    60
    
    
    
    50Net cash provided by (used in) investing activities of continuing operations
    
    
    (42
    )
    
    
    157
    
    
    
    91Net cash (used in) investing activities of discontinued operations
    
    
    (190
    )
    
    
    (89
    )
    
    
    (252
    )FINANCING ACTIVITIES:Net proceeds from (payments on) lines of credit
    
    
    
    
    
    
    (1,262
    )
    
    
    326Payment of preferred stock dividend
    
    
    
    
    
    
    (12
    )
    
    
    Proceeds from the sale of stock, net
    
    
    
    
    
    
    
    
    
    
    942Net cash provided by (used in) financing activities of continuing operations
    
    
    
    
    
    
    (1,274
    )
    
    
    1,268Net cash provided by (used in) financing activities of discontinued operations
    
    
    (496
    )
    

    
    677
    
    
    
    (237
    )Net (decrease) in cash
    
    
    (1,065
    )
    
    
    (80
    )
    
    
    (284
    )Effect of exchange rate changes on cash of discontinued operations
    
    
    239
    
    
    
    (64
    )
    
    
    184Cash, at beginning of period
    
    
    1,082
    
    
    
    1,226
    
    
    
    1,326Cash, at end of period
    
    $
    256
    
    
    $
    1,082
    
    
    $
    1,226
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Supplemental information:Cash paid for:Interest
    
    $
    272
    
    
    $
    153
    
    
    $
    107Taxes
    
    
    
    
    
    
    
    
    
    
    Non-cash transactions:Conversion of line of credit and accounts payable to term loans
    
    
    2,124
    
    
    
    
    
    
    
    Conversion of common stock to preferred stock
    
    
    
    
    
    
    230
    
    
    
    Conversion of preferred stock to common stock
    
    
    
    
    
    
    230
    
    
    
    Conversion of debt to equity
    
    
    
    
    
    
    
    
    
    
    152
 SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8




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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. SUBSIDIARIES AND
BASIS OF PRESENTATION AESP and its subsidiaries are based in the
United States. Until recently, AESP
subsidiaries also operated in Germany,
Sweden, the Czech Republic and Norway. The
operations in Germany, Sweden and Norway were
sold or discontinued in 2004 and the
operations in the Czech Republic were sold in
March 2005. Accordingly, the operations
related to these subsidiaries have been
classified as discontinued operations in the
accompanying Consolidated Financial
Statements. The functional and reporting
currency for statutory purposes is the United
States Dollar, European Union Euro, Czech
Koruny, Norwegian Krone and Swedish Krona.
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 2003 and 2002
financial statements have been reclassified to conform to the 2004
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 F-9




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AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES allowance. Based on the available
information, the Company believes that its allowance for
doubtful accounts is adequate. However, actual write-offs
might exceed the recorded allowance. INVENTORIES Inventories consist of finished goods available for sale and are stated at the lower of
cost or market using the first-in, first-out method. During the years ended December 31, 2004, 2003 and 2002, the
Company recorded provisions for inventory obsolescence for
certain specific inventory items to reduce the items to their
estimated realizable value in the following amounts (in
thousands): 2004
    
    
    2003
    
    
    2002U.S.
    
    $
    366
    
    
    $
    
    
    
    $
    161
 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, 2004 are nominal. 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, 2004, 2003, and 2002 are shipping and
handling fees of $361,000, $468,000, and $394,000,
respectively. ADVERTISING COSTS Advertising costs incurred amounted to $336,000,
$366,000 and $494,000 for the three years ended
December 31, 2004, 2003 and 2002, respectively.
The Company expenses advertising costs as
incurred. F-10




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AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES The Company is subject to taxation in the United
States, Germany, 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 repatriate earnings from its foreign
subsidiaries. Accordingly, during 2004, 2003 and
2002, 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-11




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AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES YEAR ENDED DECEMBER 31,
    
    2004
    
    
    2003
    
    
    2002Net (loss) available to common
shareholders as reported
    
    $
    (3,621
    )
    
    $
    (2,689
    )
    
    $
    (2,291
    )Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (315
    )
    
    
    (276
    )
    
    
    (443
    )Pro forma (loss)
    
    $
    (3,936
    )
    
    $
    (2,965
    )
    
    $
    (2,734
    )Basic (loss) per share as reported
    
    $
    (.59
    )
    
    $
    (.45
    )
    
    $
    (.49
    )Basic (loss) per share  pro forma
    
    $
    (.64
    )
    
    $
    (.50
    )
    
    $
    (.58
    )Diluted (loss) per share as reported
    
    $
    (.59
    )
    
    $
    (.45
    )
    
    $
    (.49
    )Diluted (loss) per share  pro forma
    
    $
    (.64
    )
    
    $
    (.50
    )
    
    $
    (.58
    )
 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 2004; no
dividend yield percent; expected volatility of 65.0%;
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 2003; no dividend yield
percent; expected volatility of 112.0%; weighted average
risk-free interest rates of approximately 4.75%; and expected
lives 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. 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-12




