U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
|_|TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10799
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1351610
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 East Iola
Broken Arrow, Oklahoma 74012
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (918) 251-9121
Securities registered under Section 12(b) of the Act:
Common Stock, $.01 par value
Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes No X
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The aggregate market value of the shares of common stock, par value $.01
per share, held by non-affiliates of the issuer was $14,419,734 as of March 31,
2004.
The number of the registrant's common stock, $.01 par value per share,
outstanding was 10,082,889 as of December 1, 2004.
The identified sections of definitive Proxy Statement to be filed as
Schedule 14A pursuant to Regulation 14A in connection with the Registrant's 2005
annual meeting of shareholders is incorporated by reference into Part III of
this Form 10-K. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the close of the registrant's most
recent fiscal year.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 2004
INDEX
Page
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 11
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 38
Item 9A. Controls and Procedures 38
Item 9B. Other Information 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accounting Fees and Services 40
PART IV
Item 15. Exhibits, Financial Statement Schedules 40
2
Forward Looking-Statements
Certain matters discussed in this report constitute forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, including statements which relate to, among other things, expectations
of the business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding our
goals and objectives and other similar matters. The words "estimates",
"projects," "intends," "expects," "anticipates," "believes," "plans" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this report
and the documents incorporated into it by reference. These and other statements
which are not historical facts are hereby identified as "forward-looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. These statements are subject to a number of risks,
uncertainties and developments beyond the control or foresight of the Company,
including changes in the trends of the cable television industry, technological
developments, changes in the economic environment generally, the growth or
formation of competitors, changes in governmental regulation or taxation,
changes in our personnel and other such factors. Our actual results,
performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in the forward-looking
statements. We do not undertake any obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date of this report or to reflect the occurrence of unanticipated events.
Readers should carefully review the risk factors described herein and in other
documents we file from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
Recent Developments in the Business
On September 30, 2004, the Company redeemed all of the outstanding shares
of its Series A 5% Cumulative Convertible Preferred Stock at its aggregate
stated value of $8 million. All of the outstanding shares of Series A Preferred
Stock were held beneficially by David E. Chymiak, Chairman of the Board of the
Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the
Company. The Company financed the redemption with a new credit agreement with
its bank which includes a Revolving Credit Commitment in the amount of $7
million and a Term Loan Commitment in the amount of $8 million. The proceeds
from the Term Loan were used to redeem the Series A Preferred Stock.
On September 29, 2004, the Company's majority shareholders, David Chymiak
and Ken Chymiak, entered into a stock purchase agreement in which they sold
500,000 shares of their common stock to Barron Partners, LP ("Barron"), a
private investment partnership, for $3.25 per share. Under this agreement,
Barron also received options to purchase up to 3 million additional shares of
the common stock owned by these majority shareholders. The Company did not
receive any of the proceeds from the sale of the shares and will not receive any
of the proceeds from the exercise of any of the options, but paid the cost of
registering the sales for resale by the selling shareholders. The Company filed
a registration statement covering the resale of the shares of common stock sold
as well as the shares of common stock issuable upon exercise of the options.
3
Risk Factors
Each of the following risk factors could adversely affect our business,
operating results and financial condition, as well as adversely affect the value
of an investment in our common stock. Additional risks not presently known, or
which we currently consider immaterial also may adversely affect us.
We are highly dependent upon our principal executive officers who also
control us. At September 30, 2004, David Chymiak, Chairman of the Board, and
Kenneth Chymiak, President and Chief Executive Officer, owned approximately 74%
of our outstanding common stock and 100% of our outstanding preferred stock. Our
performance is highly dependent upon the skill, experience and availability of
these two persons. Should either of them become unavailable to us, our
performance and results of operations would probably be adversely affected to a
material extent. In addition, they will continue to own a controlling interest
in us, thus restricting our ability to take any action without their approval or
acquiescence. Likewise, as shareholders, they may elect to take certain actions
which may be contrary to the interests of the other shareholders.
Our business is dependent on our customers' capital budgets. Our
performance is impacted by our customers' capital spending for constructing,
rebuilding, maintaining or upgrading broadband communications systems. Capital
spending in the telecommunications industry is cyclical. A variety of factors
will affect the amount of capital spending, and therefore, our sales and
profits, including:
o consolidations and recapitalizations in the cable television industry;
o general economic conditions;
o availability and cost of capital;
o other demands and opportunities for capital;
o regulations;
o demands for network services;
o competition and technology; and
o real or perceived trends or uncertainties in these factors.
Developments in the industry and in the capital markets in recent years
have reduced access to funding for certain customers, causing delays in the
timing and scale of deployments of our equipment, as well as the postponement or
cancellation of certain projects by our customers.
On the other hand, a significant increase in the capital budgets of our
customers could impact us in a negative fashion. Much of our inventory consists
of refurbished and surplus-new equipment and materials that we have acquired
from other cable operators. If our customers seek higher end, more expensive
equipment, the demand for our products may suffer.
The markets in which we operate are very competitive, and competitive
pressures may adversely affect our results of operations. The markets for
broadband communication equipment are extremely competitive and dynamic,
requiring the companies that compete in these markets to react quickly and
capitalize on change. This will require us to make quick decisions and deploy
substantial resources in an effort to keep up with the ever-changing demands of
the industry. We compete with national and international manufacturers,
distributors, resellers and wholesalers including many companies larger than we
are.
4
The rapid technological changes occurring in the broadband markets may lead
to the entry of new competitors, including those with substantially greater
resources than we have. Because the markets in which we compete are
characterized by rapid growth and, in some cases, low barriers to entry, smaller
niche market companies and start-up ventures also may become principal
competitors in the future. Actions by existing competitors and the entry of new
competitors may have an adverse effect on our sales and profitability. The
broadband communications industry is further characterized by rapid
technological change. In the future, technological advances could lead to the
obsolescence of a substantial portion of our current inventory, which could have
a material adverse effect on our business.
Consolidations in the telecommunications industry could result in delays or
reductions in purchases of products, which would have a material adverse effect
on our business. The telecommunications industry has experienced the
consolidation of many industry participants, and this trend is expected to
continue. We and one or more of our competitors may each supply products to
businesses that have merged, such as AT&T Broadband and Comcast, or will merge
in the future. Consolidations could result in delays in purchasing decisions by
the merged businesses, and we could play either a greater or lesser role in
supplying the communications products to the merged entity. These purchasing
decisions of the merged companies could have a material adverse effect on our
business. Mergers among the supplier base also have increased, and this trend
may continue. The larger combined companies with pooled capital resources may be
able to provide solution alternatives with which we would be at a disadvantage
to compete. The larger breadth of product offerings by these consolidated
suppliers could result in customers electing to trim their supplier base for the
advantages of one-stop shopping solutions for all of their product needs.
Consolidation of the supplier base could have a material adverse effect on our
business.
Our success depends in large part on our ability to attract and retain
qualified personnel in all facets of our operations. Competition for qualified
personnel is intense, and we may not be successful in attracting and retaining
key executives, marketing, engineering and sales personnel, which could impact
our ability to maintain and grow our operations. Our future success will depend,
to a significant extent, on the ability of our management to operate
effectively. The loss of services of any key personnel, the inability to attract
and retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers and other technical professionals, could
negatively affect our business.
We are substantially dependent on certain manufacturers, and an inability
to obtain adequate and timely delivery of products could adversely affect our
business. We are a value added reseller and master distributor for
Scientific-Atlanta and a value added reseller of Motorola broadband and
transmission products. Should these relationships terminate or deteriorate, or
should either manufacturer be unable or unwilling to deliver the products needed
by us for our customers, our performance could be adversely impacted. An
inability to obtain adequate deliveries or any other circumstance that would
require us to seek alternative sources of supplies could affect our ability to
ship products on a timely basis. Any inability to reliably ship our products on
time could damage relationships with current and prospective customers and harm
our business.
We have a large investment in our inventory which could become obsolete or
outdated. Much of our inventory is acquired from other cable operators and is in
the nature of used, refurbished, remanufactured or surplus new equipment.
Determining the amounts and types of inventory requires us to speculate to some
degree as to what the future demands of our customers will be. Technological
changes, consolidation in the industry or competition from other types of
broadcast media could substantially reduce the demands for our inventory, which
could have a material adverse effect upon our business and financial results.
5
Our outstanding common stock is very thinly traded. While we have
approximately 10.1 million shares of common stock outstanding, 69.2% of these
shares are beneficially owned at December 1, 2004 by David Chymiak and Kenneth
Chymiak and 4.9% are beneficially held by Barron Partners, L.P. As a
consequence, only about 21% of our shares of common stock are held by
nonaffiliated, public investors and available for public trading. The average
daily trading volume of our common stock is low. Thus, investors in our common
stock may encounter difficulty in liquidating their investment in a timely and
efficient manner.
We have not paid any dividends on our outstanding common stock and have no
plans to pay dividends in the future. We currently plan to retain our earnings
and have no plans to pay dividends on our common stock in the future. We may
also enter into credit agreements or other borrowing arrangements which may
restrict our ability to declare dividends on our common stock.
