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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2005, OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM---------------- TO ----------------
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1351610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 E. Iola
Broken Arrow, Oklahoma 74012
(Address of principal executive office) (Zip Code)
(918) 251-9121
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for much shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ----- No X
Shares outstanding of the issuer's $.01 par value common stock as of April 29,
2005 were 10,070,172.
Page
Part I - Financial Information ----
Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 2005 (Unaudited) and September 30, 2004 3
Consolidated Condensed Statements of Income and Comprehensive
Income (Unaudited)
Three Months and Six Months Ended March 31, 2005 and 2004 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
Six Months Ended March 31, 2005 and 2004 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 16
Signatures 17
- 2 -
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
2005 2004
(Unaudited) (Audited)
----------- ---------
Assets
Current assets:
Cash $ 577,551 $ 1,316,239
Accounts receivable, net of allowance of
$52,871 and $68,063 3,857,440 4,787,749
Income taxes receivable 291,496 -
Inventories, net of allowance for excess
and obsolete inventory of $1,093,000 23,281,960 20,978,714
Deferred income taxes 756,000 651,000
---------- ----------
Total current assets 28,764,447 27,733,702
Property and equipment, at cost:
Machinery and equipment 2,190,126 2,138,798
Land and buildings 1,302,527 1,302,527
Leasehold improvements 521,972 521,972
---------- ----------
4,014,625 3,963,297
Less accumulated depreciation and
amortization (1,670,489) (1,561,698)
---------- ----------
Net property and equipment 2,344,136 2,401,599
Other assets:
Deferred income taxes 933,000 1,042,000
Goodwill 1,150,060 1,150,060
Other assets 227,103 31,222
----------- -----------
Total other assets 2,310,163 2,223,282
----------- -----------
Total assets $ 33,418,746 $ 32,358,583
=========== ===========
See notes to unaudited consolidated condensed financial statements.
- 3 -
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
2005 2004
(Unaudited) (Audited)
----------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,977,346 $ 1,758,695
Accrued expenses 695,893 1,011,911
Accrued income taxes - 120,748
Bank revolving line of credit 1,835,750 3,225,183
Notes payable-current portion 1,237,954 1,237,047
Dividends payable 210,000 210,000
----------- -----------
Total current liabilities 6,956,943 7,563,584
Notes payable 6,528,035 7,147,334
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$1.00 par value, at stated value:
Series B, 7% cumulative; 300,000 shares
issued and outstanding with a stated value
of $40 per share 12,000,000 12,000,000
Common stock, $.01 par value; 30,000,000
shares authorized; 10,091,272 and 10,081,789
shares issued, respectively 100,913 100,818
Paid-in capital (7,268,724) (7,285,564)
Retained earnings 15,069,500 12,886,575
Accumulated other comprehensive income:
Unrealized gain on interest rate swap 86,243 -
---------- -----------
19,987,932 17,701,829
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
---------- -----------
Total stockholders' equity 19,933,768 17,647,665
---------- -----------
Total liabilities and stockholders' equity $ 33,418,746 $ 32,358,583
=========== ===========
See notes to unaudited consolidated condensed financial statements.