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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 reviews long-lived assets for
impairment 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 December 2004, the Financial Accounting
Standards Board issued SFAS No. 123®, Share-Based Payment, a revision of SFAS Statement
No. 123 that will significantly change the accounting for employee stock options and other
equity-based compensation. The standard requires companies to expense the fair value of stock
options on the grant date and is effective for interim or annual periods beginning after June
15, 2005. In accordance with the revised statements, the Company will be required to
recognize the expense attributable to stock options granted or vested subsequent to July 1,
2005. The Company is currently assessing the potential impact of SFAS No. 123 upon the
financial statements of the Company. In November 2004, the Financial Standards Board issued
SFAS No. 151, Inventory Costs  An Amendment of ARB No. 43,
Chapter 4(SFAS No. 151).SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be
recognized as current-period charges regardless of whether
they meet the criterion of so abnormal. In addition, this
Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. This Statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Management does not believe
that the adoption of SFAS No. 151 will have a material impact
upon the financial statements of the Company. F-13




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In December 2004, the Financial Standards
Board issued SFAS No. 153, Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29 (SFAS No. 153). SFAS
No. 153 amends Opinion 29 to eliminate the exception to fair
value for exchanges of similar productive assets and replaces
it with a general exception for exchange transactions that do
not have commercial substancethat is, transactions that are
not expected to result in significant changes in the cash
flows of the reporting entity. This Statement is effective
for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Management does not believe
that the adoption of SFAS No. 153 will have a material impact
upon the financial statements of the Company. F-14




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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, 2004, 2003 and 2002. As of December 31, 2004, the Company
had a working capital deficit of $1,965,000. The Company is dependent upon generating
sufficient cash flow from operations or financings to repay its liabilities. On April 27, 2004, the Company paid in full the remaining
balance of $631,000 under its U.S. based Bank line of credit
agreement through the proceeds received under a term loan
agreement with Bendes Investment Ltd. (Bendes). The Bendes
loan is collateralized by all of the Companys U.S. assets,
except accounts receivable sold under the Marquette agreement
discussed below, and is also guaranteed by the Companys
principal shareholders. On November 22, 2004, the Company
signed a promissory note in the amount of $1,493,400 with
Chao Jui Hsia (Chao), who owns the unaffiliated trading
company in Taiwan that acts as the Companys liaison with its
Far East suppliers. The note is in exchange for payments made
on the Companys behalf by Ms. Chao on the Companys trade
accounts payable with certain of its Far East suppliers. The
Chao loan is collateralized by a second position in certain of the
assets securing the Bendes loan. Under the terms of the
agreements, the Company is required to comply with certain
affirmative and negative covenants. As of December 31, 2004,
$631,000 was outstanding under the Bendes loan and $1,493,400
was outstanding under the Chao loan. The Bendes loan matures
and is payable in full on October 27, 2005 and the Chao loan
matures and is payable in full on December 31, 2005. On April
28, 2005, the Company signed the First Amendment to the
Bendes loan, which extended the maturity date to October 27,
2005, waived a violation of one of the negative covenants
contained in the loan agreement and consented to the Chao loan. If the Bendes and Chao loans
are not extended or paid in full at maturity and either
lender 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 Marquette Commercial
Finance, Inc. (formerly KBK Financial, Inc.) (Marquette).
Marquette advances funds to the Company at a rate of 82.5% of
the invoice amount purchased by Marquette. All of the
Companys invoices to U.S. customers are available for sale
under this agreement and may be offered to Marquette on a
daily basis, subject to a $2,000,000 funding limit. Marquette
can accept or reject offered invoices and is not obligated to
purchase any invoices. The Marquette agreement expires in
October 2005, subject to cancellation by either party upon 30
days notice. Financial covenants under the Marquette
agreement require the Companys U.S. operations to meet a
minimum current ratio and tangible net worth. As of December
31, 2004, the Company was not in compliance with the current
ratio and tangible net worth covenants under the Marquette
agreement. However, Marquette has waived compliance with
these financial covenants as of December 31, 2004. F-15




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, the Company may not meet its financial
covenants in
future periods unless its results of operations substantially
improve. As of December 31, 2004, Marquette had purchased
invoices totaling $871,000. The Companys Czech Republic subsidiary, Intelek, has
two lines of
credit available for its operations. At December 31, 2004,
an aggregate of $922,000 was outstanding under these lines of
credit and $19,000 was available for borrowing under these
agreements. This amount is included in Current liabilities of
discontinued operations in the accompanying Consolidated
Balance Sheets. Intelek was sold in March 2005. See Note 2 of Notes to Consolidated Financial
Statements. The new buyer of Intelek assumed responsibility
for these lines of credit. 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. Assuming that it is successful in extending the maturity
dates of the Bendes loan and the Chao loan, and assuming the
Marquette factoring arrangement remains available after its
maturity in October 2005, of which there can be no assurance,
the Company believes that internally generated cash flow from
operations combined with funds available under the Marquette
agreement, will be sufficient to meet its financial
obligations for the next twelve months. Additionally, the
Companys plans for 2005 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 as to when and if
it will return to profitability. If available, the Company
may sell additional debt or equity securities in order to
meet current and future working capital requirements, or the
Company may agree to convert debt into equity. 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 2005 of its
term loans 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. F-16