Our principal executive officers and shareholders have a number of
conflicts of interest with us. Certain of our key properties are leased from
entities owned by our principal executive officers. Also, these executives have
made loans to us in various amounts in the past and were paid interest on these
loans. These transactions are described in the proxy statement that is
incorporated by reference into this report. These arrangements create certain
conflicts of interest between these executives and us that may not always be
resolved in a manner most beneficial to us.
Our international operations may be adversely affected by a number of
factors. Although the majority of our business efforts are focused in the United
States, we have international operations in the Philippines, Taiwan, Korea,
Japan, Australia, Brazil, Ecuador, Dominican Republic, Honduras and a few other
Latin American countries. We currently have no binding agreements or commitments
to make any material international investment. Our foreign operations may be
adversely affected by a number of factors, including:
o local political and economic developments could restrict or increase
the cost of our
o foreign operations;
o exchange controls and currency fluctuations;
o tax increases and retroactive tax claims could increase costs of our
foreign operations;
o expropriation of our property could result in loss of revenue,
property and equipment;
o import and export regulations and other foreign laws or policies could
result in loss of revenues; and
o laws and policies of the United States affecting foreign trade,
taxation and investment could restrict our ability to fund foreign
operations or make foreign operations more costly.
6
Current Business
We are a supplier of a comprehensive line of electronics and hardware for
the cable television ("CATV") industry (both franchise and non-franchise, or
private cable). Our products are used to acquire, distribute and protect the
broad range of communications signals carried on fiber optic, coaxial cable and
wireless distribution systems. These products are sold to customers providing an
array of communications services including television, high-speed data
(internet) and telephony, to single family dwellings, apartments and
institutions such as hospitals, prisons, universities, schools, cruise boats and
others.
TULSAT, one of our subsidiaries, is an exclusive Scientific-Atlanta Master
Distributor for certain legacy products and distributes most of
Scientific-Atlanta's other products. TULSAT has been designated an authorized
third party Scientific-Atlanta repair center for selected products. Another
subsidiary, NCS Industries, is a leading distributor of Motorola broadband
products. Other subsidiaries distribute Standard, Corning-Gilbert,
Blonder-Tongue, RL Drake, Quintech and Videotek products. We continue to upgrade
our products to stay in the forefront of the communications broadband technology
revolution.
We continue to expand our core product lines (head end and distribution),
to maintain the ability to provide electronics equipment needed to build smaller
cable systems and much of the equipment needed in larger systems for the most
efficient operation and highest profitability in high density areas.
We also continue to purchase surplus equipment from cable operators and
others that become available as a result of upgrades in their systems or
overstocks in their warehouses. We maintain one of the industries' largest
inventories of new and refurbished equipment, allowing us to provide products
within a short period of time. Each of our six locations operates service
centers specializing in Motorola, Magnavox, Scientific-Atlanta and Alpha Power
Supplies repairs.
Overview of the Industry
We participate in markets for equipment sold primarily to cable operators
and other related parties. As internet usage by households continues to
increase, more customers are electing to switch from dial-up access services to
high-speed services, particularly those offered by cable operators in the United
States. Within the last few years, certain cable operators have begun to offer a
"triple-play" bundle of services that includes voice, video and high-speed data
over a single network with the objective of capturing higher average revenues
per subscriber. We believe cable operators are well positioned to deliver
next-generation voice, video and data services because cable operators have
invested significantly over the past few years to upgrade their cable plants to
digital networks. These upgrades allow them to leverage their incumbent video
and high speed data positions further. Many cable operators have well-equipped
networks to offer video and two-way high-speed data services to over 90% of
their subscribers and through their existing Hybrid Fiber Co-axial (HFC)
infrastructure, are capable of delivering symmetrical high-bandwidth video,
voice and data to their subscribers.
For the past couple of years, we believe that we have been able to provide
the products and services sought after by cable operators as they establish and
expand their services and territories. Our relationships with our principal
vendors, Scientific-Atlanta and Motorola, provide solutions with products that
are required to implement and support existing cable operators. These
relationships and our inventory are key factors in our significant revenue and
profits.
7
We are focused on the opportunities provided by technological changes in
fiber-to-the premises, the expansion of bandwidth, and our recent appointment as
a Scientific-Atlanta International Distributor for Latin and South America. We
will continue to stock legacy CATV equipment as well as digital and optical
broadband telecommunications equipment from major suppliers so we can provide
our customers one-stop shopping and access to "hard-to-find" products by
reducing customer downtime by our having the product in stock. Our customers
consult with us for solutions for various products and configurations. We have
the technical know-how from our experienced sales support staff. Through our six
"world-class" service centers that provide warranty and out-of-warranty repairs,
we continue to reach new customers.
Business of the Company
We continue to add products and services to maintain and expand our current
customer base in North America, Latin and South America, Europe and the Far
East. Recently, Scientific-Atlanta has appointed one of our subsidiaries, Tulsat
Corporation, to become one of their non-exclusive distributors in Latin and
South America. Since the appointment, management has made several trips to the
area, visiting with relationships that had previously been developed by our new
sales associate for this area. In addition, Tulsat has contracted for 12 months
of advertising in the leading magazine for the cable equipment market in this
area and Spain.
Economics seem to be improving for the international cable operators in
Latin and South America. The continuing advances in technology, products and
services will continue to create a better financial model for potential
customers. We require prepayment of purchases or letters of credit from U.S.
banks prior to shipment of products to most international customers. Recently,
we have found several other methods of guaranteeing payment through insurance
companies or government agencies. The successful implementation of alternative
methods of payments should put our companies in a better position to capture
market share.
Geographic Areas
Revenues by geographic areas are as follows:
Year ended September 30,
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2004 2003 2002
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Geographic Area
United States $46,163,254 $32,026,494 $24,710,724
Latin America, Mexico,
and Other 908,075 1,301,251 698,207
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$47,071,329 $33,327,745 $25,408,931
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8
Revenues attributed to geographic areas are based on the location of the
customer. All of our long-lived assets are located in the United States.
Products and Services
Our sales of new products represent 70% of our revenue and re-manufactured
product sales represent 20% of our revenues. Repair services contribute the
remaining 10% of our revenues.
Headend products are used by a system operator for signal acquisition,
processing and manipulation for further transmission. Among the products we
offer in this category are satellite receivers (digital and analog), integrated
receiver/decoders, demodulators, modulators, antennas and antenna mounts,
amplifiers, equalizers and processors. The headend of a television signal
distribution system is the "brain" of the system, the central locations where
the multi-channel signal is initially received, converted and allocated to
specific channels for distribution. In some cases, where the signal is
transmitted in encrypted form or digitized and compressed, the receiver will
also be required to decode the signal.
Fiber products are used to transmit the output of cable system headend to
multiple locations using fiber optic cable. Among the products offered are
optical transmitters, receivers, couplers, splitters and compatible accessories.
These products convert RF frequencies to light frequencies and launch them on
optical fiber. At each receiver site, an optical receiver is used to convert the
signals back to RF VHF frequencies for distribution to subscribers.
Distribution products are used to permit signals to travel from the headend
to their ultimate destination in a home, apartment, hotel room, office or other
terminal location along a distribution network of fiber optic or coaxial cable.
Among the products we offer in this category are optical transmitters, optical
receivers, line extenders, broadband amplifiers, directional taps and splitters.
Other hardware such as test equipment, connector and cable products are
also inventoried and sold to our customers.
Sales and Marketing
We market and sell our products to franchise and private cable operators,
system contractors and others directly. Our sales and marketing are
predominantly performed by our internal sales force. We also have sales
representatives in particular geographic areas. The majority of our sales
activity is generated through personal relationships developed by our sales
personnel and executives, referrals from manufacturers we represent, advertising
in trade journals, telemarketing and direct mail to our customer base in the
United States. We have developed contacts with the major CATV operators in the
United States and we are constantly in touch with these operators regarding
their plans for upgrading or expansion and their needs to either purchase or
sell equipment. In 2004, we purchased approximately 39% of our inventory from
Scientific-Atlanta and approximately 14% of our inventory from Motorola. The
concentration of suppliers of our inventory subjects us to risk. We also
purchase a large amount of our inventory from cable operators who have upgraded
or are in the process of upgrading, their systems.
9
Competition
The CATV industry is highly competitive with numerous companies competing
in various segments of the market. There are a number of customers throughout
the United States engaged in buying and selling re-manufactured CATV equipment.
Most of our competitors are not able to maintain the large inventory we maintain
due to capital requirements. In terms of sales and inventory, we are the largest
in this industry, providing both sales and service of new and re-manufactured
CATV equipment.
We also face competition from manufacturers and other vendors supplying new
products. Due to our large inventory, we generally have the ability to ship and
supply products to our customers from our large inventory without having to wait
for the manufacturers to supply the items.
Significant Customers
We are not dependent on one or a few customers to support our business. The
customer base consists of over 1,200 active accounts. Sales to Power and
Telephone Supply Company accounted for approximately 11.9% of our revenues in
fiscal 2004. Approximately 23% of our revenues for fiscal year 2004 and
approximately 33% for 2003 were derived from sales of products and services to
our five largest customers. There are approximately 6,000 cable television
systems within the United States, each of which is a potential customer.
