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EX-23.1 - CONSENT OF HOGANTAYLOR LLP - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit23.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SEC 302 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SEC 302 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_1.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SEC 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SEC 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_1.htm
EX-10.6 - AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT - ADDVANTAGE TECHNOLOGIES GROUP INCcredit_agreement.htm
EX-21.1 - LISTING OF COMPANY SUBSIDIARIES - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit21.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
 
oTRANSITION 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
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1221 E. Houston, Broken Arrow, Oklahoma
74012
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number:  (918) 251-9121
                                                       Securities registered under Section 12(b) of the Act:

Title of each class
Name of exchange on which registered
Common Stock, $.01 par value
NASDAQ Global Market

                                                     Securities registered under Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 Yes o      No  x
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 Yes o      No  x
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Yes x      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 Yes o      No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
 
             x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
   Large accelerated filer   o                                                                                     Accelerated filer   o
   Non-accelerated filer   o                                                                                     Smaller reporting company   x
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes o      No  x
 
The aggregate market value of the outstanding shares of common stock, par value $.01 per share, held by non-affiliates
computed by reference to the closing price of the registrant’s common stock as of March 31, 2010 was $12,221,531.
 
 
The number of shares of the registrant’s outstanding common stock, $.01 par value per share, was 10,143,970 as of
November 30, 2010.
 
 
Documents Incorporated by Reference
 
   
The identified sections of definitive Proxy Statement to be filed as Schedule 14A pursuant to Regulation 14A in connection with the Registrant’s 2011 annual meeting of shareholders are 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 end of the fiscal year covered by this Form 10-K.
 


 
 

 
 
ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 2010
INDEX
   
Page
 
PART I
 
 
 
   
     
Item 1.
Business.
Item 2.
Properties.
Item 3.
Legal Proceedings.
     
     
 
PART II
 
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
 
Item 6.
Selected Financial Data.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
 
     
Item 8.
Financial Statements and Supplementary Data.
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
 
Item 9A.
Controls and Procedures.
Item 9B.
Other Information.
 
 
PART III
 
     
Item 10.
Directors, Executive Officers and Corporate Governance.
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Principal Accounting Fees and Services.
     
 
PART IV
 
     
Item 15.
Exhibits, Financial Statement Schedules.
     
 
SIGNATURES
 
 
 


 
2

 

PART   I

Item  1.                 Business.

 
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 ADDvantage Technologies Group, Inc. (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 our control or foresight, 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.

Background

We (through our subsidiaries) distribute and service a comprehensive line of electronics and hardware for the cable television (“CATV”) industry.  The products we sell and service are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems.  Our customers provide 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.

We conduct our operations through a network of regionally based subsidiaries that focus on servicing customers in different geographic markets.  Our operating subsidiaries include Tulsat Corporation (“Tulsat”), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska, Inc. (dba “Tulsat-Nebraska”), ADDvantage Technologies Group of Texas, Inc. (dba “Tulsat Texas”), Jones Broadband International, Inc. (dba “Tulsat-West”), ADDvantage Technologies Group of Missouri, Inc. (dba “ComTech Services”), NCS Industries, Inc. (“NCS”), and Broadband Remarketing International LLC (formerly Tulsat-Pennsylvania LLC through September 30, 2010).

Several of our subsidiaries, through their long relationships with the original equipment manufacturers (“OEMs”) and specialty repair facilities, have established themselves as value-added resellers (“VARs”).  Tulsat, located in Broken Arrow, Oklahoma, is a Cisco Master Stocking Distributor for certain current and legacy products offered within their Service Provider Video Technology Group (“SPVTG”) and distributes most of Cisco’s other SPVTG products.  Tulsat has also been designated an authorized third party Cisco-SPVTG repair center for select products.  NCS, located in Warminster, Pennsylvania, is one of only three distributors of Motorola broadband products and is also a Master Distributor for the United States distribution of Fujitsu Frontech North America encoders, decoders and media solutions products.  Our subsidiaries also sell products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni. 

In addition to offering a broad range of new products, we also purchase and sell surplus and refurbished equipment that becomes available in the market as a result of cable operator system upgrades or an overstock in their warehouses.  We maintain one of the industry's largest inventories of new and refurbished equipment, which allows us to deliver products to our customers within a short period of time.  We continue to upgrade our new product offerings to stay in the forefront of the communications broadband technology revolution.

Most of our subsidiaries operate technical service centers specializing in Cisco-SPVTG, Motorola, Magnavox and power supply repairs.

 
3

 
Overview of the Industry

We participate in markets for equipment sold primarily to cable operators (called multiple system operators or “MSOs”) and other communication companies.  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 MSOs in the United States.  Within the last few years, many MSOs now 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.  To offer these expanded services, MSOs have invested significantly to convert their systems to digital networks, and they continue to upgrade their cable plants to increase the speed of their communication signals.  As a result, many MSOs have well-equipped networks capable of delivering symmetrical high-bandwidth video, two-way high speed data service and telephony to most of their subscribers through their existing hybrid fiber coaxial infrastructure.

We believe that we have been able to provide many of the products and services sought by MSOs as they establish and expand their services and territories.  Our relationships with our principal vendors, Cisco and Motorola, provide us with products that are important to cable operators as they maintain and expand their systems.  These relationships and our inventory are key factors, we believe, in our prospects for revenue and profit growth.

In addition, we continue to expand our relationships with vendors and establishing new vendors and product lines for our company.  In 2010, NCS became a Master Distributor for the United States distribution of Fujitsu Frontech North America encoders, decoders and media solutions products and a member of the Fujitsu global channel partner program servicing the United States.  We believe this relationship will expand our customer base into the broadcast market segment of the industry.

We are focused on the opportunities provided by technological changes resulting from the implementation of fiber-to-the home by several large telephone companies, the continued expansion of bandwidth signals by MSOs, and sales to customers in Latin America.  We continue to stock legacy CATV equipment as well as new digital and optical broadband telecommunications equipment from major suppliers so we can provide our customers with one-stop shopping, access to “hard-to-find” products and reduced customer downtime because we have the product in stock and can deliver to the customer’s location the next day.  Our experienced sales support staff has the technical know-how to consult with our customers regarding solutions for various products and configurations.  Through our six service centers that provide warranty and out-of-warranty repairs, we continue to reach new customers.

Recent Business Developments

Under the terms of our agreement with Cisco, which was set to expire January 15, 2010, Tulsat is authorized to inventory, distribute and resell the entire line of Cisco-SPVTG current and legacy equipment.  This agreement has been extended through December 20, 2010 for the United States and Canada.  Cisco announced earlier this year that it was modifying its distribution channel for the SPVTG business in order to align it more closely with its IT lines of business, and since then we have been in negotiations with Cisco regarding our agreement.  We expect to sign a new agreement with Cisco by calendar year-end.  Any material change in the terms or structure of our current relationship with Cisco could negatively affect our marketing of Cisco-SPVTG products or the profit margins we have historically realized on these products under the current agreement.  Also, Tulsat is in negotiations with Cisco regarding selling Cisco products in the Latin American market, since the latest extension excludes the Latin American market.

In March 2010, NCS Industries became a Master Distributor for the United States distribution of Fujitsu Frontech North America encoders, decoders and media solutions products and a member of the Fujitsu global channel partner program servicing the United States.

During fiscal year 2010, we moved our Broadband Remarketing International operations from Chambersburg, Pennsylvania to our Broken Arrow, Oklahoma facility.  Also, at the end of fiscal year 2010, we were in the process of moving the Tulsat-West operations from Oceanside, California to our Broken Arrow facility.  Both of these moves were undertaken as cost reduction measures.


 
4

 


Products and Services

We offer our customers a wide range of new, surplus new and refurbished products that are used in connection with video, telephone and internet data signals.

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 location 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.  In this category, we currently offer products including optical transmitters, fiber-optic cable, receivers, couplers, splitters and compatible accessories.  These products convert radio 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 transmitters, receivers, line extenders, broadband amplifiers, directional taps and splitters.

Digital converters and modems are boxes placed inside the home that receive, record and transmit video, data and telephony signals.  Among the products we offer in this category are remanufactured Cisco and Motorola digital converter boxes and modems.

We also inventory and sell to our customers other hardware such as test equipment, connector and cable products.