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. DISCONTINUED OPERATIONS In 2004, the Company made a strategic decision to fundamentally
change its method of doing business in Europe. In light of continuing
losses incurred by its European subsidiaries, the Company
decided to exit its ownership positions by disposing of these
operations, either through a sale or a winddown of
operations. Going forward, it is the Companys intention to
sign exclusive and non-exclusive distributor agreements with
qualified European distributors to sell its Signamax branded
products. To date, the Company has signed several such
agreements and is currently negotiating with additional
distributor prospects. In May 2004, the management of Lanse AS, one of the Companys
Norwegian subsidiaries, informed the Company that they
intended to terminate their employment relationship with
Lanse. Thereafter, these managers and the Company entered
into negotiations to sell Lanse to these managers. These
negotiations were concluded in July 2004 when Lanse signed an
agreement to sell certain of its assets to a company jointly
owned by the former managers of Lanse and several of Lanses
major vendors. The assets sold were (1) a majority of Lanses
inventory, with an original cost of approximately $157,000,
sold at cost with the proceeds required to be used to retire
current accounts payable due to the vendors and (2) the
ownership of certain trade names sold for $237,000, payable
$145,000 at closing in the form of additional credits from
the vendors, $48,000 in cash due in one year and the
remainder, $44,000 in cash due in two years. The Company is
currently winding down the operations of Lanse, primarily
through collection of accounts receivable and payment of
remaining liabilities. In July 2004, the Company determined that its German
subsidiary, AESP GmbH, which has recorded losses from
operations for the last three years, most likely met the
criteria for insolvency under German law. In response, an
attorney designated by the German government met with the
management of AESP GmbH and reviewed its financial position,
specifically to assess its ability to pay bills when due and
the level of shareholders equity. On September 1, 2004, the
German court adjudged AESP GmbH to be insolvent and at that
point, control of the assets and liabilities of AESP GmbH
passed from the Company to the attorney, acting on behalf of
the German government. As such, the Company has ceased
consolidating AESP GmbH subsequent to August 31, 2004, due to
the Company no longer controlling the entity. In conjuction
with this insolvency, the Company has recorded approximately
$260,000 in accrued costs relating to payments expected to be
made to certain creditors and administrators. While the amount accrued
is currently expected to be sufficient to allow the Company to settle
all outstanding claims (based on all currently available
information), the claims process is still ongoing and there can be no
assurance that the final amount due and owing will not be higher. In August 2004, the Company signed an agreement with an
unrelated third party to sell 100% of the outstanding common
stock in its other Norwegian subsidiary, Jotec AS, for a
nominal sum. In connection with this sale, the Company
collected approximately $285,000 in overdue accounts
receivable from Jotec and was relieved of any further
liability under Jotecs bank line of credit and its facility
lease, which had approximately seven years remaining. F-17




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In October 2004, the Company signed an agreement to sell 100%
of the outstanding common stock in its Swedish subsidiary,
AESP Sweden, for a nominal sum. In connection with this sale,
the Company was
relieved of any liability under AESP Swedens bank line of
credit. As a condition to the sale, the Company will not
collect approximately $130,000 in accounts receivable that
AESP Sweden owed Jotec, which when paid by AESP Sweden, was
to be transferred to the Company by the new owners of Jotec. In September 2004, the Company decided to phase out the
operations of its second German subsidiary, Signamax GmbH, by
transferring its customer base and sales operations, along
with its inventory, to the operations of the Companys Czech
Republic subsidiary, Intelek. The Company is currently
winding down the operations of Signamax GmbH, primarily
through the collection of accounts receivable and the payment
of remaining liabilities. In March 2005, the Company completed negotiations that had
begun in December 2004 by signing an agreement to sell 100%
of the outstanding common stock of its final European
subsidiary, Intelek in the Czech Republic. The stock was sold
to a company controlled by the former owner of Intelek, who
served as its managing director since its acquisition in
2001. The stock was sold for $940,000. The initial payment of
$400,000 was paid on March 23, 2005 and the balance is due in
eleven quarterly installments commencing July 1, 2005. In
connection with this transaction, the Company has recognized
approximately $150,000 in losses on disposal. As a result of these transactions, the Company has reflected
the operating results of Lanse, AESP GmbH, Jotec, AESP
Sweden, Signamax GmbH and Intelek as well as the estimated
losses on disposal, as discontinued operations in the
Consolidated Financial Statements for all periods presented,
which results in a restatement of the Consolidated Balance
Sheet as of December 31, 2003 and the related Consolidated
Statements of Operations and Cash Flows for each of the two
years in the period ended December 31, 2003. These operations
comprise the entire operating/geographic segment known as
Western Europe, resulting in the Companys continuing
operations to consist of one operating/geographic segment,
the United States. Results of these discontinued operations,
as presented in the accompanying Consolidated Statements of
Operations, are as follows (in thousands): Years EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Net sales
    