- 4 -
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31, Six Months Ended March 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales income $ 8,681,531 $10,473,636 $19,798,815 $20,638,015
Net service income 1,213,355 1,180,405 2,357,196 2,308,526
----------- ----------- ----------- -----------
Total income 9,894,886 11,654,041 22,156,011 22,946,541
Costs of sales 5,540,336 7,047,283 12,913,713 13,766,697
Cost of service 834,834 773,174 1,666,168 1,475,532
----------- ----------- ----------- -----------
Gross profit 3,519,716 3,833,584 7,576,130 7,704,312
Operating, selling, general
and administrative
expenses 1,587,332 1,347,243 3,097,874 2,919,059
Depreciation and
amortization 58,109 65,586 115,140 130,575
----------- ----------- ----------- -----------
Income from operations 1,874,275 2,420,755 4,363,116 4,654,678
Interest expense 147,037 41,129 293,191 96,882
----------- ----------- ----------- -----------
Income before income taxes 1,727,238 2,379,626 4,069,925 4,557,796
Provision for income taxes 639,000 856,000 1,467,000 1,641,000
----------- ----------- ----------- -----------
Net income 1,088,238 1,523,626 2,602,925 2,916,796
----------- ----------- ----------- -----------
Other comprehensive income:
Unrealized gain on interest
rate swap (net of $46,584
and $52,859 in taxes) 76,004 - 86,243 -
----------- ----------- ----------- -----------
Comprehensive income 1,164,242 1,523,626 2,689,168 2,916,796
=========== =========== =========== ===========
Net income 1,088,238 1,523,626 2,602,925 2,916,796
Preferred dividends 210,000 310,000 420,000 620,000
----------- ----------- ----------- -----------
Net income attributable
to common stockholders $ 878,238 $ 1,213,626 $ 2,182,925 $ 2,296,796
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.09 $ 0.12 $ 0.22 $ 0.23
Diluted $ 0.09 $ 0.11 $ 0.22 $ 0.21
Shares used in per share calculation
Basic 10,065,128 10,035,613 10,063,441 10,023,463
Diluted 10,117,578 12,107,469 10,117,972 12,095,451
See notes to unaudited consolidated condensed financial statements.
- 5 -
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended March 31,
2005 2004
---------- -----------
Cash Flows from Operating Activities
Net income $2,602,925 $ 2,916,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 115,140 130,575
Deferred income tax benefit (48,859) (95,000)
Change in:
Receivables 638,813 (1,725,635)
Inventories (2,303,246) 1,259,829
Other assets (56,779) 9,678
Accounts payable 1,218,651 885,278
Accrued liabilities (436,766) 12,036
---------- ----------
Net cash provided by operating activities 1,729,879 3,393,557
---------- ----------
Cash Flows from Investing Activities
Additions to property and equipment (57,677) (24,700)
Disposals of property and equipment - 24,412
---------- ----------
Net cash used in investing activities (57,677) (288)
---------- ----------
Cash Flows from Financing Activities
Net change under line of credit (1,389,433) (1,521,224)
Payments on stockholder loans - (168,877)
Payments on notes payable (618,392) (100,687)
Proceeds from stock options exercised 16,935 65,309
Payments of preferred dividends (420,000) (620,000)
---------- ----------
Net cash used in financing activities (2,410,890) (2,345,479)
---------- ----------
Net (decrease) increase in cash (738,688) 1,047,790
Cash, beginning of period 1,316,239 496,283
---------- ----------
Cash, end of period $ 577,551 $1,544,073
========== ==========
Supplemental Cash Flow Information
Cash paid for interest $ 293,191 $ 104,924
Cash paid for income taxes $1,930,972 $1,723,808
See notes to unaudited consolidated condensed financial statements.
- 6 -
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, the information furnished reflects all adjustments,
consisting only of normal recurring items which are, in the opinion of
management, necessary in order to make the financial statements not misleading.
The consolidated financial statements as of September 30, 2004 have been
audited by an independent registered public accounting firm. It is suggest-
ed that these consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2004.
Note 2 - Description of Business
ADDvantage Technologies Group, Inc., through its subsidiaries TULSAT
Corporation, ADDvantage Technologies Group of Nebraska, (dba "Lee Enterprise"),
NCS Industries, Inc. ("NCS"), ADDvantage Technologies Group of Missouri, (dba
"Comtech Services"), ADDvantage Technologies Group of Texas,
(dba "Tulsat - Texas"), and Tulsat - Atlanta, LLC ("Tulsat - Atlanta")
(collectively, the "Company"), sells new, surplus, and refurbished cable
television equipment throughout North America in addition to being a repair
center for various cable companies. The Company operates in one business
segment.
Note 3 - Earnings Per Share
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic net earnings per share is computed by dividing net earnings available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net earnings per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be reacquired under the treasury
stock method from the exercise of stock options.