Revenues by Geographic Area

Our revenues by geographic areas were as follows:

   
2010
   
2009
   
2008
 
United States
  $ 40,523,492     $ 37,694,831     $ 48,597,910  
Canada, Central America, Mexico, South America and Other
    6,782,638       4,548,761       7,850,651  
                         
    $ 47,306,130     $ 42,243,592     $ 56,448,561  

Revenues attributed to geographic areas are based on the location of the customer.  All of our long-lived assets are located within the United States.


 
5

 


Sales and Marketing

In 2010, sales of new products represented 68% of our total revenues and refurbished product sales represented 20%.  Repair and other services contributed the remaining 12% of revenues.

We market and sell our products to franchise and private MSOs, telephone companies, system contractors and other resellers.  Our sales and marketing are predominantly performed by the internal sales and customer service staff of our subsidiaries.  We also have outside sales representatives located in various 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 major MSOs in the United States, and we are constantly in touch with these operators regarding their plans for upgrading or expansion as well as their needs to either purchase or sell equipment.

We market ourselves as an “On Hand – On Demand” distributor.  We maintain one of the largest inventories of new and used cable products of any reseller in the industry and offer our customers same day shipments.  We believe our investment in on-hand inventory, our network of regional repair centers and our experienced sales and customer service team create a competitive advantage for us.

We continue to add products and services to maintain and expand our current customer base in North America, Central and South America, Asia and other international markets.  We believe there is growth potential for sales of new and legacy products in the international market as some operators choose to upgrade to new larger bandwidth platforms, while other customers, specifically in developing markets, desire less expensive legacy new and refurbished products.   We extend credit on a limited basis to international customers that purchase products on a regular basis and make timely payments.  However, for most international sales we require prepayment of sales or letters of credit confirmed by United States banks prior to shipment of products.
 
Suppliers

In 2010, we purchased approximately $7.6 million of new inventory directly from Cisco and approximately $4.5 million of new inventory directly from Motorola.  These purchases represented approximately 52% of our total inventory purchases for 2010.  In addition to purchasing inventory from other original equipment manufacturers, we also purchase used or surplus new inventory from MSOs who have upgraded or are in the process of upgrading their systems.

Seasonality

Many of the products that we sell are installed outdoors and can be damaged by storms and power surges.  Consequently, we experience increased demand on certain product offerings during the months between late spring and early fall when severe weather tends to be more prominent than at other times during the year.

Competition and Working Capital Practices.

The CATV industry is highly competitive with numerous companies competing in various segments of the market.  There are a number of competitors throughout the United States buying and selling new and remanufactured CATV equipment similar to the products that we offer.  However, most of these competitors do not maintain the large inventory that we carry due to working capital limitations.  We maintain the practice of carrying large quantities of inventory to meet both the customers' urgent needs and mitigate the extended lead times of our suppliers.  In terms of sales and inventory on hand, we are the largest reseller in this industry, providing both sales and service of new and re-manufactured CATV equipment.

We also compete with our OEM suppliers as they sell directly to our customers.  Our OEM suppliers have a competitive advantage over us as they can sell products at lower prices than we offer.  As a result, we are often considered a secondary supplier by large MSOs and telephone companies when they are making large equipment purchases or upgrades.  However, for smaller orders or items that are needed to be delivered quickly, we often hold an advantage over our OEM suppliers as we carry most inventory in stock and can have it delivered in a very short timeframe.

 
6

 
Working capital practices in the industry center on inventory and accounts receivable.  We choose to carry a relatively large inventory due to our “On Hand – On Demand” business model for both new and used inventory.  We have typically utilized excess cash flows to reinvest in new inventory to expand our product offerings.  The greatest need for working capital occurs when we make bulk purchases of surplus new and used inventory, or when our OEM suppliers offer additional discounts on large purchases.  However, in fiscal year 2010, due to the continued economic downturn, we chose to reduce our inventory, which helped in generating excess cash flows of approximately $8 million.  Our working capital requirements are generally met by cash flow from operations and a bank line of credit, which currently permits borrowings up to $7.0 million.  We expect to have sufficient funds available from our cash on hand, future excess cash flows and the bank line of credit to meet our working capital needs for the foreseeable future.

Significant Customers

We are not dependent on one or a few customers to support our business.  Our customer base consists of approximately 1,300 active accounts.  Sales to our largest customer accounted for approximately 9% of our revenues in fiscal year 2010.  Approximately 26% and 22% of our revenues for fiscal years 2010 and 2009, respectively, 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 alone, each of which is a potential customer.

Personnel

At September 30, 2010, we had 129 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, warehouse and service center facilities.

·  
Broken Arrow, Oklahoma – Tulsat owns a facility consisting of an office, warehouse and service center of approximately 100,000 square feet on ten acres, with an investment of $3.3 million, financed by a loan of $2.8 million, due in monthly payments through 2021 at an interest rate of LIBOR plus 1.4%.   Tulsat constructed a 62,500 square foot warehouse facility on the rear of its existing property in Broken Arrow, OK, with an investment of $1.6 million, financed with cash flow from operations.

Tulsat also continues to lease warehouse space of approximately 56,000 square feet from an entity that is controlled by David E. Chymiak, Chairman of the Company’s Board of Directors, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company.  The lease expired in September 2008 and is now leased on a month-to-month basis with a monthly payment of $7,500.

·  
Deshler, Nebraska – Tulsat-Nebraska owns a facility consisting of land and an office, warehouse and service center of approximately 8,000 square feet.

·  
Warminster, Pennsylvania – NCS owns its facility consisting of an office, warehouse and service center of approximately 12,000 square feet, with an investment of $0.6 million.  NCS also leases property of approximately 2,000 square feet, with monthly rental payments of $1,298 through December 31, 2010.  NCS also rents on a month-to-month basis another property of approximately 2,000 square feet, with monthly rental payments of $1,250.

·  
Sedalia, Missouri – ComTech Services owns land and an office, warehouse and service center of approximately 24,300 square feet.  ComTech Services also constructed an 18,000 square foot warehouse facility on the back of its existing property in Sedalia, MO with an investment of $0.4 million.

·  
New Boston, Texas – Tulsat-Texas owns land and an office, warehouse and service center of approximately 13,000 square feet.

·  
Suwannee, Georgia – Tulsat-Atlanta leases an office and service center of approximately 5,000 square feet, with monthly lease payments of $3,360 through January 31, 2011.

 
7

 
·  
Oceanside, California – Tulsat-West leased an office, warehouse and service center of approximately 15,000 square feet for $13,881 a month through November 30, 2010.  At the expiration of the lease, this facility was closed, and all operations moved to our Broken Arrow facility.

We believe that our current facilities are adequate to meet our needs.

Item 3.                 Legal Proceedings.

From time to time in the ordinary course of business, we have become a party to 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.


 
8

 

PART II

Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The table sets forth the high and low sales prices on the NASDAQ Global Market under the symbol “AEY” for the quarterly periods indicated.

Year Ended September 30, 2010
High
Low
     
First Quarter
$2.58
$1.91
Second Quarter
$2.50
$1.97
Third Quarter
$3.48
$2.20
Fourth Quarter
$3.41
$2.34
     
Year Ended September 30, 2009
High
Low
     
First Quarter
$2.65
$1.02
Second Quarter
$2.40
$1.25
Third Quarter
$1.99
$1.30
Fourth Quarter
$2.32
$1.61
     
Holders

At November 30, 2010, we have approximately 70 shareholders of record and, based on information received from brokers, there are approximately 1,700 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.  In addition, subsequent to September 30, 2010, the Company signed an Amended and Restated Revolving Credit and Term Loan Agreement with its primary financial lender, which restricts the payment of dividends to no more than 50% of the Company’s net income.  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.