    $
    13,627
    
    
    
    
    
    
    $
    16,213
    
    
    
    
    
    
    $
    15,595(Loss) from operations, net of tax
    
    $
    (811
    )
    
    
    
    
    
    $
    (1,419
    )
    
    
    
    
    
    $
    (664
    )(Loss) on disposal, net of tax
    
    $
    (1,157
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-18




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The remaining assets and liabilities of discontinued
operations, as presented in the accompanying Consolidated
Balance Sheets, are as follows (in thousands): December 31, 2004
    
    
    December 31, 2003Accounts receivable, net
    
    $
    1,780
    
    
    $
    3,112Inventories
    
    
    1,720
    
    
    
    2,672Due from employees
    
    
    121
    
    
    
    19Prepaid expenses and other current assets
    
    
    289
    
    
    
    191Current assets
    
    $
    3,910
    
    
    $
    5,994Property and equipment, net
    
    $
    243
    
    
    $
    383Goodwill
    
    
    109
    
    
    
    643Other assets
    
    
    375
    
    
    
    503Non-current assets
    
    $
    727
    
    
    $
    1,529Lines of credit
    
    $
    923
    
    
    $
    1,257Accounts payable
    
    
    1,761
    
    
    
    2,477Accrued expenses
    
    
    299
    
    
    
    519Accrued salaries and benefits
    
    
    68
    
    
    
    511Income taxes payable
    
    
    
    
    
    
    38Customer deposits and other
    
    
    118
    
    
    
    565Current portion of long-term debt
    
    
    82
    
    
    
    45Current liabilities
    
    $
    3,251
    
    
    $
    5,412Long term debt
    
    $
    126
    
    
    $
    71Non-current liabilities
    
    $
    126
    
    
    $
    71
 F-19




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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 this, the Company identified its reporting
units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of
adoption. Based on projected future cash flows of each of the
Companys reporting units and a comparison to each reporting units
carrying amount as of January 1, 2002, the Company did not record any
goodwill impairment. In addition, the Company performed its required
annual impairment test of goodwill as of December 31, 2003 and 2002
and did not record any goodwill impairment. However, in 2004 in
connection with the sale of certain assets of Lanse and the sale of
the common stock of Intelek, the Company recorded a writedown of the
goodwill associated with the prior acquisition of these entities. The
writedown totaled $534,000, with a balance remaining at December 31,
2004 of $109,000, relating to the acquisition of Intelek. This
remaining balance is included in non-current assets of discontinued
operations at December 31, 2004 in the accompanying Consolidated
Balance Sheets. Prior to adoption of SFAS No. 142, the Company amortized goodwill on
a straight-line basis over periods ranging from 7-15 years. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): DECEMBER 31,
    
    2004
    
    
    2003Leasehold improvements
    
    
    176
    
    
    
    308Office equipment
    
    
    161
    
    
    
    433Machinery and equipment
    
    
    138
    
    
    
    238Furniture and fixtures
    
    
    61
    
    
    
    75Vehicles
    
    
    38
    
    
    
    67574
    
    
    
    1,121Less: accumulated depreciation and amortization
    
    
    455
    
    
    
    969$
    119
    
    
    $
    152
 F-20




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LINES OF CREDIT AND LONG TERM DEBT Lines of credit and long term debt are comprised of the
following (dollar amounts in thousands): 2004
    
    
    2003Prime + 7% (11.00% at December 31, 2003) line of
credit with a U.S. financial institution in the
amount of $631 at December 31, 2003, collateralized
by all U.S. assets except certain accounts
receivable; guaranteed by the Companys principal
shareholders, paid in full April 27, 2004
    
    $
    
    
    
    $
    631Variable rate, prime rate + 8%, (13.25% at December
31, 2004) term loan, due October 27, 2005,
collateralized by all U.S. assets except certain
accounts receivable, guaranteed by the Companys
principal shareholders
    
    
    631
    
    
    
    6% fixed rate term loan, due December 31, 2004,
collateralized by a second position in certain U.S.
assets
    
    
    1,493
    
    
    