- 7 -
Three Months Ended March 31, Six Months Ended March 31,
2005 2004 2005 2004
----------- ----------- ----------- ----------
Basic EPS Computation:
Net income attributable
to common stockholders $ 878,238 $ 1,213,626 $ 2,182,925 $ 2,296,796
Weighted average outstanding
common shares 10,065,128 10,035,613 10,063,441 10,023,463
Earnings per Share-Basic $ 0.09 $ 0.12 $ 0.22 $ 0.23
========== =========== =========== ===========
Diluted EPS Computation:
Net income attributable
to common stockholders $ 878,238 $ 1,213,626 $ 2,182,925 $ 2,296,796
Add: Dividends on Series
A convertible preferred
stock - 100,000 - 200,000
----------- ----------- ----------- -----------
Net income attributable
to common stockholders -
Diluted $ 878,238 $ 1,313,626 $ 2,182,925 $ 2,496,796
Weighted average outstanding
common shares 10,065,128 10,035,613 10,063,441 10,023,463
Potentially dilutive securities
- -------------------------------
Assumed conversion of 200,000
shares of Series A convertible
preferred stock - 2,000,000 - 2,000,000
Effect of dilutive stock
options 52,450 71,856 54,531 71,988
----------- ---------- ---------- -----------
Weighted average shares
outstanding - assuming
dilution 10,117,578 12,107,469 10,117,972 12,095,451
Earnings per Share
- Diluted $ 0.09 $ 0.11 $ 0.22 $ 0.21
========== ========== ========== ==========
Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At March 31, 2005, a $1,835,750 balance is outstanding under a $7 million
line of credit due September 30, 2005, with interest payable monthly based on
the prevailing 30-day LIBOR rate plus 2.0% (4.9% at March 31, 2005).
Borrowings under the line of credit are limited to the lesser of $7 million
or the sum of 80% of qualified accounts receivable and 50% of qualified
inventory for working capital purposes. Among other financial covenants, the
line of credit agreement provides that the Company's net worth must be greater
than $15 million plus 50% of annual net income (with no deduction for net
losses), determined quarterly. The line of credit is collateralized by
inventory, accounts receivable, equipment and fixtures, and general
intangibles.
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
- 8 -
of credit. The resulting overdraft balance, consisting of outstanding checks,
was $540,679 at March 31, 2005, and is included in the bank revolving line of
credit.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding shares of the Series A Convertible
Preferred Stock at September 30, 2004. The outstanding balance on this note
was $7.4 million at March 31, 2005. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the note on September 30, 2004,
which fixed the interest rate at 6.13%. Upon entering into this interest rate
swap, the Company designated this derivative as a cash flow hedge by
documenting the company's risk management objective and strategy for undertaking
the hedge along with methods for assessing the swap's effectiveness. At March
31, 2005, the fair market value of the interest rate swap approximated its
carrying value of $139,102. Notes payable secured by real estate of $365,989
are due in monthly payments through 2013 with interest at 5.5% through 2008,
converting thereafter to prime minus .25%.
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Value Added Reseller ("VAR") for selected Scientific-Atlanta and
Motorola broadband new products. We also specialize in the sale of
refurbished, previously-owned cable television ("CATV") equipment to CATV
operators and other broadband communication companies. Within the last three
years, we have become distributors for several different manufacturers of
equipment and other related products. It is through our development of these
relationships that we have focused our initiative to market our products
and services to the larger cable multiple system operators ("MSOs"). We
continue to believe that as cable companies look at expanding their services in
key markets and to remain competitive during this period of economic recovery,
there will be an emphasis on minimizing their costs, thus creating a higher
demand for our repair services and surplus-new equipment.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2005
and March 31, 2004
Net Sales. Net sales decreased $1.76 million, or 15.1%, to $9.9 million in the
second quarter of fiscal 2005, from $11.7 million for the same period in fiscal
2004, primarily due to weather and the timing of orders. Heavier than normal
snowfall in the U.S. Northeast and excessive rainfall in the western parts of
the country contributed to a decline or postponement of equipment orders.
Also, several pending orders were awaiting the outcome of the customer's
obtainment of financing arrangements. New equipment sales were down 20.8% to
$6.7 million for the current period, compared with $8.4 million for the same
period of fiscal 2004. Sales of remanufactured equipment decreased by 2.4% to
$2.0 million for the current period, compared with $2.1 million in the same
period last year. Repair service revenues were up 2.8% to $1.21 million for
the current quarter, compared with $1.18 million for the same period last year.