Personnel
At September 30, 2004, we had 141 employees. Management considers its
relationships with its employees to be excellent. Our employees are not
unionized and we are not subject to any collective bargaining agreements.
ITEM 2. PROPERTIES
Each subsidiary owns or leases property for office space and warehouse
facilities. Tulsat Corporation ("Tulsat") leases a total of approximately
133,050 square feet of facilities in seven buildings from entities which are
controlled by David E. Chymiak, Chairman of the Board, and Kenneth A. Chymiak,
President and Chief Executive Officer. Each lease has a renewable five-year
term, expiring at different times through 2008. At September 30, 2004, total
monthly rental payments of $38,800 were required. ADDvantage Technologies Group
of Nebraska, Inc. (dba "Lee Enterprise") owns property of approximately 8,000
square feet, with an investment of $267,000. NCS Industries, Inc. ("NCS") owns
property of approximately 12,000 square feet, with an investment of $567,000,
financed by loans of $419,000, due in monthly payments through 2013 at an
interest rate of 5.5% through 2008, converting thereafter to prime minus 1/4%.
NCS also rents property of approximately 2,000 square feet, with monthly rental
payments of $1,200 through November 2005. ADDvantage Technologies Group of
Missouri, Inc. (dba "ComTech Services") owns property of approximately 11,000
square feet, with an investment of $343,000. ADDvantage Technologies Group of
Texas, Inc. ("Tulsat-Texas") owns property of approximately 13,000 square feet,
with an investment of $150,000. Tulsat-Atlanta, LLC ("Tulsat-Atlanta") rents
property of approximately 4,300 square feet. The term is month-to-month, with
monthly rental payments of approximately $2,400. We believe that our current
facilities are adequate to meet our needs.
10
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we have become a
defendant in various types of legal proceedings. We do not believe that these
proceedings, individually or in the aggregate, will have a material adverse
effect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our stockholders in the fourth
quarter of fiscal 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to November 24, 2003, our common stock was traded on the OTC Bulletin
Board under the symbol ADDM. On November 24, 2003, our common stock began
trading on the American Stock Exchange under the symbol AEY.
The following table sets forth, for the quarterly periods indicated of
fiscal 2003 and the first quarter (through November 23, 2003) of fiscal 2004,
the high and low bid quotations per share for our common stock as quoted on the
OTC bulletin board. These quotations represent inter-dealer prices without an
adjustment for retail mark-ups, mark-downs or commissions and may not represent
actual transactions. From November 24, 2003 through the end of fiscal 2004, the
table sets forth the high and low sales prices on the American Stock Exchange
for the quarterly periods indicated.
Year Ended September 30, 2003 High Low
- ----------------------------- ---- ---
First Quarter $0.90 $0.52
Second Quarter $2.10 $0.60
Third Quarter $2.50 $1.40
Fourth Quarter $4.50 $1.60
Year Ended September 30, 2004 High Low
- ----------------------------- ---- ---
First Quarter $6.05 $3.00
Second Quarter $5.90 $4.00
Third Quarter $6.90 $4.66
Fourth Quarter $5.30 $3.35
11
Substantially all of the holders of our common stock maintain ownership of
their shares in "street name" accounts and are not, individually, shareholders
of record. As of December 1, 2004, there were approximately 80 holders of record
of our common stock. However, we believe there are in excess of 500 beneficial
owners of our common stock.
Dividend Policy
We have never declared or paid a cash dividend on our common stock. It has
been the policy of our Board of Directors to use all available funds to finance
the development and growth of our business. The payment of cash dividends in the
future will be dependent upon our earnings and financial requirements and other
factors deemed relevant by our Board of Directors. Under the terms of our
outstanding preferred stock, no dividends may be paid on our common stock unless
all cumulative cash dividends due on the preferred stock have been paid or
provided for.
Repurchase Program
In 2000, our Board of Directors authorized the repurchase of up to $l.0
million of our outstanding common stock from time to time in the open market at
prevailing market prices or in privately negotiated transactions. The
repurchased shares will be held in treasury and used for general corporate
purposes including possible use in our employees' stock plans or for
acquisitions. We did not repurchase any shares during the 2003 or 2004 fiscal
years.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended September 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Sales and service income $47,071 $ 33,327 $ 25,409 $ 22,885 $ 22,003
Income from operations 9,484 6,197 3,550 4,855 6,134
Net income 5,814 4,493 2,201 2,851 3,708
Earnings per share
Basic $ .46 $ .33 $ .10 $ .16 $ .25
Diluted $ .41 $ .30 $ .10 $ .16 $ .24
Total assets $ 32,359 $ 31,748 $ 26,531 $ 25,335 $21,951
Long-term obligations inclusive
of current maturities $ 11,610 $6,912 $6,276 $6,253 $ 5,039
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated historical
financial statements and the notes to those statements that appear elsewhere in
this report. Certain statements in the discussion contain forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as plans, objectives, expectations and intentions. Actual results and the
timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under "Business - Risk Factors" and elsewhere in this report.
General
We and our subsidiaries, Tulsat, Lee Enterprise, NCS, ComTech Services,
Tulsat - Texas and Tulsat - Atlanta comprise an organization involved in the
re-manufacture, repair and sale of previously owned cable television ("CATV")
equipment and the distribution of new and surplus equipment to CATV operators.
New sales are defined as products that are purchased from the manufacturer, and
includes new surplus, which is defined as inventory items purchased from other
distributors or MSOs with excess equipment that have never been used.
Remanufactured sales are defined as used inventory that is updated to meet
customer needs and requirements.
Overview
It is difficult to time the placing of orders in our business due to
cyclical conditions that exist in the broadband and cable industry and present
economic conditions that affect it. Fiscal 2004 continued to be a challenging
business environment in the industry due to a significant reduction in capital
spending that began in fiscal 2001. We believe we are in a unique position to
service those MSOs, which are looking to minimize costs. We have a large
inventory of new and used equipment, $16.4 million and $5.7 million,
respectively, at September 30, 2004. We also offer repair services, which are
available to our customers who include some of the largest cable operators in
the industry. The industry conditions have affected all equipment suppliers, and
we have worked to minimize the negative impact of these conditions on our
financial results and operations. We have aggressively sought to stimulate sales
by marketing our products and services to the larger MSOs, and we have managed
our receivables to minimize any bad debt write-offs. Our efforts have resulted
in increasing sales in a slowly expanding economy (41.2% over last year), while
minimizing the overall impact of bad debts written-off in total compared to net
income. However, our largest risk is our investment in inventory. After
consideration of continued analysis, review, and evaluation of our inventory, we
recorded an allowance for excess and obsolete inventory of $1,093,000,
representing 5% of inventory at September 30, 2004. At September 30, 2003, this
allowance amounted to $447,100. We expect fiscal 2005 to continue the trend of
increasing sales based on preliminary results from increased sales in the first
quarter of 2005 compared to first quarter 2004. However, there is no assurance
that revenues in fiscal 2005 will continue to exceed those for comparable
periods in fiscal 2004 due to the factors discussed elsewhere in this report.
13
Results of Operation
Year Ended September 30, 2004, Compared to Year Ended September 30, 2003
(all references to years are to fiscal years)
Net Sales. Net sales climbed $13.7 million or 41.2% to $47.1 million for
2004 from $33.3 million for 2003. Sales of new and refurbished equipment
increased 47.3% from $28.8 million in 2003 to $42.4 million for 2004, primarily
due to the positive results of our marketing initiatives and the strengthening
of our distributor relationships. Sales of new Scientific-Atlanta and Motorola
equipment increased substantially as we strengthened our strategic alliances
with these manufacturers. Repair service revenues increased by 2.7% from $4.5
million last year to $4.6 million this year. The increase in repair services was
due to the continued focus of being a leading repair service provider for both
warranty and non-warranty repairs.
Costs of Sales. Costs of sales includes the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, the
equipment costs used in repairs, and the related transportation costs. Costs of
sales this year were 61.2% of net sales compared to 57.2% last year. Costs of
sales for new and refurbished equipment increased to 65.2% of net sales for 2004
from 63.3% of net sales for 2003. This was primarily due to the higher
proportion in 2004 of sales of new equipment, which has margins lower than that
of refurbished equipment. Costs of sales for repair services increased to 24.6%
of net sales for 2004 from 19.9% of net sales for 2003. This increase was due
primarily to the high-end hybrid and fiber optic equipment being repaired, which
involves a higher relative cost of material.
Gross Profit. Gross profit climbed $4.0 million, or 28.1%, to $18.3 million
for fiscal 2004 from $14.3 million for fiscal 2003. The gross margin percentage
was 38.8% for the current year, compared to 42.8% for last year. The percentage
decrease was primarily due to an increase in sales of new and surplus equipment,
which is accompanied by margins lower than that of re-manufactured equipment or
repairs.
Operating, Selling, General and Administrative Expenses. Operating,
selling, general and administrative expenses include all personnel costs,
including fringe benefits, insurance and taxes, occupancy, transportation,
communication and professional services, among other less significant accounts.
Operating, selling, general and administrative expenses increased by $693,000
for fiscal 2004 to $8.5 million from $7.8 million in 2003, an increase of 8.9%.
The increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the incurrence of fees for
the Company's commencement of trading on the American Stock Exchange.
Income from Operations. Income from operations increased $3.3 million, or
53.1%, to $9.5 million for 2004 from $6.2 million for 2003. This increase was
primarily due to increases in sales of new equipment to the larger MSOs,
partially offset by the lower margins received and the increase in our
operating, selling, general and administrative expenses.
Interest Expense. Interest expense for fiscal 2004 was $158,000 compared to
$217,000 in fiscal 2003. The decrease was primarily attributable to a lower
average interest rate on our line of credit and the lower average balances
outstanding on this line during 2004. The weighted average interest rate paid on
the line of credit decreased to 2.85% for 2004 from 2.98% for 2003.
14
Income Taxes. The provision for income taxes for fiscal 2004 increased to
$3.5 million from $1.5 million in fiscal 2003. The increase was primarily due to
higher pre-tax earnings in fiscal 2004 and a reduction in fiscal 2003 of the
Company's allowance against deferred tax assets due to favorable tax
developments during that period. For a more complete discussion of income taxes,
please see "Note 4 - Income Taxes" in the notes to the consolidated financial
statements.
Year Ended September 30, 2003, Compared to Year Ended September 30, 2002
(all references to years are to fiscal years)
Net Sales. Net sales climbed $7.9 million or 31.2% to $33.3 million for
2003 from $25.4 million for 2002. Sales of new and refurbished equipment
increased 33.9% from $21.5 million for 2002 to $28.8 million for 2003 as we
strengthened our role as a Master Distributor for several of
Scientific-Atlanta's legacy products and increased sales of Motorola products.
Our focus on increasing repair revenue resulted in a 15.8% increase in those
revenues, from $3.9 million for 2002 to $4.5 million for 2003. The increase in
repair services was due to the continued focus of being a leading repair service
provider and the expansion of our repairs sales to our Atlanta operations which
began in June of 2002.
Costs of Sales. Costs of sales includes the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, the
equipment costs used in repairs, and the related transportation costs. Costs of
sales for 2003 were 57.2% of net sales compared to 56.6% for 2002. Costs of
sales for new and refurbished equipment decreased slightly to 63.3% of net sales
for 2003 from 63.8% of net sales for 2002. This was primarily due to the
write-down of inventory in 2002 of $1.4 million, partially offset by the
allowance for obsolete inventory recorded in 2003 of $447,000. Costs of sales
for repair services increased to 19.9% of net sales for 2003 from 16.9% of net
sales for 2002. This increase was due primarily to the increase in our repairs
on more high-end hybrid and fiber optic equipment, which involve a higher
relative cost of material.
Operating, Selling, General and Administrative Expenses. Operating,
selling, general and administrative expenses includes 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 $629,000 or 8.8% in 2003 over the previous year. Most of this increase
was directly attributable to the commencement of operations of Tulsat - Atlanta
in June 2002, coupled with an expanding sales force and other added expenses
incurred to meet the marketing initiatives described previously.
Income from Operations. Income from operations increased 74.6% to $6.2
million for 2003 from $3.5 million for 2002. This increase was primarily due to
the increase in net sales and the inventory write-down in 2002, partially offset
by the charge in 2003 to reduce inventory for obsolete equipment and the
increase in our operating, selling, general and administrative expenses.
Interest Expense. Interest expense for fiscal 2003 was $217,000 compared to
$245,000 in fiscal 2002. The decrease was primarily attributable to a lower
average interest rate on our line of credit, partially offset by higher average
balances outstanding on this line during 2003. The weighted average interest
rate paid on the line of credit decreased to 2.98% for 2003 from 3.67% for 2002.
15
Income Taxes. The provision for income taxes for fiscal 2003 increased to
$1.5 million from $1.1 million in fiscal 2002. The increase was primarily due to
higher pre-tax earnings, partially offset by a favorable impact from changes in
the deferred tax valuation allowance. For a more complete discussion of income
taxes, please see "Note 4 - Income Taxes" in the notes to the consolidated
financial statements.
Liquidity and Capital Resources
We finance our operations primarily through internally generated funds and
a bank line of credit.
During 2004, we generated approximately $5.4 million cash flow from
operations after decreasing the net carrying value of inventory by $1.2 million,
and increased our bank borrowings by $6.0 million, which we used to invest in
property ($77,000), repurchase the outstanding Series A Preferred Stock ($8.0
million), repay stockholder notes ($1.2 million), and meet our preferred stock
dividend obligations of $1.34 million.
We lease various properties primarily from a company owned by our principal
shareholders. Future minimum lease payments under these leases are as follows:
2005 $ 480,240
2006 380,040
2007 360,000
2008 324,000
------------
$ 1,544,280
============
Cash used in financing activities in 2004 was primarily used to pay
dividends on our Series A and Series B Preferred Stock. With the redemption of
the Series A Preferred Stock on September 30, 2004, dividends on the remaining
Series B preferred stock total $840,000 annually. The outstanding common and
preferred stock is beneficially owned by our principal shareholders as reflected
in the following table.
Stock Ownership
- ---------------
Percent of
Percent of Series B
Common Preferred
Stock Stock
Name of Beneficially Beneficially
Beneficial Owner Owned Owned (A)
- ---------------- ----- ---------
David E. Chymiak 39.0% 50.0%
Kenneth A. Chymiak 35.2% 50.0%
16
(A) The outstanding preferred stock has an aggregate preference upon
liquidation of $12,000,000.
On September 29, 2004, David Chymiak and Ken Chymiak entered into a stock
purchase agreement in which they sold 500,000 shares of their common stock to
Barron Partners, LP, a private investment partnership, for $3.25 per share.
Under this agreement, Barron also received options to purchase up to 3 million
additional shares of the common stock owned by these majority shareholders.
Option 1 grants Barron the option to purchase an additional one million shares
over a period of 15 months at a price of $4.25 per share. Option 2 grants Barron
the option to purchase an additional one million shares over a period of 18
months at a price of $5.25 per share. Option 3 grants Barron the option to
purchase an additional one million shares over a period of 24 months at a price
of $6.25 per share. The Company did not receive any of the proceeds from the
sale of the shares and will not receive any of the proceeds from the exercise of
any of the options, but paid the cost of registering the sales for resale by the
selling shareholders. The Company filed a registration statement covering the
resale of the shares of common stock sold as well as the shares of common stock
issuable upon exercise of the options.
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $7.0 million at a borrowing rate based on the
prevailing 30-day LIBOR rate plus 2.0% (3.84% at September 30, 2004.) This line
of credit will provide the lesser of $7.0 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 September 30, 2004, of $3.2 million, due September 30,
2005.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding share of the Series A convertible
preferred stock at September 30, 2004. 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
$384,381 are due in monthly payments through 2013 with interest at 5.5% through
2008, converting thereafter to prime minus .25%.
The aggregate maturities of notes payable and the line of credit for the
five years ending September 30, 2009 are as follows:
2005 $ 4,462,230
2006 1,237,047
2007 1,237,047
2008 1,237,047
2009 3,237,047
Thereafter 199,146
-------------
Total $ 11,609,564
=============
17
We believe that cash flow from operations, existing cash balances and our
existing line of credit provide sufficient liquidity and capital resources to
meet our working capital needs.
Critical Accounting Policies and Estimates
Note 1 to the Consolidated Financial Statements in this 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 of America 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.
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products for 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 annual 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 that we do make.
In order to address the risks associated with our investment in inventory,
we regularly review inventory quantities on hand and reduce the carrying value
when the loss of usefulness of an item or other factors, such as obsolete and
excess inventories, indicate that cost will not be recovered when an item is
sold. Demand for some of the items in our inventory has been impacted by recent
economic conditions present in the cable industry. We recorded an allowance of
2%, or $447,000, of the inventory balance at September 30, 2003 as a reserve for
excess and obsolete equipment. We increased this allowance to a total of 5%, or
$1,093,000, of the inventory balance at September 30, 2004. Any significant,
unanticipated changes in product demand, technological developments or continued
economic trends affecting the cable industry could have a significant impact on
the value of our inventory and operating results.
18
Inbound freight charges are included in costs of sales. Purchasing and
receiving costs, inspection costs, warehousing costs, internal transfer costs
and other inventory expenditures are included in operating expenses since the
amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing
the allowance for doubtful accounts. Specifically, we analyze the aging of
accounts receivable balances, historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms. Significant changes in customer concentration or payment terms,
deterioration of customer credit-worthiness, as in the case of the bankruptcy of
Adelphia and its affiliates, 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. The reserve for bad debts decreased to $68,063 at
September 30, 2004 from $78,359 at September 30, 2003. This decrease is
primarily due to the increasingly optimistic outlook for economic conditions in
the coming year. At September 30, 2004, accounts receivable, net of allowance
for doubtful accounts, amounted to $4.8 million.
Impact of Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires certain guarantees to be recorded at fair value
regardless of the probability of the loss. The adoption did not have a material
impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities.", and a revised interpretation of
FIN 46 (FIN 46R) in December 2003. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The provisions FIN 46 are effective immediately for all
arrangements entered into after January 31, 2003. We have not invested in any
entities that we believe are variable interest entities for which we are the
primary beneficiary. The adoption of FIN 46R had no impact on our financial
position, results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", which
revised ARB No. 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
believe that the adoption of this standard will have no material impact on our
financial position and results of operations.