    $
    2,124
    
    
    $
    631
 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
Marquette Commercial Finance, Inc. (formerly KBK Financial, Inc.)
(Marquette). The initial and a subsequent funding from Marquette
was used to fund a permanent reduction in the Companys line of
credit with the Bank. The initial funding under the Marquette
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 Marquette
agreement was made in December 2003, to permanently reduce the
available balance under the Banks line of credit to $631,000 (which
was due and payable on April 20, 2004). This balance was paid in full
on April 27, 2004 through the proceeds received by the Company under
a term loan agreement with Bendes Investment Ltd. (Bendes). On
November 22, 2004, the Company signed a promissory term note in the
amount of $1,493,400 with Chao Jui Hsia (Chao), who owns the
unaffiliated trading company in Taiwan that acts as the Companys
liaison with its Far East suppliers. The note is in exchange for
payments made on the Companys behalf by Ms. Chao on the Companys
trade accounts payable with certain of its Far East suppliers.
Borrowings from Bendes and Chao are secured by first and second liens
on certain of the Companys U.S. assets. The Bendes loan is also guaranteed by the
Companys principal shareholders. The Marquette 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. At December 31, 2004, we were in violation of
the negative covenant regarding prohibition on additional F-21




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS indebtedness under the Bendes note, as it related to the Chao note
signed in November 2004. In April 2005, in conjunction with the First
Amendment under the Bendes note, Bendes waived the covenant violation and
consented to the Chao note. As of
December 31, 2004, the Company was not in compliance with the current
ratio and tangible net worth covenants under the Marquette factoring
agreement. However, Marquette has waived compliance with the
financial covenants as of December 31, 2004. Additionally, the
Company may not meet its financial covenants in future periods unless
its results of operations substantially improve. The Marquette agreement advances funds to the Company at a rate of
82.5% of the invoice amount purchased by Marquette. 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 Marquette on a daily basis,
subject to a $2,000,000 funding limit. Marquette can accept or reject
offered invoices and is not obligated to purchase any invoices.
Marquette exercises control over incoming lockbox receipts to ensure
that cash received on purchased invoices is collected. The Marquette
agreement contains fixed and variable discount rate pricing
components. The fixed discount is 1.25% of the invoice amount and is
payable at the time of funding. The variable rate is Marquettes base
rate as established by Marquette 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 agreement is
terminable by either party upon 30 days notice and immediately by
Marquette upon default by the Company. In the event of termination by
the Company prior to November 2005, a termination fee of up to
$20,000 may be due. Bendes and Marquette 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 Marquette 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 in 2003. 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. Bendes
and Chao have not advised the Company at this time if they will
extend the term loans and the failure to obtain extensions could be
material and adverse to the Companys financial position. The Company
believes that assuming the Bendes and Chao notes are extended, its internally generated cash flow from operations,
combined with funds available under the Marquette agreement, will be
sufficient to fund current operations for the next twelve months. If
available, the Company may also sell debt or equity securities in
order to meet current and future working capital requirements
(including amounts due on the outstanding debt with Bendes and Chao),
or the Company may agree to convert debt into equity.
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. F-22




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. OPERATING SEGMENTS Prior to 2004, the Companys operations, consisting primarily of sales of
computer networking products, were handled by each of its subsidiaries operating in their
respective countries. Accordingly, management operated its business based on a geographic
basis, whereby sales and related data were attributed to the AESP entity that generated such
revenues. Due to the disposal of all of the Companys subsidiaries in Europe (which comprised
one of the Companys two reportable segments, Western Europe), the Company currently operates
one reportable segment and one geographic area, the United States. 6. MAJOR CUSTOMERS/SUPPLIERS Foreign sales from continuing operations for the years ended
December 31, 2004, 2003 and 2002 approximated 34%, 28% and 23%, respectively, of consolidated
revenues. Sales by the Company to its exclusive distributor in Russia,
AESP-Russia, amounted to approximately 28% of net sales for
2004, 24% of net sales for 2003 and 20% of net sales for
2002. No other customers accounted for greater than 10% of
consolidated revenues during the years ended December 31,
2004, 2003 and 2002. For the years ended December 31, 2004, 2003 and 2002, the
following suppliers accounted for greater than 10% of
consolidated cost of sales: 2004

    
    2003

    
    2002Czech Republic 
electrical cabinets
    
    
    17.0
    %
    
    
    11.0
    %
    
    
    Taiwan  Signamax products
    
    
    10.5
    %
    
    
    11.3
    %
    
    
    Taiwan  Signamax products
    
    
    
    
    
    
    15.3
    %
    
    
    14.5
    %
 7. RELATED PARTY TRANSACTIONS In 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 permitted the Company to use battery
restoration technology 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. F-23




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To date, the licensor has been unable to develop its
technology to a point where it is commercially feasible. As a
result, both parties agreed to terminate this license
agreement, with a termination agreement signed on May 3,
2005. No upfront fees were paid with respect to this license.
Further, 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 a production line was in
place and thereafter ratably over a four-year period) has
been cancelled. 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 was to 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 occurred prior to the termination
date, therefore no charge was recorded by the Company for the
value of the options. 8. FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including accounts
receivable, due from factor, accounts payable and debt approximated fair value due to the
relatively short maturity, the interest rate and other terms, and the variable interest rate
based on the prime rate for most of the debt. 9. COMMITMENTS AND CONTINGENCIES The Company has employment agreements, expiring in February
2006, with its two principal shareholders which include
minimum annual individual compensation for 2005 of $331,000
(voluntarily reduced to a current salary of $198,000 for
2005) 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. Subsequent to
December 31, 2004, these employment agreements were
terminated. F-24