Costs of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
decreased to $5.5 million for the second quarter of fiscal 2005 from $7.0
million for the same period of fiscal 2004. The decrease was primarily due to
the decrease in sales for the period. Costs of sales for new and refurbished
equipment decreased to 63.8% of net sales income for 2005 from 67.3% of net
sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs of sales for repair services
increased to 68.8% of net service income for 2005 from 65.5% of net service
income for 2004. This increase was due primarily to more high-end hybrid and
fiber optic equipment being repaired, which involves a higher relative cost of
material.
Gross Profit. Gross profit decreased $314,000, or 8.2%, to $3.5 million for the
second quarter of fiscal 2005 from $3.8 million for the same period in fiscal
2004. The gross margin percentage was 35.6% for the current quarter, compared
to 32.9% for the same quarter last year. The percentage increase was primarily
due to a decrease in sales of new and surplus equipment, which are accompanied
by margins lower than that of re-manufactured equipment and repairs, and the
allowance for obsolete inventory recorded during 2004 discussed above.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
- 10 -
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $240,000 in the second quarter of fiscal 2005, to $1.59 million
from $1.35 million for the same period in 2004, an increase of 17.8%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the recovery in fiscal
2004 of a bad debt previously written off.
Income from Operations. Income from operations decreased $546,000, or 22.6%,
to $1.87 million for the second quarter of fiscal 2005 from $2.42 million for
the same period last year. This decrease was primarily due to the decrease in
sales of new equipment and the increase in operating, selling, general and
administrative expenses, partially offset by the decrease in costs of sales in
2005.
Interest Expense. Interest expense for the three months ended March 31, 2005
was $147,037 compared to $41,129 for the same period last year. The increase
was primarily attributable to the increase in notes payable at September 30,
2004. The weighted average interest rate paid on our outstanding borrowings
increased to 5.9% for 2005 from 2.75% for 2004.
Income Taxes. The provision for income taxes for fiscal 2005 decreased to
$639,000 from $856,000 in fiscal 2004. This decrease was primarily due to
lower pre-tax earnings in fiscal 2005.
Comparison of Results of Operations for the Six Months Ended March 31, 2005 and
March 31, 2004
Net Sales. Net sales decreased $791,000, or 3.4%, to $22.2 million for the six
months ended March 31, 2005, from $22.9 million for the same period in fiscal
2004, primarily due to weather and the timing of orders in the second quarter.
Heavier than normal snowfall in the U.S. Northeast and excessive rainfall in
the western parts of the country contributed to a decline or postponement of
equipment orders. Also, several pending orders were awaiting the outcome of
the customer's obtainment of financing arrangements. New equipment sales were
down 2.5% to $15.6 million for the current period, compared with $16.0 million
for the same period of fiscal 2004. Sales of remanufactured equipment
decreased by 9.3% to $4.2 million for the current period, compared with $4.7
million in the same period last year. Repair service revenues were up 2.1%
to $2.36 million for the current period, compared with $2.31 million for the
same period last year.
Costs of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
decreased to $12.9 million for the six months ended March 31, 2005 from $13.8
million for the same period of fiscal 2004. The decrease was primarily due to
the decrease in sales for the period. Costs of sales for new and refurbished
equipment decreased to 65.2% of net sales income for 2005 from 66.7% of net
sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs of sales for repair services
increased to 70.7% of net service income for 2005 from 63.9% of net service
income for 2004. This increase was due primarily to more high-end hybrid and
fiber optic equipment being repaired, which involves a higher relative cost of
material.
Gross Profit. Gross profit decreased $128,000, or 1.7%, to $7.6 million for the
six months ended March 31, 2005 from $7.7 million for the same period in fiscal
2004. The gross margin percentage was 34.2% for the current period, compared
to 33.6% for the same period last year. The percentage increase was primarily
due to a decrease in sales of new and surplus equipment, which are accompanied
by margins lower than that of re-manufactured equipment and repairs, and the
allowance for obsolete inventory recorded during 2004 discussed above.
- 11 -
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $179,000 for the six months ended March 31, 2005, to $3.1 million
from $2.9 million for the same period in 2004, an increase of 6.1%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the recovery in fiscal
2004 of a bad debt previously written off.