Securities authorized for issuance under equity compensation plans

 
 
 
 
 
Plan Category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
 
Weighted-average
 exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders
 
 
136,850
 
 
$3.46
 
 
637,495
Equity compensation plans not approved by security holders
 
 
0
 
 
0
 
 
0
Total
136,850
$3.46
637,495


 
9

 


Item 6.                 Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Fiscal Year ended September 30,
   
2010
   
2009
   
2008
   
2007
   
2006
 
                               
Net sales and service income
  $ 47,306     $ 42,244     $ 56,449     $ 65,646     $ 52,541  
                                         
Income from operations
  $ 7,554     $ 5,768     $ 8,452     $ 12,543     $ 8,117  
                                         
Net income applicable to
   common shareholders
  $ 4,186     $ 3,019     $ 4,534     $ 6,590     $ 4,003  
                                         
Earnings per share
                                       
   Basic
  $ 0.41     $ 0.30     $ 0.44     $ 0.64     $ 0.39  
   Diluted
  $ 0.41     $ 0.30     $ 0.44     $ 0.64     $ 0.39  
                                         
Total assets
  $ 52,260     $ 49,433     $ 51,800     $ 49,009     $ 40,925  
                                         
Long-term obligations inclusive
                                       
   of current maturities
  $ 13,872     $ 15,857     $ 20,510     $ 9,009     $ 9,385  


Item 7.                      Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

General

We have established ourselves, through our subsidiaries’ long relationships with OEMs, as distributors and/or value-added resellers of these OEM products.  Tulsat is a Master Stocking Distributor for certain current and legacy products offered by Cisco-SPVTG and distributes most of Cisco’s other SPVTG products.  NCS Industries is a leading distributor of Motorola broadband products and is also a Master Distributor for the United States distribution of Fujitsu Frontech North America encoders, decoders and media solutions products.  Our subsidiaries also distribute products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni.  We also specialize in the sale of surplus new and refurbished previously-owned CATV equipment to CATV operators and other broadband communication companies.  It is through our development of these vendor relationships that we have focused our initiative to market our products and services to the larger cable MSOs and telecommunication companies.  These customers provide an array of different communications services as well as compete in their ability to offer subscribers “triple play” transmission services including data, voice and video.

We also operate technical service centers specializing in Cisco-SPVTG, Motorola, Magnavox and power supply repairs.

Recent Business Developments

Cisco Distribution Agreement

Under the terms of our agreement with Cisco, which was set to expire January 15, 2010, Tulsat is authorized to inventory, distribute and resell the entire line of Cisco-SPVTG current and legacy equipment.  This agreement has
 
 
10

 
been extended through December 20, 2010 for the United States and Canada.  Cisco announced earlier this year that it was modifying its distribution channel for the SPVTG business in order to align it more closely with its IT lines of business, and since then we have been in negotiations with Cisco regarding our agreement.  We expect to sign a new agreement with Cisco by calendar year-end.  Any material change in the terms or structure of our current relationship with Cisco could negatively affect our marketing of Cisco-SPVTG products or the profit margins we have historically realized on these products under the current agreement.  Also, Tulsat is in negotiations with Cisco regarding selling Cisco products in the Latin American market, since the latest extension excludes the Latin American market.
 
 
Fujitsu Frontech Distribution Agreement

In March 2010, NCS Industries became a Master Distributor for the United States distribution of Fujitsu Frontech North America encoders, decoders and media solutions products as well as a member of the Fujitsu global channel partner program servicing the United States.

Facility Closures

During fiscal year 2010, we moved our Broadband Remarketing International operations from Chambersburg, Pennsylvania to our Broken Arrow, Oklahoma facility.  Also, at the end of fiscal year 2010, we were in the process of moving the Tulsat-West operations from Oceanside, California to our Broken Arrow facility.  Both of these moves were undertaken as cost reduction measures.

Results of Operations

Year Ended September 30, 2010, compared to Year Ended September 30, 2009 (all references are to fiscal years)

Total Net Sales.  Total net sales increased $5.1 million, or 12%, to $47.3 million for 2010 from $42.2 million for 2009.  The overall increase in net sales was due primarily to sales of new equipment resulting from an increased demand for headend equipment needed to add channels to our customers’ cable systems or upgrade their equipment in order to provide HD programming on their cable systems, an overall equipment supply shortage in the market, which we met utilizing our “On Hand – On Demand” business model, and an increase in sales to Latin American and Canadian customers either directly or indirectly through our various business partners.  Sales of new equipment increased $5.1 million, or 19%, to $32.1 million in 2010 from $27.1 million in 2009.  Refurbished sales decreased $0.3 million, or 3%, to $9.4 million in 2010 from $9.7 million in 2009 despite a $0.8 million increase in the sales of our digital converter boxes.  The decrease in refurbished sales is primarily due to much of the equipment demand in fiscal year 2010 was for digital equipment products to convert our customers’ cable systems from analog to digital or to add HD programming and there is not an established refurbished equipment market for this product line yet.  Net repair service revenues increased $0.3 million, or 5%, to $5.8 million for 2010 from $5.5 million in 2009.   The repair revenue increase for 2010 was primarily due to our efforts to promote and expand this line of business, largely offset by our customers conserving cash by limiting the authorization for equipment repairs due to the downturn in the economy.

Cost of Sales.  Cost of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the equipment costs used in repairs, (iii) the related transportation costs, and (iv) the labor and overhead directly related to these sales.  Cost of sales increased $3.5 million, or 12%, to $32.9 million for 2010 from $29.3 million for 2009.  The increase in cost of sales was primarily related to the increase in new equipment sales during 2010.  Cost of sales was also impacted by a decrease in the provision for excess and obsolete inventory of $0.2 million to $0.8 million in 2010 from $1.0 million in 2009.  Cost of sales as a percent of revenues was 69% for both 2010 and 2009.

Gross Profit.  Gross profit increased $1.5 million to $14.5 million in 2010 from $12.9 million in 2009.  The increased gross profit was primarily attributable to the increase in equipment sales.  Gross profit margin was 31% for both 2010 and 2009.

Operating, Selling, General and Administrative Expenses.  Operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication, professional services and charges for bad debts, among other less significant cost categories.  Operating, selling, general and administrative expenses decreased by $0.3 million, or 4%, to $6.9
 
 
11

 
million in 2010 from $7.2 million in 2009.  The decrease was primarily due to a $0.1 million reduction in the provision for the allowance for doubtful accounts receivable with the remaining decrease due to reductions in rent expense, business insurance and advertising expense.

Income from Operations.  Income from operations increased $1.8 million, or 31%, to $7.6 million for 2010 from $5.8 million in 2009, for the reasons stated above.

Interest Expense.  Interest expense for 2010 was $0.8 million compared to $0.9 million in 2009.  The decline in interest expense was due primarily to reduced borrowing levels under our $16.3 million term loan and Line of Credit for 2010 as compared to 2009 and lower interest rates for the $2.8 million term loan for 2010 as compared to 2009.

Income Taxes.  The provision for income taxes for 2010 increased $0.8 million to $2.6 million, or an effective rate of 38.0%, for 2010 from $1.8 million, or an effective rate of 37.5%, for 2009.

Year Ended September 30, 2009, compared to Year Ended September 30, 2008

Total Net Sales.  Total net sales declined $14.2 million, or 25%, to $42.2 million for 2009 from $56.4 million for 2008.  Sales of new equipment decreased $7.6 million, or 22%, to $27.1 million in 2009 from $34.7 million in 2008.  Refurbished sales decreased $6.4 million, or 40%, to $9.7 million in 2009 from $16.1 million in 2008.  The decrease in sales of refurbished products includes a $3.8 million decline in the sales of our digital converter boxes.  Net repair service revenues decreased $0.2 million, or 3%, to $5.5 million for 2009 from $5.7 million in 2008.   The repair revenue decline for 2009 was primarily due to efforts by the large and small MSO customers to conserve cash by limiting the authorization for equipment repairs due to the downturn in the economy, offset by our efforts to promote and expand this line of business.

Cost of Sales.  Cost of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the equipment costs used in repairs, (iii) the related transportation costs, and (iv) the labor and overhead directly related to these sales.  Cost of sales decreased $10.5 million, or 26%, to $29.3 million for 2009 from $39.8 million for 2008.  Cost of sales this year were 69% of total net sales compared to 71% last year.  The decrease in cost of sales was directly related to the decrease in equipment sales during 2009.  Cost of sales was also impacted by a decrease in the provision for excess and obsolete inventory of $0.7 million to $1.0 million in 2009 from $1.7 million in 2008 due primarily to an additional provision in 2008 of $0.5 million for Cisco legacy converter boxes that were deemed unsellable and $0.3 million for unsellable inventory at our Tulsat-West location.

Gross Profit.  Gross profit in 2009 decreased $3.7 million to $12.9 million from $16.6 million in 2008.  The decreased gross profit was primarily attributable to the decline in equipment sales, partially offset by the absence of the $0.8 million additional provision for excess and obsolete inventory in 2008 to the reserve for obsolete and excess inventory discussed above.  Gross profit margins increased to 31% from 29% due primarily to sales of higher margin products and higher margin headend repairs.