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company rents office and warehouse space and certain
office equipment under non-cancelable leases. The minimum
future rental commitment for leases in effect at December 31,
2004, including leases to related parties, approximates the
following (in thousands): Years Ending December 31,2005
    
    $
    862006
    
    
    362007
    
    
    292008
    
    
    212009
    
    
    4Thereafter
    
    
    $
    176
 The Company leases, on a month-by-month basis, office and
warehouse space from an entity owned by the principal
shareholders of the Company at $7,800 per month. Rent expense in 2004, 2003 and 2002 aggregated approximately
$148,000, $153,000 and $165,000, respectively, including
$93,600, $93,600 and $93,600 for the years 2004, 2003 and
2002, 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, 2004, 2003 and
2002 aggregated $0, $17,000 and $29,000,
respectively. 11. INCOME TAXES Due to losses incurred and a
valuation allowance recorded, no (benefit) provision
for income taxes has been recorded on continuing
operations for the years ended December 31, 2004,
2003 and 2002. The Company has invested the undistributed earnings of its
foreign subsidiaries in their respective countries.
Accordingly, no provision for United States income taxes on
undistributed earnings is required. Upon distribution of
earnings in the form of dividends or otherwise, the Company
could be subject to U.S. income taxes (subject to adjustment
for foreign tax credits, if any), state income taxes and
withholding taxes payable to various foreign countries.
Determination of the amount is not practible because of the
complexities associated with this hypothetical calculation. In December 2004, the FASB issued FASB Staff Position (FSP)
No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FSP 109-2). The American Jobs
Creation Act of 2004( the Act) provides for a special
one-time tax deduction of 85% of certain foreign earnings
that are repatriated as defined in the Act. FASB Statement
No. 109,Accounting for Income Taxes, requires adjustments
of deferred F-25




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS tax liabilities and assets for the effects of a change in tax
laws or rates in the period that includes the enactment date.
FSP No. 109-2 provides an exception to allow an enterprise
time beyond the financial reporting period of enactment to
evaluate the effect of the Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying
FASB Statement No. 109. The Company has not yet completed evaluating the impact of
the repatriation provisions. Accordingly, as provided for in
FSP 109-2, the Company has not adjusted its tax expense or
deferred tax liability to reflect the repatriation provisions
of the Act. The Company will reflect the effects of the Act,
if any, in 2005, as part of the income tax expense in the
period action is taken. The Company does, however, based upon
the level of foreign earnings for 2004, believe FSP No. 109-2
would not have a material impact on its financial position,
results of operations or cash flows. The reconciliation of income tax on continuing operations
computed at the United States federal statutory tax rate of
34% to income tax expense (benefit) is as follows (in
thousands): Year Ended December 312004
    
    
    2003
    
    
    2002Tax (benefit) at the United States statutory rate
    
    $
    (562
    )
    
    $
    (428
    )
    
    $
    (553
    )State income tax (benefit) net of federal benefit
    
    
    (60
    )
    
    
    (46
    )
    
    
    (59
    )Other permanent differences, net
    
    
    (3
    )
    
    
    (23
    )
    
    
    (69
    )Valuation allowance adjustment
    
    
    625
    
    
    
    497
    
    
    
    681Total
    
    $
    
    
    
    $
    
    
    
    $
    
 Deferred income taxes reflect the net tax effect of
temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities at December 31
are as follows (in thousands): Deferred Tax Assets
    
    2004
    
    
    2003Allowance for doubtful accounts
    
    $
    41
    
    
    $
    24Inventory
    
    
    351
    
    
    
    237Net operating loss carry forward
    
    
    3,676
    
    
    
    3,144Depreciation
    
    
    67
    
    
    
    86Intangible assets
    
    
    297
    
    
    
    316Stock issued in exchange for services
    
    
    321
    
    
    
    3214,753
    
    
    
    4,128Valuation allowance
    
    
    (4,753
    )
    
    
    (4,128
    )Total deferred tax asset, net
    
    $
    
    
    
    $
    
 Realization of substantially all of the Companys
deferred tax asset at December 31, 2004 is not considered to
be more likely than not and accordingly a $4,753,000
valuation allowance has been provided. F-26




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2004, the Company has available net
operating loss carryforwards of approximately $8,600,000 for
U.S. purposes, expiring from 2018 through 2024. 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 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 expired under their terms on March 23,
2005. During the exercise period, no warrants were exercised. 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 purposes. 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. Prior to August 2004, the Companys common stock was
listed on the Nasdaq SmallCap Market and was required to
comply with the Nasdaq SmallCap Marketplace Rules. One of
those rules required 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 F-27




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 agreed
to provide services. At December 31, 2003, all shares had
vested in accordance with the agreements. 13. 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. 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. 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. F-28