19
ITEM 7A. 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 and the stockholder notes fluctuate with the LIBOR rate. At
September 30, 2004, the outstanding balances subject to variable interest rate
fluctuations totaled $3.2 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
will increase or decrease opposite any future changes in interest rates. All
sales and purchases are denominated in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
----------------------------- ----
Report of Independent Registered Public Accounting Firm
21
Consolidated Balance Sheets, September 30, 2004 and 2003
23
Consolidated Statements of Income, Years Ended September 30, 2004, 2003 and
2002 25
Consolidated Statements of Changes in Stockholders' Equity, Years ended
September 30, 2004, 2003 and 2002
26
Consolidated Statements of Cash Flows, Years Ended September 30, 2004, 2003 and
2002 27
Notes to Consolidated Financial Statements 28
20
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of ADDvantage Technologies Group, Inc. is responsible for
the accuracy and consistency of all the information contained in the annual
report, including the accompanying consolidated financial statements. These
statements have been prepared to conform with U.S. generally accepted accounting
principles appropriate to the circumstances. The statements include amounts
based on estimates and judgments as required.
ADDvantage Technologies Group, Inc. maintains internal accounting controls
designed to provide reasonable assurance that the financial records are
accurate, that the assets of the Company are safeguarded, and that the financial
statements present fairly the consolidated financial position, results of
operations and cash flows of the Company.
The Audit Committee of the Board of Directors reviews the scope of the
audits and the findings of the independent certified public accountants. The
auditors meet regularly with the Audit Committee to discuss audit and financial
reporting issues, with and without management present.
Tullius Taylor Sartain & Sartain LLP, our independent registered public
accounting firm, has audited the financial statements prepared by management.
Their opinion on the statements is presented below.
/s/ Kenneth A. Chymiak
Kenneth A. Chymiak,
President, Chief Executive Officer
and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of ADDvantage
Technologies Group, Inc. and subsidiaries (the "Company") as of September 30,
2004 and 2003, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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. 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
audits provide a reasonable basis for our opinion.
21
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 2004
and 2003, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and were made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole. The consolidated supplemental schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
As discussed in Note 1 to the consolidated financial statements, in 2003,
the Company changed its method of accounting for goodwill as a result of
adopting the provisions of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets."
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
December 3, 2004
22
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
Assets 2004 2003
- ------ ---- ----
Current assets:
Cash $ 1,316,239 $ 496,283
Accounts receivable, net of allowance of $68,063 and $78,359 4,787,749 3,783,680
Inventories, net of allowance for excess and obsolete inventory
$1,093,000 and $447,100, respectively 20,978,714 22,131,096
Deferred income taxes 651,000 367,000
------------- -----------
Total current assets 27,733,702 26,778,059
Property and equipment, at cost:
Machinery and equipment 2,138,798 2,061,598
Land and buildings 1,302,527 1,326,939
Leasehold improvements 521,972 527,972
------------- -----------
3,963,297 3,910,509
Less accumulated depreciation and amortization (1,561,698) (1,284,347)
------------- -----------
Net property and equipment 2,401,599 2,626,162
Other assets:
Deferred income taxes 1,042,000 1,154,000
Goodwill 1,150,060 1,150,060
Other assets 31,222 39,628
------------- -----------
Total other assets 2,223,282 2,343,688
------------- -----------
Total assets $ 32,358,583 31,747,909
============= ==========
See notes to audited consolidated financial statements.
23
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
Liabilities and Stockholders' Equity 2004 2003
---- ----
Current liabilities:
Accounts payable $ 1,758,695 $ 2,631,221
Accrued expenses 1,011,911 829,459
Accrued income taxes 120,748 95,114
Bank revolving line of credit 3,225,183 5,185,902
Notes payable - current portion 1,237,047 118,393
Dividends payable 210,000 310,000
Stockholder notes - 838,473
------------ -----------
Total current liabilities 7,563,584 10,008,562
Notes payable 7,147,334 384,411
Stockholder notes - 385,171
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$1.00 par value, at stated value:
Series A, 5% cumulative convertible; 200,000 shares issued
and outstanding at September 30, 2003 with a stated value
of $40 per share - 8,000,000
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;
10,081,789 and 10,030,414 shares issued and outstanding,
respectively 100,818 100,304
Paid-in capital (7,285,564) (7,389,197)
Retained earnings 12,886,575 8,312,822
------------ -----------
17,701,829 21,023,929
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
------------ -----------
Total stockholders' equity 17,647,665 20,969,765
------------ -----------
Total liabilities and stockholders' equity $ 32,358,583 $31,747,909
============ ===========
See notes to audited consolidated financial statements.
24
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
2004 2003 2002
----------- ----------- -----------
Net sales income $42,430,052 $28,809,947 $21,508,380
Net service income 4,641,277 4,517,798 3,900,551
----------- ----------- -----------
47,071,329 33,327,745 25,408,931
Costs of sales 28,815,132 19,072,042 14,370,776
----------- ----------- -----------
Gross profit 18,256,197 14,255,703 11,038,155
Operating, selling, general and
administrative expenses 8,494,486 7,801,231 7,172,510
Depreciation and amortization 277,352 257,821 315,691
----------- ----------- -----------
Income from operations 9,484,359 6,196,651 3,549,954
Interest expense 157,606 217,063 244,746
----------- ----------- -----------
Income before income taxes 9,326,753 5,979,588 3,305,208
Provision for income taxes 3,513,000 1,487,000 1,104,000
----------- ----------- -----------
Net income 5,813,753 4,492,588 2,201,208
Preferred stock dividends 1,240,000 1,240,000 1,240,000
----------- ----------- -----------
Net income attributable
to common stockholders 4,573,753 $ 3,252,588 $ 961,208
=========== =========== ===========
Earnings per share:
Basic $ 0.46 $ 0.33 $ 0.10
Diluted $ 0.41 $ 0.30 $ 0.10
Shares used in per share calculation
Basic 10,041,197 10,007,756 9,991,716
Diluted 12,104,541 12,021,235 11,991,716
See notes to audited consolidated financial statements.
25
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 2004, 2003 and 2002
Series A Series B Retained
Common Stock Preferred Preferred Paid-in Earnings Treasury
Shares Amount Stock Stock Capital (Deficit) Stock Total
--------------------------------------------------------------------------------------------------
Balance, September 30, 2001 10,011,716 $100,117 $8,000,000 $12,000,000 ($7,389,010) $ 4,099,026 ($54,164) $16,755,969
Net income - - - - - 2,201,208 - 2,201,208
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
--------------------------------------------------------------------------------------------------
Balance, September 30, 2002 10,011,716 100,117 8,000,000 12,000,000 (7,389,010) (5,060,234) (54,164) 17,717,177
Net income - - - - - 4,492,588 - 4,492,588
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
Issue common shares for
business purchase 18,698 187 - - (187) - - -
--------------------------------------------------------------------------------------------------
Balance, September 30, 2003 10,030,414 100,304 8,000,000 12,000,000 (7,389,197) 8,312,822 (54,164) 20,969,765
Net income - - - - - 5,813,753 - 5,813,753
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
Stock options exercised 51,375 514 - - 103,633 - - 104,147
Redemption of Series A
Preferred Stock - - (8,000,000) - - - - (8,000,000)
--------------------------------------------------------------------------------------------------
Balance, September 30, 2004 10,081,789 $100,818 - $12,000,000 ($7,285,564) $12,886,575 ($54,164) $17,647,665
===================================================================================================
See notes to audited consolidated financial statements.
26
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
2004 2003 2002
---- ---- ----
Cash Flows from Operating Activities
Net income $ 5,813,753 $4,492,588 $2,201,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 277,352 257,821 315,691
Loss on disposal of property and equipment 24,412 - -
Deferred income tax benefit (172,000) (414,000) (81,000)
Change in:
Receivables (1,004,069) (278,382) (509,811)
Inventories 1,152,382 (4,456,859) 144,883
Other assets 8,406 (12,770) 79,634
Accounts payable (872,526) 1,159,549 619,248
Accrued liabilities 208,086 337,975 (397,385)
-------------- ---------- ----------
Net cash provided by operating activities 5,435,796 995,922 2,372,468
-------------- ---------- ----------
Cash Flows from Investing Activities
Additions to property and equipment (77,201) (671,412) (610,630)
-------------- ---------- ----------
Net cash used in investing activities (77,201) (671,412) (610,630)
-------------- ---------- ----------
Cash Flows from Financing Activities
Net change under bank revolving line of credit (1,960,719) 712,221 222,548
Payments on stockholder notes (1,223,644) (335,705) (150,000)
Proceeds on notes payable 8,000,000 440,000 -
Payments on notes payable (118,423) (180,483) (49,204)
Proceeds from stock options exercised 104,147 - -
Payments of preferred dividends (1,340,000)(1,240,000)(1,240,000)
Redemption of preferred stock (8,000,000) - -
-------------- ---------- ----------
Net cash used in financing activities (4,538,639) (603,967)(1,216,656)
-------------- ---------- ----------
Net (increase) decrease in cash 819,956 (279,457) 545,182
Cash, beginning of year 496,283 775,740 230,558
-------------- ---------- ----------
Cash, end of year $ 1,316,239 $496,283 $775,740
============== ======== ========
Supplemental Cash Flow Information
Cash paid for interest $ 172,426 $205,626 $244,253
Cash paid for income taxes $ 3,669,170 $1,699,785 $1,832,342
See notes to audited consolidated financial statements.