Operating, Selling, General and Administrative Expenses.  Operating, selling, general and administrative expenses include personnel costs (including fringe benefits, insurance and taxes), occupancy, communication, professional services and charges for bad debts, among other less significant cost categories.  Operating, selling, general and administrative expenses decreased by $1.0 million to $7.2 million in 2009 from $8.2 million in 2008.  The decrease was primarily due to reductions in payroll expenses of $0.5 million, rent of $0.2 million and professional services of $0.2 million, partially offset by an increase in the provision for the allowance for doubtful accounts receivable of $0.1 million.  At September 30, 2009, we reduced our headcount for full-time employees by approximately 10% as compared to our headcount at September 30, 2008.

Income from Operations.  Income from operations decreased $2.7 million, or 32%, to $5.8 million for 2009 from $8.5 million in 2008, for the reasons stated above.

Interest Expense.  Interest expense for 2009 was $0.9 million compared to $1.0 million in 2008.  Interest expense decreased on our line of credit and $2.8 million term loan as a result of lower interest rates for 2009 as compared with 2008 as well as an overall lower utilization of our line of credit in 2009 as compared to 2008.  This decrease was offset by an amendment on November 27, 2007 to our $8.0 million term note with our primary financial lender to increase the term note to $16.3 million and extend the maturity date to November 30, 2012.  In connection with
 
 
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the amendment, we also entered into an interest rate swap agreement with our primary financial lender to effectively fix the rate on this debt at 5.92%.

Income Taxes.  The provision for income taxes for 2009 decreased $1.0 million to $1.8 million, or an effective rate of 37.5%, for 2009 from $2.8 million, or an effective rate of 37.5%, for 2008.

Liquidity and Capital Resources

We finance our operations primarily through internally generated funds, and we also have available to us a bank line of credit of $7.0 million.  During 2010, we generated approximately $10.1 million of cash flow from operations.  The cash flow from operations was impacted by a $0.7 million net increase in our accounts receivable.  Our accounts receivables increased from 2009 due primarily to increased revenues in the fourth quarter 2010 as compared to the fourth quarter 2009.  Despite the overall economic conditions, we have not experienced a significant deterioration in collections on accounts receivable, so we have maintained our reserve for doubtful accounts at the same level as 2009.  The cash flow from operations was also impacted by a $5.4 million net decrease in inventory.  Our inventory decreased from 2009 due primarily to management’s continuing efforts to reduce our overall inventory levels in order for our inventory to be more in line with our current and expected sales volume.  Additionally, the cash flow from operations was impacted by a $0.2 million increase in our accounts payable from 2009 resulting primarily from the timing of inventory purchases that were made at the end of the fourth quarter 2010 as compared to 2009.

We expect that our cash and cash equivalents of $8.7 million at September 30, 2010 will be sufficient for our working capital needs and scheduled debt payments in the near-term.  The $7.0 million line of credit can also be used to finance our working capital requirements as necessary.  At September 30, 2010, there was not a balance outstanding under the line of credit.  The lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory less the outstanding balances under the term loans identified in the credit agreement and less the fair value of the interest rate swap agreement in excess of $900,000 is available to us under the revolving credit facility ($5.7 million at September 30, 2010).  The entire outstanding balance on the revolving credit facility is due on maturity.

During 2010, we made principal payments totaling $2.0 million primarily on our two term loans under our Revolving Credit and Term Loan Agreement with our primary lender.  The $16.3 million term loan is payable over a five year period through November 2012 with quarterly payments of $0.4 million plus accrued interest.  In connection with this term loan, we entered into an interest rate swap to effectively fix the interest rate on this term loan at 5.92% in order to avoid the risks associated with fluctuating interest rates on this term loan and to eliminate the variability in the cash outflow for interest payments.  The notional value of the interest rate swap amortizes quarterly with payments that mirror the $16.3 million term loan.  The $2.8 million term loan requires monthly payments of $15,334 plus accrued interest through November 2021.  In addition, we paid off our other note payable, secured by real estate, in June 2010 totaling $0.1 million.

We believe that our cash flow from operations, current cash balances and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.

Critical Accounting Policies and Estimates

Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year 2010 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 United States 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 revenues and expenses during the reporting period.  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
 
 
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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 could 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

Our position in the industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales.  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 cannot ship new equipment on a same-day basis.  Carrying these large inventory quantities represents our largest risk.

Our inventory consists of new and used electronic components for the cable television industry.  Inventory is stated at the lower of cost or market, and with our cost determined using the weighted-average method.  At September 30, 2010, we had total inventory of $30.0 million, consisting of $21.8 million in new products and $8.2 million in used or refurbished products against which we have a reserve of $2.5 million for excess and obsolete inventory, leaving us a net inventory of $27.4 million.

We are required to make judgments as to future demand requirements from our customers.  We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand.  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 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.  During 2010, we increased our reserve for excess and obsolete inventory by approximately $0.8 million and wrote down the carrying value of certain inventory items by approximately $0.5 million to reflect deterioration in the market price of that inventory.  If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be adversely affected.

Inbound freight charges are included in cost 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, or weakening in economic trends could have a significant impact on the collectability 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, an additional provision to the allowance for doubtful accounts may be required.  The reserve for bad debts was $0.3 million at September 30, 2010 and September 30, 2009.   At September 30, 2010, accounts receivable, net of allowance for doubtful accounts, was $4.9 million.

Off-Balance Sheet Arrangements

None.

 
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Item 8.                      Financial Statements and Supplementary Data.


Index to Financial Statements
Page
   
Report of Independent Registered Public Accounting Firm
   
Consolidated Balance Sheets, September 30, 2010 and 2009
   
Consolidated Statements of Income and Comprehensive Income, Years
 
ended September 30, 2010, 2009 and 2008
   
Consolidated Statements of Changes in Shareholders’ Equity, Years ended
 
September 30, 2010, 2009 and 2008
   
Consolidated Statements of Cash Flows, Years ended
 
September 30, 2010, 2009 and 2008
   
Notes to Consolidated Financial Statements





 
15

 



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and 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, 2010 and 2009, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2010.  Our audits of the consolidated financial statements also included the financial statement schedule of ADDvantage Technologies Group, Inc., listed in Item 15(a).  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.  Hogan & Slovacek, P.C. audited the  consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows of the Company for the year ended September 30, 2008, and merged with Tullius Taylor Sartain & Sartain LLP to form HoganTaylor LLP effective January 7, 2009.
 
 
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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit 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.

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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.  

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



/s/ HOGANTAYLOR LLP


December 14, 2010
Tulsa, Oklahoma

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2010
   
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 8,739,151     $ 700,004  
Accounts receivable, net of allowance of $300,000
    4,905,733       4,199,136  
                 
Income tax refund receivable
    203,405       88,411  
Inventories, net of allowance for excess and obsolete
               
inventory of $2,545,000 and $2,196,000, respectively
    27,410,722       33,166,624  
Prepaid expenses
    92,567       107,423  
Deferred income taxes
    1,423,000       1,282,000  
Total current assets
    42,774,578       39,543,598  
                 
Property and equipment, at cost:
               
Land and buildings
    7,208,679       7,188,936  
Machinery and equipment
    3,203,701       3,258,819  
Leasehold improvements
    205,797       205,797  
      10,618,177       10,653,552  
Less accumulated depreciation and amortization
    (3,393,921 )     (3,096,885 )
Net property and equipment
    7,224,256       7,556,667  
                 
Other assets:
               
Deferred income taxes
    678,000       744,000  
Goodwill
    1,560,183       1,560,183  
Other assets
    23,236       28,098  
Total other assets
    2,261,419       2,332,281  
                 
Total assets
  $ 52,260,253     $ 49,432,546  






















See notes to audited consolidated financial statements.

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2010
   
2009
 
Liabilities and Shareholders’ Equity
           
Current liabilities:
           
Accounts payable
  $ 2,751,498     $ 2,523,143  
Accrued expenses
    1,340,414       1,095,822  
Notes payable – current portion
    1,814,008       1,863,767  
Total current liabilities
    5,905,920       5,482,732  
                 
Notes payable, less current portion
    12,058,128       13,992,873  
Other liabilities
    1,252,683       1,049,685  
                 
Shareholders’ equity:
               
Common stock, $.01 par value; 30,000,000 shares authorized;
10,367,934 and 10,340,784 shares issued, respectively;
10,143,970 and 10,116,820 shares outstanding, respectively
      103,679         103,408  
Paid in capital
    (6,070,986 )     (6,151,530 )
Retained earnings
    40,193,791       36,007,342  
Accumulated other comprehensive loss:
               
Unrealized loss on interest rate swap, net of tax
    (776,683 )     (645,685 )
      33,449,801       29,313,535  
                 
Less: Treasury stock, 223,964 shares, at cost
    (406,279 )     (406,279 )
Total shareholders’ equity
    33,043,522       28,907,256  
                 
Total liabilities and shareholders’ equity
  $ 52,260,253     $ 49,432,546  

























See notes to audited consolidated financial statements.