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 2004, the two principal shareholders, as employees,
received an aggregate of 150,000 options at an exercise price
of $0.90 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. In 2004, 91,900 options
exercisable at $0.90 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 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. During 2004, the
Company granted options to purchase 75,000 shares of its
common stock at an exercise price of $0.90 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 counterpartys performance is
complete, neither of which has occurred as of December 31,
2004. The license agreement and the related stock options
were terminated in May 2005, prior to the attainment of a
measurement date. A summary of the status of the Companys fixed stock option
plan and non-plan options as of December 31, 2004, 2003 and
2002, and changes during the years then ended is presented
below (in thousands, except exercise price per option): F-29




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AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004
    
    
    DECEMBER 31, 2003
    
    
    DECEMBER 31, 2002WEIGHTED AVERAGE EXERCISE
    
    
    WEIGHTED AVERAGE EXERCISE
    
    
    WEIGHTED AVERAGE EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    2,652
    
    
    $
    1.33
    
    
    
    2,414
    
    
    $
    1.44
    
    
    
    1,993
    
    
    $
    1.56Granted
    
    
    317
    
    
    
    0.90
    
    
    
    375
    
    
    
    0.81
    
    
    
    475
    
    
    
    0.93Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (52
    )
    
    
    1.08
    
    
    
    (137
    )
    
    
    1.79
    
    
    
    (54
    )
    
    
    1.72Outstanding at end of year
    
    
    2,917
    
    
    $
    1.29
    
    
    
    2,652
    
    
    $
    1.33
    
    
    
    2,414
    
    
    $
    1.44Options exercisable at year-end
    
    
    2,667
    
    
    $
    1.33
    
    
    
    2,092
    
    
    $
    1.42
    
    
    
    1,969
    
    
    $
    1.41Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    0.90
    
    
    
    
    
    
    $
    0.81
    
    
    
    
    
    
    $
    0.93
 The following table summarizes information about fixed
stock options and non-plan options outstanding at December
31, 2004 (in thousands, except per share amounts): Number
    
    
    Weighted-Average
    
    
    Weighted-
    
    
    Number
    
    
    Weighted-Range of Average
    
    Outstanding at
    
    
    Remaining
    
    
    Average Exercise
    
    
    Exercisable at
    
    
    AverageExercise Price
    
    12/31/04
    
    
    Contractual Life
    
    
    Price
    
    
    12/31/04
    
    
    Exercise Price$0.81 - $1.08
    
    
    1,332
    
    
    
    7.79
    
    
    $
    0.91
    
    
    
    1,082
    
    
    $
    0.93$1.47 - $2.13
    
    
    1,585
    
    
    
    4.54
    
    
    $
    1.61
    
    
    
    1,585
    
    
    $
    1.612,917
    
    
    
    
    
    
    
    
    
    
    
    2,667
 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Results for the quarterly periods in the years ended December 31, 2004 and 2003 are as
follows: First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands, except earnings per share)2004:Net Sales
    
    $
    4,170
    
    
    $
    3,330
    
    
    $
    4,483
    
    
    $
    3,772Total operating expenses (A)
    
    
    4,204
    
    
    
    3,586
    
    
    
    4,455
    
    
    
    4,678Income (loss) from operations
    
    
    (34
    )
    
    
    (256
    )
    
    
    28
    
    
    
    (906
    )(Loss) from continuing operations
    
    
    (97
    )
    
    
    (317
    )
    
    
    (31
    )
    
    
    (1,208
    )Basic and diluted net (loss) per
share from continuing operations
    
    $
    (.02
    )
    
    $
    (.05
    )
    
    $
    (.00
    )
    
    $
    (.20
    )
 First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands, except earnings per share)2003:Net Sales
    
    $
    4,030
    
    
    $
    3,663
    
    
    $
    4,049
    
    
    $
    3,964Total operating expenses
    
    
    3,963
    
    
    
    3,995
    
    
    
    4,154
    
    
    
    4,368Income (loss) from operations
    
    
    67
    
    
    
    (332
    )
    
    
    (105
    )
    
    
    (404
    )Income (loss) from continuing operations
    
    
    54
    
    
    
    (334
    )
    
    
    (135
    )
    
    
    (843
    )Basic and diluted net (loss) per share
from continuing operations
    
    
    .01
    
    
    
    (.06
    )
    
    
    (.02
    )
    
    
    (.14
    )
   (A)
    
    During the fourth quarter of 2004, a provision of $366 was recorded for inventory
obsolescence. F-30