27
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies
Description of business
ADDvantage Technologies Group, Inc. and its subsidiaries (the "Company")
sell new, surplus, and re-manufactured cable television equipment throughout
North America, Latin America and South America in addition to being a repair
center for various cable companies. The Company operates in one business
segment.
Principles of consolidation
The consolidated financial statements include the accounts of ADDvantage
Technologies Group, Inc. and its subsidiaries: Tulsat Corporation, NCS
Industries, Inc., Tulsat Atlanta LLC, ADDvantage Technologies Group of Missouri,
Inc. (dba "ComTech Services"), ADDvantage Technologies Group of Nebraska, Inc.
(dba "Lee Enterprise") and ADDvantage Technologies Group of Texas, Inc. (dba
"Tulsat Texas"). All significant intercompany balances and transactions have
been eliminated in consolidation.
Accounts receivable
Trade receivables are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition, credit history, and current economic conditions.
Trade receivables are written-off when deemed uncollectible. Recoveries of trade
receivables previously written-off are recorded when received.
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.
Property and equipment
Property and equipment consists of office equipment, other equipment, and
buildings, with estimated useful lives of 5 years, 10 years, and 40 years,
respectively. Depreciation is provided using straight line and accelerated
methods over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the remainder of the lease agreement. Repairs
and maintenance are expensed as incurred, whereas major improvements are
capitalized. Depreciation and amortization expense was $277,352, $257,821 and
$157,267 for the years ended September 30, 2004, 2003 and 2002, respectively.
28
Income taxes
The Company provides for income taxes in accordance with the liability
method of accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and tax
carryforward amounts. Management provides a valuation allowance against deferred
tax assets for amounts which are not considered "more likely than not" to be
realized.
Revenue recognition
Our principal sources of revenues are from sales of new, remanufactured or
used equipment, and repair services. The Company recognizes revenue for product
sales when title transfers, the risks and rewards of ownership have been
transferred to the customer, the fee is fixed and determinable, and the
collection of the related receivable is probable which is generally at the time
of shipment. The stated shipping terms are FOB shipping point per our sales
agreements with customers. Accruals are established for expected returns based
on historical activity. Revenue for services is recognized when the repair is
completed and the product is shipped back to the customer.
Derivatives
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, requires that all derivatives, whether designated in
hedging relationships or not, be recorded on the balance sheet at fair value. If
the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk
are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of the changes in the fair value of the derivative
are recorded in Other Comprehensive Income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in other income (expense).
Our objective of holding derivatives is to minimize the risks of interest
rate fluctuation by using the most effective methods to eliminate or reduce the
impact of this exposure. The Company has designated its interest rate swap as a
hedge for the underlying note payable. Interest expense on the note is adjusted
to include the payment made or received under the interest rate swap agreement.
Freight
Amounts billed to customers for shipping and handling represent revenues
earned and are included in Net Sales Income and Net Service Income in the
accompanying Consolidated Statements of Income. Actual costs for shipping and
handling of these sales is included in Costs of Sales.
29
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
$265,112, $229,534 and $224,468 for the years ended September 30, 2004, 2003 and
2002 respectively.
Management estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Any significant, unanticipated changes in product demand, technological
developments or continued economic trends affecting the cable industry could
have a significant impact on the value of our inventory and operating results.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade receivables. Concentrations of
credit risk with respect to trade receivables are limited because a large number
of geographically diverse customers make up our customer base, thus spreading
the trade credit risk. The Company controls credit risk through credit
approvals, credit limits, and monitoring procedures. The Company performs
in-depth credit evaluations for all new customers but does not require
collateral to support customer receivables. In 2004, we purchased approximately
39% of our inventory from Scientific-Atlanta and approximately 14% of our
inventory from Motorola. The concentration of suppliers of our inventory
subjects us to risk.
Goodwill
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS 142 requires,
among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. SFAS 142 was adopted by the Company
on October 1, 2002, the date of the annual impairment review. The Company
completed its transitional impairment testing of goodwill, which indicated that
goodwill was not impaired as of October 1, 2002. Therefore, the adoption of this
pronouncement had no impact on the Company's carrying value of its goodwill.
Annual impairment testing indicates that goodwill is not impaired as of
September 30, 2004. If SFAS 142 had been adopted in 2002, the Company's earnings
would have been improved because of reduced amortization, as described below:
30
Goodwill - Adoption of Statement 142
------------------------------------
Year ended September 30,
- ------------------------
2004 2003 2002
---- ---- ----
Reported Net Income $ 5,813,753 $ 4,492,588 $ 2,201,208
Add back: Goodwill amortization - - 158,424
----------- ----------- -----------
Adjusted Net Income $ 5,813,753 $ 4,492,588 $ 2,359,632
=========== =========== ===========
Basic Earnings per Share
Reported Net Income $0.46 $0.33 $0.10
Add back: Goodwill amortization - - 0.01
----------- ----------- -----------
Adjusted Net Income $0.46 $0.33 $0.11
=========== =========== ===========
Diluted Earnings per Share
Reported Net Income $0.41 $0.30 $0.10
Add back: Goodwill amortization - - 0.01
----------- ----------- -----------
Adjusted Net Income $0.41 $0.30 $0.11
=========== =========== ===========
Employee stock-based awards
Employee stock-based awards are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, compensation expense is based on the difference, if any, on the date
of grant between the fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
provides an alternative method of determining compensation cost for employee
stock options, which alternative method may be adopted at the option of the
Company. Had compensation cost been determined consistent with SFAS 123, the
Company's net income would not have changed significantly.
Earnings per share
Basic earnings per share are based on the sum of the average number of
common shares outstanding and issuable restricted and deferred shares. Diluted
earnings per share include any dilutive effect of stock options, restricted
stock and convertible preferred stock.
Fair value of financial instruments
The carrying amounts of accounts receivable and accounts payable
approximate fair value due to their short maturities. The carrying value of the
Company's line of credit approximates fair value since the interest rate
fluctuates periodically based on the prime rate. Terms of the stockholder loans
are similar to the bank loan. Management believes that the carrying value of the
Company's borrowings approximate fair value based on credit terms currently
available for similar debt.
31
Impact of recently issued accounting standards
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," and a revised interpretation of
FIN 46 (FIN 46R) in December 2003. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The provisions of FIN 46 were effective immediately for all
arrangements entered into after January 31, 2003. We have not invested in any
entities that we believe are variable interest entities for which we are the
primary beneficiary. The adoption of FIN 46 and 46R had no impact on our
financial position, results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", which
revised ARB No. 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
believe that the adoption of this standard will have no material impact on our
financial position and results of operations.
Reclassifications
Certain reclassifications have been made to the 2003 and 2002 financial
statements to conform to the 2004 presentation.
Note 2 - Inventories
Inventories are summarized as follows:
2004 2003
------------------------ -----------------------
New $ 16,410,694 $ 16,479,825
Used 5,661,020 6,098,371
Allowance for excess and obsolete inventory
(1,093,000) (447,100)
------------------------ -----------------------
$ 20,978,714 $ 22,131,096
======================== =======================
New inventory includes products purchased from the manufacturers plus
"surplus-new" which is unused products purchased from other distributors or
multiple system operators. Used inventory includes factory remanufactured,
Company remanufactured and used products.
We regularly review inventory quantities on hand and a departure from cost
is required when the loss of usefulness of an item or other factors, such as
obsolete and excess inventories, indicate that cost will not be recovered when
an item is sold. Demand for some of the items in our inventory has been impacted
by recent economic conditions present in the cable industry. The Company
recorded a charge to allow for obsolete inventory at September 30, 2004,
increasing the cost of sales by $645,900. We recorded a charge to allow for
obsolete inventory at September 30, 2003, increasing the cost of sales by
$447,100. We wrote certain items in inventory down to their estimated market
values at September 30, 2002, increasing the cost of sales by $1,442,938.
32
Note 3 - Line of Credit, Stockholder Notes, and Notes Payable
At September 30, 2004, a $3,225,183 balance is outstanding under a $7.0
million line of credit due September 30, 2005, with interest payable monthly
based on the prevailing 30-day LIBOR rate plus 2.0% (3.84% at September 30,
2004). Borrowings under the line of credit are limited to the lesser of $7.0
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 $15.0 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 of credit. The resulting overdraft balance, consisting of outstanding
checks, was $471,620 at September 30, 2004, 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 share of the Series A Convertible
Preferred Stock at September 30, 2004. 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 our
risk management objective and strategy for undertaking the hedge along with
methods for assessing the swap's effectiveness. At September 30, 2004, the fair
market value of the interest rate swap approximated its carrying value of $0.