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME


   
Years ended September 30,
 
   
2010
   
2009
   
2008
 
Sales:
                 
Net new sales income
  $ 32,108,559     $ 27,053,746     $ 34,678,054  
Net refurbished sales income
    9,444,802       9,704,744       16,090,192  
Net service income
    5,752,769       5,485,102       5,680,315  
Total net sales
    47,306,130       42,243,592       56,448,561  
Cost of sales
    32,850,524       29,315,645       39,839,667  
Gross profit
    14,455,606       12,927,947       16,608,894  
Operating, selling, general and administrative expenses
    6,901,946       7,159,604       8,156,536  
Income from operations
    7,553,660       5,768,343       8,452,358  
Interest expense
    801,211       936,339       983,564  
Income before income taxes
    6,752,449       4,832,004       7,468,794  
Provision for income taxes
    2,566,000       1,813,000       2,801,000  
Net income
    4,186,449       3,019,004       4,667,794  
                         
Other comprehensive loss:
                       
Unrealized loss on interest rate swap, net of $72,000,
                       
$292,000 and $112,000 tax benefit, respectively
    (130,998 )     (457,741 )     (225,302 )
                         
Comprehensive income
  $ 4,055,451     $ 2,561,263     $ 4,442,492  
                         
Net income
    4,186,449       3,019,004       4,667,794  
Preferred stock dividends
                133,480  
Net income attributable to common shareholders
  $ 4,186,449     $ 3,019,004     $ 4,534,314  
                         
Earnings per share:
                       
Basic
  $ 0.41     $ 0.30     $ 0.44  
Diluted
  $ 0.41     $ 0.30     $ 0.44  
Shares used in per share calculation:
                       
Basic
    10,132,658       10,162,122       10,263,365  
Diluted
    10,136,610       10,164,216       10,281,136  



















See notes to audited consolidated financial statements.

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 2010, 2009 and 2008

                                 
Accumulated
             
               
Series B
               
Other
             
   
Common Stock
   
Preferred
   
Paid-in
   
Retained
   
Comprehensive
    Treasury        
   
Shares
   
Amount
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
    Total  
Balance, September 30, 2007
    10,270,756     $ 102,708     $ 12,000,000     $ (6,383,574 )   $ 28,454,024     $ 37,358     $ (54,164 )   $ 34,156,352  
                                                                 
Net income
                            4,667,794                   4,667,794  
Preferred stock dividends
                            (133,480 )                 (133,480 )
Repurchase of preferred stock
                (12,000,000 )                             (12,000,000 )
Stock issuance
    16,359       164             69,836                         70,000  
Stock options exercised
    7,000       69             20,180                         20,249  
Net unrealized loss on interest swap
                                  (225,302 )           (225,302 )
Share based compensation expense
                      20,661                         20,661  
                                                                 
Balance, September 30, 2008
    10,294,115     $ 102,941     $     $ (6,272,897 )   $ 32,988,338     $ (187,944 )   $ (54,164 )   $ 26,576,274  
                                                                 
Net income
                            3,019,004                   3,019,004  
Purchase of common stock
                                        (352,115 )     (352,115 )
Stock issuance
    46,669       467             69,533                         70,000  
Net unrealized loss on interest swap
                                  (457,741 )           (457,741 )
Share based compensation expense
                      51,834                         51,834  
                                                                 
Balance, September 30, 2009
    10,340,784     $ 103,408     $     $ (6,151,530 )   $ 36,007,342     $ (645,685 )   $ (406,279 )   $ 28,907,256  
                                                                 
Net income
                            4,186,449                   4,186,449  
Stock issuance
    27,150       271             59,729                         60,000  
Net unrealized loss on interest swap
                                  (130,998 )           (130,998 )
Share based compensation expense
                      20,815                         20,815  
                                                                 
Balance, September 30, 2010
    10,367,934     $ 103,679     $     $ (6,070,986 )   $ 40,193,791     $ (776,683 )   $ (406,279 )   $ 33,043,522  


See notes to audited consolidated financial statements.

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


 
   
Years ended September 30,
   
   
2010
   
2009
   
2008
Operating Activities
               
Net income
  $ 4,186,449     $ 3,019,004     $ 4,667,794  
Adjustments to reconcile net income to net cash
                         
provided by operating activities:
                         
Depreciation and amortization
    398,778       411,052       388,702  
Provision for losses on accounts receivable
    26,162       129,307       38,238  
Provision for excess and obsolete inventories
    805,684       970,720       1,670,425  
(Gain) loss on disposal of property and equipment
    7,704       (8,594 )     -  
Deferred income tax benefit
    (3,000 )     (40,000 )     (225,000 )
Share based compensation expense
    84,984       121,834       61,492  
Cash provided (used) by changes in current assets
and liabilities:
                         
Accounts receivable
    (732,759 )     2,375,719       (32,521 )
Income tax refund receivable
    (114,994 )     (4,676 )     69,517  
Inventories
    4,950,218       (458,926 )     (3,884,316 )
Prepaid expenses
    14,856       1,137       16,559  
Other  assets
    693       1,014       42,423  
Accounts payable
    228,355       (743,863 )     (1,034,666 )
Accrued expenses
    244,592       (50,850 )     (185,218 )
Net cash provided by operating activities
    10,097,722       5,722,878       1,593,429  
                           
Investing Activities
                         
Additions to machinery and equipment
    (77,078 )     (58,411 )     (125,610 )
Additions of land and buildings
    (19,743 )     (11,133 )     (694,743 )
Disposals of machinery and equipment
    22,750       36,594       3,500  
Net cash used in investing activities
    (74,071 )     (32,950 )     (816,853 )
                           
Financing Activities
                         
Net change under bank revolving line of credit
          (2,789,252 )     1,053,847  
Proceeds on notes payable
                12,000,000  
Payments on notes payable
    (1,984,504 )     (1,863,768 )     (1,552,974 )
Repurchase of preferred stock
                (12,000,000 )
Purchase of treasury stock
          (352,115 )      
Proceeds from stock options exercised
                20,249  
Payments of preferred dividends
                (343,480 )
Net cash used in financing activities
    (1,984,504 )     (5,005,135 )     (822,358 )
                           
Net increase (decrease) in cash and cash equivalents
    8,039,147       684,793       (45,782 )
Cash and cash equivalents at beginning of year
    700,004       15,211       60,993  
Cash and cash equivalents at end of year
  $ 8,739,151     $ 700,004     $ 15,211  
                           
Supplemental cash flow information:
                         
Cash paid for interest
  $ 814,332     $ 944,777     $ 901,940  
Cash paid for income taxes
  $ 2,767,180     $ 1,934,465     $ 2,946,329  




See notes to audited consolidated financial statements.

 
21

 

Note 1 – Description of Business and Summary of Significant Accounting Policies

Description of business

ADDvantage Technologies Group, Inc. through its subsidiaries (collectively, the “Company”) sells new, surplus, and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology.  In addition, the Company is also a repair center for various cable companies.

Summary of Significant Accounting Policies

Principles of consolidation and segment reporting

The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries:  Tulsat Corporation, Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska (dba Tulsat-Nebraska), ADDvantage Technologies Group of Texas, Inc. (dba Tulsat-Texas), Jones Broadband International, Inc. (dba Tulsat-West), NCS Industries, Inc., ADDvantage Technologies Group of Missouri, Inc. (dba ComTech Services) and Tulsat-Pennsylvania LLC (dba Broadband Remarketing International).   All significant inter-company balances and transactions have been eliminated in consolidation.  In addition, each subsidiary represents a separate operating segment of the Company and is aggregated for segment reporting purposes.

FASB Accounting Standards Codification

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets generally accepted accounting principles (“GAAP”) that the Company follows to ensure that the Company’s financial condition, results of operations and cash flows are consistently reported.  References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“Codification” or “ASC”).

Cash and cash equivalents

Cash and cash equivalents includes demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.