Income from Operations. Income from operations decreased $292,000, or 6.3%,
to $4.4 million for the six months ended March 31, 2005 from $4.7 million for
the same period last year. This decrease was primarily due to the decrease in
sales of new and refurbished equipment and the increase in operating, selling,
general and administrative expenses, partially offset by the decrease in costs
of sales in 2005.
Interest Expense. Interest expense for the six months ended March 31, 2005 was
$293,191 compared to $96,882 for the same period last year. The increase was
primarily attributable to the increase in notes payable at September 30, 2004.
The weighted average interest rate paid on our outstanding borrowings increased
to 5.5% for 2005 from 2.75% for 2004.
Income Taxes. The provision for income taxes for fiscal 2005 decreased to
$1.47 million from $1.64 million in fiscal 2004. This decrease was primarily
due to lower pre-tax earnings in fiscal 2005.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal
year 2004 includes a summary of the significant accounting policies or methods
used in the preparation of our Consolidated Financial Statements. Some of those
significant accounting policies or methods require us to make estimates and
assumptions that affect the amounts reported by us. We believe the following
items require the most significant judgments and often involve complex
estimates.
General
-------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates and judgments on historical
experience, current market conditions, and various other factors we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to the carrying value of our inventory and, to
a lesser extent, the adequacy of our allowance for doubtful accounts.
Inventory Valuation
-------------------
Inventory consists of new and used electronic components for the cable
television industry. Inventory is stated at the lower of cost or market.
Market is defined principally as net realizable value. Cost is determined
using the weighted average method.
- 12 -
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products of which manufacturers have
discontinued production, or are seeking shipment on a same-day basis. Our
position in the industry requires us to carry large inventory quantities
relative to quarterly sales, but also allows us to realize high overall gross
profit margins on our sales. Carrying these large inventories represents our
largest risk. For individual inventory items, we may carry inventory
quantities that are excessive relative to market potential, or we may not be
able to recover our acquisition costs for sales we are able to make in a
reasonable period. Over the past two years, our investment in inventory has
shifted to become predominantly new products purchased from manufacturers and
"surplus-new" products, which are unused products purchased from other
distributors or MSOs.
In order to address the risks associated with our investment in inventory,
we regularly review inventory quantities on hand and reduce the carrying value
by recording a provision for excess and obsolete inventory based primarily on
inventory aging and forecasts of product demand and pricing. The broadband
industry is characterized by changing customer demands and changes in
technology that could result in significant increases or decreases of inventory
pricing or increases in excess or obsolete quantities on hand. Our estimates
of future product demand may prove to be inaccurate; in which case the
provision required for excess and obsolete inventory may have been understated
or overstated. Although every effort is made to ensure the accuracy of
internal forecasting, any significant changes in demand or prices could have a
significant impact on the carrying value of our inventory and reported
operating results. Demand for some of the items in our inventory has been
impacted by recent economic conditions present in the cable industry. As of
September 30, 2004, we have reduced inventories by recording an allowance for
excess and obsolete inventories totaling $1,093,000. No addition to this
allowance was recorded during the six months ended March 31, 2005. An
allowance of $413,000 was recorded during the six months ended March 31, 2004.
Accounts Receivable Valuation
-----------------------------
Management judgments and estimates are made in connection with establish-
ing the allowance for doubtful accounts. Specifically, we analyze the aging of
accounts receivable balances, historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in our customer
payment terms. Significant changes in customer concentration or payment terms,
deterioration of customer creditworthiness, or weakening in economic trends
could have a significant impact on the collectibility of receivables and our
operating results. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. At March 31, 2005, accounts receivable,
net of allowance for doubtful accounts of $53,000, amounted to $3.9 million.
Liquidity and Capital Resources
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $7 million at a borrowing rate based on the
prevailing 30-day LIBOR rate plus 2.0% (4.9% at March 31, 2005.) This line of
credit will provide the lesser of $7 million or the sum of 80% of qualified
accounts receivable and 50% of qualified inventory in a revolving line of
credit for working capital purposes. The line of credit is collateralized by
inventory, accounts receivable, equipment and fixtures, and general intangibles
and had an outstanding balance at March 31, 2005, of $1.8 million, due
- 13 -
September 30, 2005. We intend to renew the agreement at the maturity date
under similar terms.
Cash decreased $739,000 during the first six months of fiscal 2005.