Notes payable secured by real estate of $384,381 are due in monthly payments
through 2013 with interest at 5.5% through 2008, converting thereafter to prime
minus .25%.
The aggregate maturities of notes payable and the line of credit for the
five years ending September 30, 2009 are as follows:
2005 $ 4,462,230
2006 1,237,047
2007 1,237,047
2008 1,237,047
2009 3,237,047
Thereafter 199,146
-------------
Total $ 11,609,564
=============
33
Note 4 - Income Taxes
The provisions for income taxes consist of:
2004 2003 2002
----------------------- ----------------------- -----------------------
Current $ 3,685,000 $ 1,901,000 $1,185,000
Deferred (172,000) (414,000) (81,000)
----------------------- ----------------------- -----------------------
$ 3,513,000 $ 1,487,000 $1,104,000
======================= ======================= =======================
The following table summarizes the differences between the U.S. federal
statutory rate and the Company's effective tax rate for financial statement
purposes for the year ended September 30,:
2004 2003 2002
------------------- -------------------- ---------------------
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of U.S.
federal tax benefit 4.7 5.0 2.4
Non-deductible goodwill
amortization and other
non-deductible expenses - - 1.4
Tax credits and exclusions (0.6) (2.8) -
Adjustment of deferred tax
asset valuation allowance - (7.4) (3.8)
Other (0.4) (3.9) (0.6)
------------------- -------------------- ---------------------
37.7% 24.9% 33.4%
=================== =================== =====================
Deferred tax assets consist of the following at September 30:
2004 2003
------------------------- ---------------------
Net operating loss carryforwards $ 1,316,000 $ 1,417,000
Financial basis in excess of tax basis
of certain assets (155,000) (131,000)
Financial liability accruals 532,000 235,000
------------------------- ---------------------
Net deferred tax asset $ 1,693,000 $ 1,521,000
========================= =====================
Deferred tax assets are classified as:
Current $ 651,000 $ 367,000
Non-Current 1,042,000 1,154,000
------------------------- ---------------------
$ 1,693,000 $ 1,521,000
========================= =====================
34
Utilization of ADDvantage's net operating loss carry forward of
approximately $3,467,000 to reduce future taxable income is limited to an annual
amount of $265,000. The NOL carryforward expires in varying amounts from 2014 to
2019.
Note 5 - Stockholders' Equity
The 1998 Incentive Stock Plan (the "Plan") provides for the award to
officers, directors, key employees and consultants of stock options and
restricted stock. The Plan provides that upon any issuance of additional shares
of common stock by the Company, other than pursuant to the Plan, the number of
shares covered by the Plan will increase to an amount equal to 10% of the then
outstanding shares of common stock. Under the Plan, option prices will be set by
the Board of Directors and may be greater than, equal to, or less than fair
market value on the grant date.
At September 30, 2004, 1,001,041 shares of common stock were reserved for
the exercise of stock awards under the 1998 Incentive Stock Plan. Of the shares
reserved for exercise of stock awards, 811,041 shares were available for future
grants at September 30, 2004.
A summary of the status of the Company's stock options at September 30,
2004, 2003 and 2002 and changes during the years then ended is presented below.
2004 2003 2002
----------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------------------------------------------------------------------------------------
Outstanding, beginning of year 179,000 $1.97 114,500 $2.07 114,500 $2.07
Granted 4,000 4.40 71,500 1.81 - -
Exercised (51,375) 2.03 - - - -
Canceled (500) 1.50 (7,000) 1.50 - -
Outstanding, end of year 131,125 $2.83 179,000 $1.97 114,500 $2.07
Exercisable, end of year 108,500 $3.08 129,875 $2.79 46,125 $2.31
Weighted average fair value of
Options granted $4.04 $1.55 N/A
============== ============== ==============
The following table summarizes information about fixed stock options
outstanding at September 30, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Number Remaining Number
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price At 9/30/04 Life Price At 9/30/04 Price
- ----------------------------------------------------------------------------- --------------------------------
$4.400 4,000 9.5 years $4.400 2,500 $1.900
$1.650 5,000 7.5 years $1.650 5,000 $1.650
$0.810 5,000 6.5 years $0.810 5,000 $0.810
$1.500 5,000 5.5 years $1.500 5,000 $1.500
$1.500 29,625 4.5 years $1.500 14,500 $1.500
$3.125 22,500 3.5 years $3.125 22,500 $3.125
$4.000 50,000 3.0 years $4.000 50,000 $4.000
---------------- ----------------
131,125 108,500
================ ================
35
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2004: risk-free interest rates of 2.0%; expected
dividend yield of 0.0%; expected lives of 6 years; and estimated volatility of
142%.
The Series B Preferred Stock (the "Preferred Stock") has priority over the
Company's common stock with respect to the payment of dividends and the
distribution of assets. Cash dividends on the Preferred Stock shall be payable
quarterly when and as declared by the Board of Directors. Interest accrues on
unpaid dividends at the rate of 7% per annum. No dividends may be paid on any
class of stock ranking junior to the Preferred Stock unless Preferred Stock
dividends have been paid. Liquidation preference is equal to the stated value
per share. The Preferred Stock is redeemable at any time at the option of the
Board of Directors at a redemption price equal to the stated value per share.
Holders of the Preferred Stock do not have any voting rights unless the Company
fails to pay dividends for four consecutive dividend payment dates.
Note 6 - Related Parties
Cash used in financing activities in 2004 was primarily used to pay
dividends on the Company's Series A and Series B Preferred Stock. On September
30, 2004, the Company redeemed, at the $8 million stated value, all of the
Series A Preferred Stock, which was beneficially owned by David E. Chymiak and
Kenneth A. Chymiak. With the redemption of the Series A Preferred Stock on
September 30, 2004, dividends on the remaining Series B Preferred Stock total
$840,000 annually. The outstanding common and preferred stock is beneficially
owned by our principal shareholders as reflected in the following table.
Stock Ownership
- ---------------
Percent of
Percent of Series B
Common Preferred
Stock Stock
Name of Beneficially Beneficially
Beneficial Owner Owned Owned (A)
- ---------------- ----- ---------
David E. Chymiak 39.0% 50.0%
Kenneth A. Chymiak 35.2% 50.0%
(A) The outstanding preferred stock has an aggregate preference upon
liquidation of $12,000,000.
In fiscal 1999, Chymiak Investments, L.L.C., which is owned by David E.
Chymiak and Kenneth A. Chymiak, purchased from TULSAT Corporation on September
30, 1999, the real estate and improvements comprising the headquarters and a
substantial portion of the other office and warehouse space of TULSAT
Corporation for a price of $1,286,000. The price represents the appraised value
of the property less the sales commission and other sales expenses that would
have been incurred by TULSAT Corporation if it had sold the property to a third
party in an arm's-length transaction. TULSAT Corporation entered into a
five-year lease commencing October 1, 1999 with Chymiak Investments, L.L.C.
covering the property. This lease was renewed on October 1, 2004 and will expire
on September 30, 2008.
36
In fiscal 2001, ADDvantage Technologies Group of Texas borrowed $150,000 on
June 26, 2001 from Chymiak Investments, L.L.C for the purchase of a building
consisting of office and warehouse space at the location in Texas. The note is
payable at 7.5% over 10 years and total interest paid in 2004, 2003 and 2002 was
$4,898, $9,869 and $10,694, respectively. The note was repaid in April 2004.
In fiscal 2002, ADDvantage Technologies Group of Missouri completed
additions at its location in Missouri and financed $342,000 from Chymiak
Investments, L.L.C for a building consisting of office and warehouse space. The
note is payable at 7.5% over 10 years and total interest paid in 2004, 2003 and
2002 was $11,694, $23,371 and $21,657, respectively. The note was repaid in
April 2004.
Chymiak Investments Inc., which is owned by Kenneth A. Chymiak and his
wife, Susan C. Chymiak, owns three other properties leased to TULSAT Corporation
for five-year terms (all ending in 2008).
The Company had outstanding, unsecured stockholder loans of $800,000 at
September 30, 2003. Of this amount, $650,000 was payable to revocable trusts for
the benefit of Kenneth A. Chymiak and his wife and $150,000 was payable to David
E. Chymiak. The interest rate on the notes was 1.25% below the Chase Manhattan
Bank Prime, which was the same rate as the Company's bank line of credit. The
total interest paid on the notes was $19,134 in 2004, $30,323 in 2003 and
$47,352 in 2002. These notes were repaid in August and September 2004.
The Company leases various properties primarily from two companies owned by
David E. Chymiak and Kenneth A. Chymiak. Future minimum lease payments under
these leases are as follows:
2005 $ 480,240
2006 380,040
2007 360,000
2008 324,000
------------
$ 1,544,280
============
Related party rental expense for the years ended September 30, 2004, 2003
and 2002 was $466,000, $461,000 and $438,000, respectively.
Note 7 - Retirement Plan
The Company sponsors a 401(k) plan that covers all employees who are at
least 21 years of age and have completed one year of service as of the plan
effective date. The Company's contributions to the plan consist of a matching
contribution as determined by the plan document. Pension expense under the
401(k) plan was $161,644 during the year ended September 30, 2004, $140,673
during the year ended September 30, 2003, and $111,144 during the year ended
September 30, 2002.