Accounts receivable

Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts 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 against the allowance when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  The Company generally does not charge interest on past due 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.  The Company records inventory reserve provisions to reflect inventory at its estimated realizable value based on a review of inventory quantities on hand, historical sales volumes and technology changes. These reserves are to provide for items that are potentially slow-moving, excess or obsolete.
 
Property and equipment

Property and equipment consists of office equipment, warehouse and service equipment and buildings with estimated useful lives of 5 years, 10 years and 40 years, respectively.  Depreciation is provided using the straight-
 
 
22

 
line method over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the remainder of the lease agreement.  Gains or losses from the ordinary sale or retirement of property and equipment are recorded in other income (expense).  Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized.  Depreciation and amortization expense was $0.4 million for each of the years ended September 30, 2010, 2009 and 2008, respectively.

Goodwill

Goodwill represents the excess of cost over fair value of the assets of businesses acquired. Goodwill is evaluated at least annually for impairment by first comparing our estimate of the fair value of the reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. Judgments and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit’s fair value. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.  At September 30, 2010 and 2009, the fair value of our reporting unit exceeded its carrying value, so goodwill was not impaired.

Income taxes

The Company provides for income taxes in accordance with the liability method of accounting pursuant to ASC Topic 740, 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 and product line reporting

The Company’s principal sources of revenues are from sales of new, refurbished or used equipment and repair services.  As a stocking distributor for several cable television equipment manufacturers, the Company offers a broad selection of inventoried and non-inventoried products.  The Company’s sales of different products fluctuate from year to year as its customers’ needs change.  Because the Company’s product line sales change from year to year, the Company does not report sales by product line for management reporting purposes and does not disclose sales by product line in these financial statements.

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 the Company's sales agreements with its 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

FASB ASC 815, Derivatives and Hedging, 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).  The Company's 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.
  

 
23

 


Freight

Amounts billed to customers for shipping and handling represent revenues earned and are included in Net New Sales Income, Net Refurbished Sales Income and Net Service Income in the accompanying Consolidated Statements of Income and Comprehensive Income.  Actual costs for shipping and handling of these sales are included in Cost of Sales.

Advertising costs

Advertising costs are expensed as incurred.  Advertising expense was $0.2 million, $0.3 million and $0.3 million for the years ended September 30, 2010, 2009 and 2008, respectively.

Management estimates

The preparation of financial statements in conformity with United States 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 the Company's inventory and operating results.
 
Concentrations of credit risk

The Company holds cash with one major financial institution, which at times exceeds FDIC insured limits.  Historically, the Company has not experienced any loss due to such concentration of credit risk.

Other 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 the Company’s 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.  The Company had no customer in 2010 that contributed in excess of 10% of the total net sales.  The Company’s sales to foreign (non-U.S. based customers) were approximately $6.8 million, $4.6 million and $7.9 million for the years ended September 30, 2010, 2009 and 2008, respectively.  In 2010, the Company purchased approximately 32% of its inventory from Cisco and approximately 19% of its inventory from Motorola.  The concentration of suppliers of the Company’s inventory subjects the Company to risk.

Employee stock-based awards

FASB ASC 718, Stock Compensation, requires all share-based payments to employees, including grants of employee stock options, be recognized in financial statements based on their grant date fair value over the requisite service period.  The Company determines the fair value of the options issued, using the Black-Scholes valuation model, and amortizes the calculated value over the vesting term of the stock options.  Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of income and comprehensive income.

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.


 
24

 


Fair value of financial instruments

The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these 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 a floating interest rate.  Management believes that the carrying value of the Company’s borrowings approximates fair value as the interest rate fluctuates periodically based on a floating interest rate.

Note 2 – Inventories

Inventories at September 30, 2010 and 2009 are as follows:

   
2010
   
2009
 
New
  $ 21,808,323     $ 24,723,788  
Refurbished
    8,147,399       10,638,836  
Allowance for excess and obsolete inventory
    (2,545,000 )     (2,196,000 )
                 
    $ 27,410,722     $ 33,166,624  

New inventory includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators.  Refurbished inventory includes factory remanufactured, Company remanufactured and used products.

The Company regularly reviews 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.  The Company recorded charges to allow for obsolete inventory during the fiscal years ended September 30, 2010, 2009 and 2008, increasing the cost of sales by approximately $0.8 million, $1.0 million and $1.7 million, respectively.

Note 3 – Income Taxes

The provision (benefit) for income taxes for the years ended September 30, 2010, 2009 and 2008 consists of:

   
2010
   
2009
   
2008
 
Current
  $ 2,569,000     $ 1,853,000     $ 3,026,000  
Deferred
    (3,000 )     (40,000 )     (225,000 )
                         
    $ 2,566,000     $ 1,813,000     $ 2,801,000  


 
25

 


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 years ended September 30, 2010, 2009 and 2008:

   
2010
   
2009
   
2008
 
Statutory tax rate
    34.0 %     34.0 %     34.0 %
State income taxes, net of U.S.
                       
     federal tax benefit
    4.0 %     4.7 %     4.6 %
Tax credits and exclusions
          (1.2 %)     (1.1 %)
                         
Company’s effective tax rate
    38.0 %     37.5 %     37.5 %

Deferred tax assets at September 30, 2010 and 2009 consist of the following:

   
2010
   
2009
 
Net operating loss carryforwards
  $ 714,000     $ 826,000  
Financial basis in excess of tax basis of certain assets
    (575,000 )     (574,000 )
Accounts receivable
    114,000       116,000  
Inventory
    1,097,000       1,015,000  
Interest rate swap
    476,000       404,000  
Other, net
    275,000       239,000  
                 
    $ 2,101,000     $ 2,026,000  

Deferred tax assets are classified as:
           
   Current
  $ 1,423,000     $ 1,282,000  
   Noncurrent
    678,000       744,000  
                 
    $ 2,101,000     $ 2,026,000  

Utilization of the Company’s net operating loss carryforward, totaling approximately $1.9 million at September 30, 2010, to reduce future taxable income is limited to an annual deductable amount of approximately $0.3 million.  The net operating loss carryforward expires in varying amounts in 2019 and 2020.

In accordance with FASB ASC 740, Income Taxes, the Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.  The Company has concluded, based on its historical earnings and projected future earnings, that it will be able to realize the full effect of the deferred tax assets and no valuation allowance is needed.

Based upon a review of its income tax positions, the Company believes that its positions would be sustained upon an examination by the Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. Generally, the Company is no longer subject to examinations by the U.S. federal, state or local tax authorities for tax years before 2007.

 
26

 


Note 4 – Accrued Expenses

Accrued expenses as of September 30, 2010 and 2009 are as follows:

   
2010
   
2009
 
Employee costs
  $ 971,099     $ 724,349  
Taxes other than income tax
    154,835       148,540  
Interest
    60,065       73,186  
Other, net
    154,415       149,747  
                 
    $ 1,340,414     $ 1,095,822  

Note 5 – Line of Credit and Notes Payable

Line of Credit

The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Revolving Credit and Term Loan Agreement with its primary financial lender.  At September 30, 2010 and 2009, the Company had no amount outstanding under the Line of Credit.  The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 1.4% (1.66% at September 30, 2010), and the interest rate is reset monthly.  Any outstanding balance under the Line of Credit is due on November 30, 2010.  Borrowings under the line of credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory less any outstanding term note balances and less the fair value of the interest rate swap agreement in excess of $900,000.  Under these limitations, the Company’s total Line of Credit available borrowing base was $5.7 million at September 30, 2010.  Among other financial covenants, the credit agreement provides that the Company must maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not less than 1.25 to 1.0, determined quarterly.  The Line of Credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.

Subsequent to September 30, 2010, the Company signed an Amended and Restated Revolving Credit and Term Loan Agreement with its primary financial lender effective November 30, 2010.  Among other things, this amendment extended the Line of Credit maturity to November 30, 2011, changed the interest rate from the prevailing 30-day LIBOR rate plus 1.4% to the prevailing 30-day LIBOR rate plus 2.75%, and restricts the payment of dividends to no more than 50% of the Company’s net income.  The Line of Credit remains at $7.0 million.  The financial covenants did not change under this agreement nor did the terms of the two separate term loans.

Notes Payable

The Revolving Credit and Term Loan Agreement includes two separate term loans, which are also collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.  The first term loan is a $2.8 million term loan.  The outstanding balance under this note was $2.1 million and $2.2 million at September 30, 2010 and 2009, respectively.  This note is due on November 20, 2021, with monthly principal payments of $15,334 plus accrued interest.  The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (1.66% at September 30, 2010) and is reset monthly.