During the first six month of fiscal 2005, operating activities provided
$1,730,000 of cash. Net earnings adjusted for noncash items provided
$2,669,000 of cash, and changes in receiveables provided $639,000 of cash.
Changes in inventories, accounts payable, accrued liabilities and other assets
used $1,578,000 of cash. Cash used by investing activities was $58,000 for
property and equipment expenditures. Financing activities used $1,390,000 to
pay down the line of credit, $618,000 for payments on notes payable, and
$420,000 for payments of preferred dividends, while $17,000 of cash was
provided from the exercise of stock options.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding shares of our Series A Convertible
Preferred Stock at September 30, 2004. The outstanding balance on this note
was $7.4 million at March 31, 2005. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the note on September 30, 2004,
which fixed the interest rate at 6.13%. Notes payable secured by real estate
of $365,989 are due in monthly payments through 2013 with interest at 5.5%
through 2008, converting thereafter to prime minus .25%.
We finance our operations primarily through internally generated funds and
the bank line of credit. Monthly payments of principal for notes payable and
loans used to purchase buildings total $1.2 million in the next 12 months. We
expect to fund these payments through cash flows from operations.
Forward-Looking Statements
Certain statements included in this report which are not historical facts
are forward-looking statements. These forward-looking statements are based on
current expectations, estimates, assumptions and beliefs of management; and
words such as "expects," "anticipates," "intends," "plans," "believes,"
"projects," "estimates" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including, but not limited to, the future prospects for our
business, our ability to generate or to raise sufficient capital to allow it to
make additional business acquisitions, changes or developments in the cable
television business that could adversely affect our business or operations, the
continued availability to us of our key management personnel, general economic
conditions, the availability of new and used equipment and other inventory and
our ability to fund the costs thereof, and other factors which may affect our
ability to comply with future obligations. Accordingly, actual results may
differ materially from those expressed in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its revolving line of credit. The interest rates under
the line of credit fluctuate with the LIBOR rate. At March 31, 2005, the
outstanding balances subject to variable interest rate fluctuations totaled
$1.8 million. Future changes in interest rates could cause our borrowing costs
to increase or decrease.
The Company maintains no cash equivalents. However, the Company entered
into an interest rate swap on September 30, 2004, in an amount equivalent to
the $8 million notes payable in order to minimize interest rate risk. Although
the note bears interest at the prevailing 30-day LIBOR rate plus 2.50%, the
swap effectively fixed the interest rate at 6.13%. The fair value of this
derivative, $139,102 at March 31, 2005, will increase or decrease opposite any
future changes in interest rates. All sales and purchases are denominated in
U.S. dollars.
Item 4. Controls and Procedures
Based on his evaluation, our Chief Executive Officer and Principal
Financial Officer has concluded that our disclosure controls and procedures (as
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defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this report on Form 10-Q are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act are recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
During the period covered by this report on Form 10-Q, there have been no
changes in our internal controls over financial reporting that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held in Broken
Arrow, Oklahoma at the Corporate Offices of ADDvantage Technologies Group, Inc.
on March 8, 2005. At the meeting, the following directors were elected for one
year terms (with the votes as indicated).
FOR WITHHELD
--- --------
Kenneth A. Chymiak 9,758,806 396
David E. Chymiak 9,758,806 396
Stephen J. Tyde 9,758,806 396
Freddie H. Gibson 9,754,466 4,736
Henry F. McCabe 9,754,466 4,736
The shareholders also approved the appointment of Tullius, Taylor, Sartain
& Sartain as the Company's auditors for the 2005 fiscal year with 9,758,231
votes FOR, 471 votes AGAINST, and 500 votes ABSTAINING.
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Item 6. Exhibits
Exhibit No. Description
31.1 Certification of Chief Executive Officer and Chief
Financial Officer under Section 302 of the Sarbanes
Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
/s/ Kenneth A. Chymiak
-------------------------------
Date: May 3, 2005 Kenneth A. Chymiak,
President and Chief Executive
Officer (Principal Executive
Officer and Principal Financial
Officer)
/s/ Dee Cooper
-------------------------------
Date: May 3, 2005 Dee Cooper,
Controller
(Chief Accounting Officer)
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Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. Description
31.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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