37
Note 8 - Earnings per Share
Year ended Year ended Year Ended
September 30, September 30, September 30,
2004 2003 2002
------------------- ------------------- -------------------
Net income $ 5,813,753 $ 4,492,588 $ 2,201,208
Dividends on preferred stock 1,240,000 1,240,000 1,240,000
------------------- ------------------- -------------------
Net income attributable to
common shareholders - basic 4,573,753 3,252,588 961,208
Dividends on Series A convertible
preferred stock 400,000 400,000 400,000
------------------- ------------------- -------------------
Net income attributable to common
shareholders - diluted $ 4,973,753 $ 3,652,588 $ 1,361,208
=================== =================== ===================
Weighted average shares outstanding 10,041,197 10,007,756 9,991,716
Potentially dilutive securities
Assumed conversion of 200,000 shares of
Series A convertible preferred stock 2,000,000 2,000,000 2,000,000
Effect of dilutive stock options 63,344 13,479 -
------------------- ------------------- -------------------
Weighted average shares outstanding -
assuming dilution 12,104,541 12,021,235 11,991,716
=================== =================== ===================
Earnings per common share:
Basic $ 0.46 $ 0.33 $ 0.10
Diluted $ 0.41 $ 0.30 $ 0.10
=================== =================== ===================
Earnings per common share-diluted for the year ended September 30, 2002 are
the same as basic earnings per share as conversion of potentially dilutive
securities are anti-dilutive.
38
Note 9 - Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30, 2004 and 2003.
Three months ended
------------------ -- ------------------ -- --------------- -- ---------------
December 31 March 31 June 30 September 30
------------------ ------------------ --------------- ---------------
Fiscal year ended 2004
Net sales and service income $ 11,292,500 $ 11,654,041 $ 12,682,449 $ 11,442,339
Gross profit 4,447,890 4,427,620 4,830,899 4,549,788
Net income 1,393,170 1,523,626 1,715,232 1,181,725
Basic earnings per common share 0.11 0.12 0.14 0.09
Diluted earnings per common share 0.10 0.11 0.12 0.08
Fiscal year ended 2003
Net sales and service income $7,696,978 $8,570,726 $8,249,732 $8,810,309
Gross profit 3,624,056 3,696,875 3,631,845 3,302,927
Net income 1,014,175 1,049,409 1,308,592 1,120,412
Basic earnings per common share 0.07 0.07 0.10 0.09
Diluted earnings per common share 0.07 0.07 0.10 0.06
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management carried out an evaluation pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended, under the supervision and with the
participation of our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as 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. Based upon that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or furnish 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-K, there has been no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
39
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our officers, directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference to the information in the sections
entitled "Identity of Officers," "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act," respectively, of our Proxy Statement for the
2005 Annual Meeting of Shareholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission within 120 days after the end of our fiscal
year ended September 30, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation is
incorporated by reference to the information set forth in the section entitled
"Compensation of Directors and Executive Officers" of our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Relationships and Related Transactions" of our
Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item regarding principal accounting fees
and services is incorporated by reference to the information set forth in the
section entitled "Appointment Of Independent Auditors" of our Proxy Statement.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The following financial statements are included in Part II,
Item 8 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2004 and 2003
Consolidated Statements of Operations for the years ended
September 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. The following financial statement Schedule II - Valuation and
Qualifying Accounts for the years ended September 30, 2004,
2003 and 2002 is filed as part of this report. All other
financial statement schedules have been omitted because they
are not applicable or are not required or the information
required to be set forth therein is included in the financial
statements or notes thereto contained in Part II, Item 8 of
this current report.
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Write-offs Recoveries of Period
--------- -------- ---------- ---------- ---------
Period Ended September 30, 2004
Allowance for Doubtful Accounts $ 78,359 $(58,413) $(19,968) $ 68,085 $ 68,063
Allowance for Excess and Obsolete Inventory 447,100 645,900 - - 1,093,000
Valuation Allowance of Deferred Tax Asset - - - - -
Period Ended September 30, 2003
Allowance for Doubtful Accounts $ 85,212 $ 83,740 $(90,593) $ - $ 78,359
Allowance for Excess and Obsolete Inventory - 447,100 - - 447,100
Valuation Allowance of Deferred Tax Asset 443,000 - - 443,000 -
Period Ended September 30, 2002
Allowance for Doubtful Accounts $ - $ 229,975 $(144,763) $ - $ 85,212
Allowance for Excess and Obsolete Inventory - - - - -
Valuation Allowance of Deferred Tax Asset 567,000 - - 124,000 443,000
41
3. The following documents are included as exhibits to this Form 10-K.
Those exhibits below incorporated by reference herein are indicated as such by
the information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
-------
3.1 Certificate of Incorporation of the Company and amendments thereto
incorporated by reference to Exhibit 3.1 to the Annual Report on Form
10-KSB filed with the Securities Exchange Commission by the Company on
January 10, 2003.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-KSB filed with the
Securities Exchange Commission by the Company on January 10, 2003.
4.1 Certificate of Designation, Preferences, Rights and Limitations of
ADDvantage Media Group, Inc. Series A 5% Cumulative Convertible
Preferred Stock and Series B 7% Cumulative Preferred Stock as filed
with the Oklahoma Secretary of State on September 30, 1999
incorporated by reference to Exhibit 4.1 to the Current Report on Form
8-K filed with the Securities Exchange Commission by the Company on
October 14, 1999.
10.1 Lease Agreement dated September 15, 1999 by and between Chymiak
Investments, L.L.C. and TULSAT Corporation (formerly named DRK
Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to the
Annual Report on Form 10-KSB filed with the Securities Exchange
Commission by the Company on December 30, 1999.
10.2 Schedule of documents substantially similar to Exhibit 10.1
incorporated by reference to Exhibit 10.3 to the Annual Report on Form
10-KSB filed with the Securities Exchange Commission by the Company on
December 30, 1999.
10.4 Form of promissory notes issued by TULSAT to David Chymiak and to Ken
Chymiak Revocable Trust and Susan C. Chymiak Revocable Trust dated as
of February 7, 2000 incorporated by reference to Exhibit 10.7 to the
Annual Report on Form 10-KSB filed with the Securities Exchange
Commission on January 9, 2001.
10.5 Revolving Credit and Term Loan Agreement dated September 30, 2004, by
and between Bank of Oklahoma, N.A. ("Lender") and Registrant
("Borrower").
21.1 Subsidiaries incorporated by reference to Exhibit 21.1 to the Annual
Report on Form 10-KSB filed with the Securities Exchange Commission by
the Company on January 10, 2003.
42
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
31.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADDvantage Technologies Group, Inc.
Date: December 22, 2004 By: /s/ Kenneth A. Chymiak
----------------------
Kenneth A. Chymiak, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: December 22, 2004 /s/ David E. Chymiak
--------------------
David E. Chymiak, Chairman of the Board of
Directors
Date: December 22, 2004 /s/ Kenneth A. Chymiak
----------------------
Kenneth A. Chymiak, President, Chief
Executive Officer and Director (Principal
Executive Officer and Principal Financial
Officer)
Date: December 22, 2004 /s/ Dee Cooper
--------------
Dee Cooper, Controller (Principal
Accounting Officer)
Date: December 22, 2004 /s/ Stephen J. Tyde
-------------------
Stephen J. Tyde, Director
Date: December 22, 2004 /s/ Freddie H. Gibson
---------------------
Freddie H. Gibson, Director
Date: December 22, 2004 /s/ Henry F. McCabe
-------------------
Henry F. McCabe, Director
43
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit Description
------- -----------
3.1 Certificate of Incorporation of the Company and amendments
thereto incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-KSB filed with the
Securities Exchange Commission by the Company on January 10,
2003.
4.1 Certificate of Designation, Preferences, Rights and Limitations
of ADDvantage Media Group, Inc. Series A 5% Cumulative
Convertible Preferred Stock and Series B 7% Cumulative Preferred
Stock as filed with the Oklahoma Secretary of State on September
30, 1999 incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K filed with the Securities Exchange Commission
by the Company on October 14, 1999.
10.1 Lease Agreement dated September 15, 1999 by and between Chymiak
Investments, L.L.C. and TULSAT Corporation (formerly named DRK
Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to
the Annual Report on Form 10-KSB filed with the Securities
Exchange Commission by the Company on December 30, 1999.
10.2 Schedule of documents substantially similar to Exhibit 10.1
incorporated by reference to Exhibit 10.3 to the Annual Report on
Form 10-KSB filed with the Securities Exchange Commission on
December 30, 1999.
10.4 Form of promissory notes issued by TULSAT to David Chymiak and to
Ken Chymiak Revocable Trust and Susan C. Chymiak Revocable Trust
dated as of February 7, 2000 incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
10.5 Revolving Credit and Term Loan Agreement dated September 30,
2004, by and between Bank of Oklahoma, N.A. ("Lender") and
Registrant ("Borrower").
21.1 Subsidiaries incorporated by reference to Exhibit 21.1 to the
Annual Report on Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
44
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
45