The second term loan under the Revolving Credit and Term Loan Agreement is a $16.3 million term loan.  The outstanding balance of this term loan was $11.8 million and $13.4 million at September 30, 2010 and 2009, respectively.  This note is due November 30, 2012, with quarterly payments of approximately $0.4 million plus accrued interest.  The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (1.66% at September 30, 2010).

The Company’s other note payable, secured by real estate, was paid off in June 2010 ($0.2 million outstanding at September 30, 2009).  The interest rate was prime minus 0.25%.

 
27

 
The carrying value of the Company’s borrowings approximates fair value as the interest rate fluctuates periodically based on a floating interest rate.

The aggregate minimum maturities of notes payable and the line of credit for each of the next five years are as follows:

2011
  $ 1,814,008  
2012
    1,814,008  
2013
    8,741,508  
2014
    184,008  
2015
    184,008  
Thereafter
    1,134,596  
         
Total
  $ 13,872,136  



Note 6 – Derivative Financial Instruments

On November 27, 2007, the Company entered into an interest rate swap agreement on the $16.3 million term loan in order to avoid the risks associated with fluctuating interest rates on this term loan and to eliminate the variability in the cash outflow for interest payments.  The interest rate swap agreement locks the interest rate on the notional value at 5.92% through November 29, 2014.  The notional value of the interest rate swap amortizes quarterly with payments that mirror the $16.3 million term loan.  Upon entering into this interest rate swap, the Company designated this derivative as a cash flow hedge by documenting the Company’s risk management objective and strategy for undertaking the hedge along with methods for assessing the swap’s effectiveness in accordance with FASB ASC 815, Derivatives and Hedging. The following table presents certain information regarding our interest rate swap.

   
Amount of Loss Recognized in
OCI on Derivative, Net of Tax
   
Amount of Loss Recognized in
Accumulated OCI, Net of Tax
 
   
Year Ended September 30,
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Interest rate swap agreement
  $ (130,998 )   $ (457,741 )   $ (776,683 )   $ (645,685 )

At September 30, 2010, the notional value of the swap was $11.8 million and the fair value of the interest rate swap was approximately $1.3 million, which is included in other liabilities on the Company’s Consolidated Balance Sheet.

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:

·  
Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
·  
Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
·  
Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.

 
28

 
Our interest rate swap is an over-the-counter instrument and is classified in the Level 2 hierarchy as the fair value can be estimated from executed transactions or broker quotes corroborated by other market data. These broker quotes are based on observable market prices at which similar transactions could currently be executed.

Note 7 – Stock-Based Compensation and Preferred Stock

Plan Information

The 1998 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants.  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, 2010, 1,024,656 million shares of common stock were reserved for the exercise of, or lapse of restrictions on, stock awards under the Plan.  Of the shares reserved for exercise of, or lapse of restrictions on, stock awards, 637,495 shares were available for future grants.

Stock Options

Stock options are accounted for in accordance with the provisions of FASB ASC 718, Stock Compensation.  FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, be recognized in financial statements based on their grant date fair value over the requisite service period.  Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of income and comprehensive income.

Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period.  Stock options granted to employees generally become exercisable over a four-year period from the date of grant and generally expire ten years after the date of grant.  Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the date of grant.

A summary of the status of the Company's stock options at September 30, 2010 and changes during the year then ended is presented below:

   
 
Options
   
Weighted Average
Exercise Price
   
Aggregate Intrinsic
Value
 
Outstanding at September 30, 2009
    148,850     $ 3.43        
Granted
                 
Exercised
                 
Expired
    (12,000 )   $ 3.13          
Forfeited
                   
Outstanding at September 30, 2010
    136,850     $ 3.46        
Exercisable at September 30, 2010
    96,850     $ 3.65        

There was no aggregate intrinsic value at September 30, 2010 for options outstanding and exercisable as the Company’s stock price at September 30, 2010 was less than the weighted average exercise price.  The total intrinsic value of options exercised for the year ended September 30, 2008 was $11,000.  There were no options exercised for the years ended September 30, 2010 and 2009.

 
29

 

Information about the Company’s outstanding and exercisable stock options at September 30, 2010 is as follows:

   
Exercisable
Remaining
 
Stock Options
Stock Options
Contractual
Exercise Price
Outstanding
Outstanding
Life
$3.001
80,000
40,000
7.9 years
$3.450
15,000
15,000
6.5 years
$5.780
15,000
15,000
5.5 years
$4.620
15,000
15,000
4.5 years
$4.400
3,000
3,000
3.5 years
$1.650
 2,000
 2,000
2.5 years
$0.810
 2,000
 2,000
1.5 years
$1.500
4,850
4,850
0.5 years
 
136,850
96,850
 

No nonqualified stock options were granted in fiscal year 2010 or 2009.  In the fourth quarter of fiscal year 2008, the Company granted nonqualified stock options to certain executives and employees of the Company totaling 100,000 shares.  The Company estimated the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shown in the table below.  The Company estimated the expected term of options granted based on the historical grants and exercises of the Company's options.  The Company estimated the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock, consistent with FASB ASC 718.  The Company based the risk-free rate that was used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected terms.  The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.  Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model.  The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards.  The Company used historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.

The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the year ended September 30, 2008 are as follows:
 
 
   
2008
 
Weighted average grant date fair value of
options
  $ 1.09  
Black-Scholes model assumptions:
       
Average expected life (years)
    6.25  
Average expected volatility factor
    30 %
Average risk-free interest rate
    3.1 %
Average expected dividends yield
     


Compensation expense related to stock options recorded for the years ended September 30, 2010, 2009 and 2008 is as follows:

   
2010
   
2009
   
2008
 
Fiscal year 2006 grant
  $     $ 3,063     $ 6,510  
Fiscal year 2008 grant
    20,815       48,771       14,151  
                         
Total compensation expense
  $ 20,815     $ 51,834     $ 20,661  
 
 
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For the options granted in fiscal years 2006 and 2008, the Company is recording compensation expense over the vesting term of the related options.  All of the options granted in fiscal year 2007 were fully vested and, as such, their calculated fair value was expensed on the grant date.

Restricted stock

The Company granted restricted stock in March 2010, 2009 and 2008 to its Board of Directors totaling 27,150 shares, 46,669 shares and 16,359 shares, respectively, which were valued at market value on the date of grant.  The shares are held by the Company for 12 months and are delivered to the directors at the end of the 12 month holding period.  The fair value of the shares upon issuance totaled $60,000 for the 2010 fiscal year grant and $70,000 for the 2009 and 2008 fiscal year grants. The grants are amortized over the 12 month holding period as compensation expense.  Compensation expense related to restricted stock recorded for the years ended September 30, 2010, 2009 and 2008 is as follows:

   
2010
   
2009
   
2008
 
Fiscal year 2008 grant
  $     $ 29,169     $ 40,831  
Fiscal year 2009 grant
    29,169       40,831        
Fiscal year 2010 grant
    35,000              
                         
    $ 64,169     $ 70,000     $ 40,831  

Note 8 – Treasury Stock

In 2000, the Company’s Board of Directors authorized the repurchase of up to $1.0 million of outstanding shares of the Company’s common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions.  The repurchased shares of common stock will be held in treasury and used for general corporate purposes including possible use in employee stock plans or for acquisitions.  During fiscal year 2009, the Company acquired in the open market and in a privately negotiated transaction a total of 202,864 shares of the Company’s common stock at an average price of $1.74 per share.  Repurchases are made in compliance with the safe harbor provisions of Rule 10b-18, which limits the timing, volume, price and method of stock repurchases.  When combined with the treasury shares purchased in prior years, the Company can purchase additional shares that have a combined value of up to $0.6 million under this program.

Note 9 – Retirement Plan

The Company sponsors a 401(k) plan that allows participation by all employees who are at least 21 years of age and have completed one year of service.  The Company's contributions to the plan consist of a matching contribution as determined by the plan document.  Costs recognized under the 401(k) plan for the years ended September 30, 2010, 2009 and 2008 were $0.2 million, $0.2 million and $0.2 million, respectively.