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##### Table of Contents



AESP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. TRANSITION DISCLOSURE FOR VARIABLE INTEREST ENTITIES The Company has evaluated its relationship with AESP Ukraine
(Ukraine), an entity created before February 1, 2003 and
has determined that as of December 31, 2004, it is not a
variable interest entity under the provisions of FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities (Revised December 2003)(Interpretation No. 46).
Ukraine was a wholly-owned subsidiary, which the Company sold
to a then thinly capitalized entity in January 2001. During
the first quarter of 2004, the Company determined that it was
the primary beneficiary (as defined in Interpretation No. 46)
of Ukraine and as such, under Interpretation No. 46, Ukraine
was a variable interest entity and the Company was required
to consolidate Ukraines assets, liabilities and
noncontrolling interests as of March 31, 2004 at their
respective carrying values, as if it were a subsidiary of the
Company. At that time, Ukraine was indebteded to the Company
for trade accounts payable and a note, dating from the sale
in 2001. Based on the Companys quarterly review of the note
receivable from the buyer of its former wholly-owned
subsidiary, the Company believes it is probable that the note
is not collectible. The Companys assessment of the notes
collectibility is based, among other things, on a review of
the buyers financial statements, collections received in
2004 and representations from the buyer on his financial
wherewithal. Accordingly, the Company recorded a $222,000
impairment in 2004 and terminated the note. In exchange for
terminating the balance of the loan, the parties agreed to a
higher markup on our sales to this distributor, beginning in
2005. Based on the termination of the note and its
restrictive covenants, this distributor is no longer
considered to be a variable interest entity under the
provisions of Interpretation No. 46 and was deconsolidated at
December 31, 2004. As of December 31, 2003, the Company recorded a $381,000
impairment against the note receivable, based on the
Companys then assessment that it was probable that the note
was not fully collectible. The remaining balance was written
off at December 31, 2004, as the note was cancelled effective
December 2004. The Company also considered whether RSB Holdings, Inc. (RSB),
a related party, is a variable interest entity. RSB, which is
owned by the Companys principal shareholders, is the lessor
on the Companys corporate headquarters in Miami, Florida.
Under the provisions of Interpretation No. 46, the Company
has determined that RSB is not a variable interest entity. F-31




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##### Table of Contents



SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2004
(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 31,2004
    
    $
    65
    
    
    $
    50
    
    
    $
    
    
    
    $
    9
    
    
    $
    1062003
    
    
    66
    
    
    
    6
    
    
    
    
    
    
    
    7
    
    
    
    652002
    
    
    144
    
    
    
    73
    
    
    
    
    
    
    
    151
    
    
    
    66Valuation allowance on deferred tax assets:Year ended December 31,2004
    
    $
    4,128
    
    
    $
    625
    
    
    $
    
    
    
    $
    
    
    
    $
    4,7532003
    
    
    3,631
    
    
    
    497
    
    
    
    
    
    
    
    
    
    
    
    4,1282002
    
    
    2,950
    
    
    
    681
    
    
    
    
    
    
    
    
    
    
    
    3,631Valuation allowance for assets of business
transferred under contractual arrangement:Year ended December 31,2004
    
    $
    381
    
    
    $
    
    
    
    $
    
    
    
    $
    381
    
    
    $
    2003
    
    
    
    
    
    
    381
    
    
    
    
    
    
    
    
    
    
    
    3812002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (A)
    
    Represents accounts receivable written-off and note receivable terminated. F-32




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##### Table of Contents



EXHIBIT INDEX EXHIBIT
    
    DESCRIPTION10.41
    
    Agreement on Transfer of Ownership Interest concluded between
Apron s.r.o. and AESP, Inc. dated March 4, 2005.10.42
    
    Assumption of Guarantee for Payment of Consideration for the
Transfer of Ownership Interest between Ing. Ivo Kravacek and AESP,
Inc. dated March 4, 2005.10.43
    
    Termination Agreement between Slav Stein and the Company.10.44
    
    Termination Agreement between Roman Briskin and the Company.10.45
    
    First Amendment to Account Transfer and Purchase Agreement dated
March 23, 2004 between Marquette Commercial Finance, Inc.
(formerly KBK Financial, Inc.) and the Company.10.46
    
    Second Amendment to Account Transfer and Purchase Agreement dated
April 21, 2004 between Marquette Commercial Finance, Inc.
(formerly KBK Financial, Inc.) and the Company.10.47
    
    Third Amendment to Account Transfer and Purchase Agreement dated
August 12, 2004 between Marquette Commercial Finance, Inc.
(formerly KBK Financial, Inc.) and the Company.10.48
    
    Fourth Amendment to Account Transfer and Purchase Agreement dated
March 30, 2005 between Marquette Commercial Finance, Inc.
(formerly KBK Financial, Inc.) and the Company.10.49
    
    First Amendment to Loan Agreement and Note, Waiver and Consent
Dated April 28, 2005 between Bendes Investment Ltd., AESP, Inc.,
Slav Stein and Roman Briskin.10.50
    
    Termination Agreement, dated
May 3, 2005, between Daidone-Steffens, LLC and the Company.10.51
    
    Termination Agreement, dated
December 30, 2004, between the Company, Yuri Burshtein and AESP
Ukraine.21
    
    List of Subsidiaries31.1
    
    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.