 
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Note 10 – Earnings per Share

Basic and diluted earnings per share for the years ended September 30, 2010, 2009 and 2008 are:
                   
 
 
2010
   
2009
   
2008
 
Net income
  $ 4,186,449     $ 3,019,004     $ 4,667,794  
Dividends on preferred stock
                133,480  
Net income attributable to
                       
   common shareholders
  $ 4,186,449     $ 3,019,004     $ 4,534,314  
                         
Basic weighted average shares
    10,132,658       10,162,122       10,263,365  
Effect of dilutive securities:
                       
   Stock options
    3,952       2,094       17,771  
Diluted weighted average shares
    10,136,610       10,164,216       10,281,136  
                         
Earnings per common share:
                       
Basic
  $ 0.41     $ 0.30     $ 0.44  
Diluted
  $ 0.41     $ 0.30     $ 0.44  

The table below includes information related to stock options that were outstanding at the end of each respective year but have been excluded from the computation of weighted-average stock options for dilutive securities due to the option exercise price exceeding the average market price per share of our common stock for the fiscal year.

   
2010
   
2009
   
2008
 
Stock options excluded
    128,000       140,000       60,000  
Weighted average exercise price of
                       
   stock options
  $ 3.60     $ 3.56     $ 5.30  
Average market price of common stock
  $ 2.49     $ 1.80     $ 4.48  

Note 11 – Related Parties

On November 27, 2007, the Company redeemed the Series B Preferred Stock, which was beneficially owned by David E. Chymiak, Chairman of the Company’s Board of Directors, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company for $12.0 million.  The redemption was financed by the second term loan under the Company’s Revolving Credit and Term Loan Agreement (see Note 5).  Prior to the redemption, the Company paid $0.3 million in fiscal year 2007 for dividends on the Series B Preferred Stock.

The Company leases on a month-to-month basis one warehouse in Oklahoma from a company owned by David E. Chymiak and Kenneth A. Chymiak.  The lease expired in September 2008.  The total payments made on the lease to this company for the years ended September 30, 2010, 2009 and 2008 totaled $0.1 million, $0.1 million and $0.2 million, respectively.

David E. Chymiak and Kenneth A. Chymiak beneficially owned 26% and 22%, respectively, of the Company’s outstanding common stock at September 30, 2010.

Note 12 – Commitments and Contingencies

The Company leases and rents various office and warehouse properties in Oklahoma, California, Georgia and Pennsylvania.   The Oklahoma facility is a 56,000 square foot warehouse and is rented on a month-to-month basis, since the lease expired in September 2008, from an entity that is controlled by David E. Chymiak and Kenneth A. Chymiak.  The terms on its other operating leases in California, Georgia and Pennsylvania vary but all mature in less than one year and contain renewal options.  The California lease for Tulsat-West expired on November 30, 2010, and the Company closed the Tulsat-West facility and moved the operations to our Broken Arrow, Oklahoma facility.

 
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Rental payments associated with leased properties in fiscal years 2010, 2009 and 2008 totaled approximately $0.2 million, $0.3 million and $0.5 million, respectively.  The Company’s minimum annual future obligations as of September 30, 2010 under all existing operating leases are $44 thousand for fiscal year 2011.  The Company has no further minimum annual future obligations as all of its existing operating leases expire in fiscal year 2011.
 
 
Note 13 – Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended September 30, 2010, 2009 and 2008:

   
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
Fiscal year ended 2010
                       
Net sales and service income
  $ 10,219,221     $ 12,055,521     $ 13,297,449     $ 11,733,939  
Gross profit
  $ 3,330,340     $ 3,619,796     $ 4,207,974     $ 3,297,496  
Net income
  $ 859,639     $ 1,081,845     $ 1,396,234     $ 848,731  
Basic earnings per common share
  $ 0.08     $ 0.11     $ 0.14     $ 0.08  
Diluted earnings per common share
  $ 0.08     $ 0.11     $ 0.14     $ 0.08  
 
Fiscal year ended 2009
                               
Net sales and service income
  $ 12,800,006     $ 10,126,636     $ 9,148,907     $ 10,168,043  
Gross profit
  $ 3,833,786     $ 3,073,992     $ 2,974,965     $ 3,045,204  
Net income
  $ 954,146     $ 698,359     $ 654,606     $ 711,893  
Basic earnings per common share
  $ 0.09     $ 0.07     $ 0.06     $ 0.07  
Diluted earnings per common share
  $ 0.09     $ 0.07     $ 0.06     $ 0.07  
                                 
Fiscal year ended 2008
                               
Net sales and service income
  $ 14,739,368     $ 13,851,819     $ 13,213,802     $ 14,643,572  
Gross profit
  $ 4,750,828     $ 4,568,063     $ 3,363,548     $ 3,926,455  
Net income
  $ 1,593,111     $ 1,411,109     $ 605,504     $ 1,058,070  
Basic earnings per common share
  $ 0.14     $ 0.14     $ 0.06     $ 0.10  
Diluted earnings per common share
  $ 0.14     $ 0.14     $ 0.06     $ 0.10  
                                 


 
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Item 9.                 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Hogan & Slovacek, P.C., the firm that had served as our independent registered public accounting firm since January 26, 2006, announced that it was combining with the firm of Tullius Taylor Sartain & Sartain LLP, on January 7, 2009.  As a result, Hogan & Slovacek resigned as our accounting firm as of January 7, 2009, and our audit committee engaged the successor firm, which is named HoganTaylor LLP (“HoganTaylor”), on January 7, 2009, to serve as the principal accountant to audit our financial statements for the fiscal year ended September 30, 2009.  The respective employees, partners and shareholders of the merged firms have become employees and partners of HoganTaylor which will continue the practices of each of the merged firms.  Hogan & Slovacek will remain in existence solely for the purpose of winding up its affairs but will not engage in any public accounting practice.

While HoganTaylor is technically a new firm, because it is a successor firm to our prior accountants, we do not consider this a substantive change of accounting firms.  Also, as this is a newly created firm, there have been no pre-engagement consultations or contacts with HoganTaylor.

The reports of Hogan & Slovacek regarding our financial statements for the fiscal year ended September 30, 2008 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.  During the year ended September 30, 2008, and during the period from October 1, 2008 through January 7, 2009, the date of resignation, there were no disagreements with Hogan & Slovacek on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Hogan & Slovacek would have caused it to make reference to such disagreement in connection with its report.


Item 9A.                 Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.
 
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures as of September 30, 2010.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
 
Management’s Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) and for the assessment of the effectiveness of internal control over financial reporting.  Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements in accordance with accounting principles generally accepted in the United States.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 
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All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2010.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.  Based on our assessment, we believe that, as of September 30, 2010, our internal control over financial reporting is effective based on those criteria.

Changes in Internal Control over Financial Reporting.

During the fourth quarter ended September 30, 2010, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.                 Other Information.

None.


 
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PART III

Item 10.                 Directors, Executive Officers and Corporate Governance.

The information required by this item concerning our officers, directors, compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, Code of Business Conduct and Ethics and Audit Committee is incorporated by reference to the information in the sections entitled “Identification of Officers,” “Election of Directors,”  “Section 16(a) Beneficial Ownership Reporting Compliance,”  “Code of Ethics” and “Audit Committee,” respectively, of our Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2010 (the “Proxy Statement”).  A copy of our Code of Business Conduct and Ethics is posted on our website at www.addvantagetech.com.
 

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 the Proxy Statement.


Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item regarding security ownership and equity compensation plans is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of the Proxy Statement.


Item 13.                 Certain Relationships and Related Transactions, and Director Independence.

The information required by this item regarding certain relationships and related transactions and director independence is incorporated by reference to the information set forth in the section entitled “Certain Relationships and Related Transactions” and “Board of Directors,” respectively, of the 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 “Principal Accounting Fees and Services” of the Proxy Statement.

 
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PART IV

Item 15.                 Exhibits, Financial Statements Schedules.

(a)           1.      The following financial statements are filed as part of this report in Part II, Item 8.

                 Report of Independent Registered Public Accounting Firm for 2010, 2009 and 2008.

                 Consolidated Balance Sheets as of September 30, 2010 and 2009.

                 Consolidated Statements of Income for the years ended September 30, 2010, 2009 and 2008.

                 Consolidated Statements of Changes in Shareholders’ Equity for the years endedSeptember 30, 2010, 2009 and 2008.

                 Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009 and 2008.

                 Notes to Consolidated Financial Statements.

 
2.
The following financial statement Schedule II – Valuation and Qualifying Accounts for the years ended September 30, 2010, 2009 and 2008 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