UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-K |
FORM 10-K
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xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 20062007 |
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oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
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| Commission file number 1-10799 |
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| 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.) |
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| 1221 E. Houston, Broken Arrow, Oklahoma | 74012 |
| (Address of principal executive offices) | (Zip code) |
&# 160;
| Registrant’s telephone number: (918) 251-9121 |
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Securities registered under Section 12(b) of the ActAct: |
| Title of each class | Name of exchange on which registered |
| Common Stock, $.01 par value | American Stock ExchangeNASDAQ 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 ActAct. | Yes o No x |
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the ActAct. | Yes o No x |
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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 Echange Exchange Act during the pastpreceding 12 months (or (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 |
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this formForm 10-K. | ox |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act) Large Accelerated Filer o Accelerated Filer o Non-accelerated filer x | |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 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, 20062007 was $34,446,944.$19,537,691. | Yes o No x |
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The number of shares of the registrant’s outstanding common stock, $.01 par value per share, was 10,232,75610,249,656 as of December 12th, 2006.10, 2007. | |
Documents Incorporated by Reference | |
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The identified sections of definitive Proxy Statement to be filed as Schedule 14A pursuant to Regulation 14A in connection with the Registrant’s 20072008 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 closeend of the registrant’s most recent fiscal year.year covered by this Form 10-K. | |
ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
FORM 10-K
YEAR ENDED SEPTEMBER 30, 20062007
INDEX
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| | PART I | |
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| Item 1B. | | |
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| | PART II | |
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Item 9A(T). | | |
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| | PART III | |
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| | PART IV | |
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| SIGNATURES | |
PART I
| 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 the control or foresight of the Company, including changes in the trends of the cable television industry, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described herein and in other documents we file from time to time with the Securities and Exchange Commission.
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 continue to expand market presence by creating a network of regionally based subsidiaries that focus on servicing customers in their markets. The current subsidiary network includes Tulsat Corporation ("Tulsat"), NCS Industries, Inc. ("NCS"), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Missouri, Inc. (dba "ComTech Services"), Tulsat-Nebraska, Inc., ADDvantage Technologies Group of Texas, Inc. (dba "Tulsat Texas"), Jones Broadband International, Inc. ("Jones Broadband") and Tulsat-Pennsylvania LLC (dba "Broadband Remarketing International").
Several of our subsidiaries, through their long relationships with OEM manufacturesthe original equipment manufacturers (“OEMs”) and specialty repair facilities, have established themselves as value added resellers (“VARs”). Tulsat, located in Broken Arrow, Oklahoma, is an exclusive Scientific-Atlanta Master Stocking Distributor for certain legacy products and distributes most of Scientific-Atlanta's other products. Tulsat has also been designated an authorized third party Scientific-Atlanta repair center for select products. NCS, located in Warminster, Pennsylvania, is a leading distributor of Motorola broadband products. Other subsidiaries distribute Standard, Corning-Gilbert, Blonder-Tongue, RL Drake, Quintech, Videotek and WaveTek products.
In addition to offering a broad range of new products, we also purchase from cable operators and others,sell surplus and usedrefurbished equipment that becomes available in the market as a result of cable operator system upgrades in their systems or overstocks in their warehouses. We maintain one of the industry's largest inventories of new and refurbished equipment, allowing us to providedeliver 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.
Our subsidiaries all operate technical service centers specializing in Motorola, Magnavox, Scientific-Atlanta and Alpha Power TechnologiesJDSU-Acterna repairs.
Overview of the Industry
We participate in markets for equipment sold primarily to cable operators (called multiple system operators or “MSOs”) and other related parties.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 cable operatorsMSOs in the United States. Within the last few years, certain cable operatorsMSOs have begun to offer a "triple-play" bundle of services that includes voice, video and high-speed data over a single network with the objective of capturing higher average revenues per subscriber. We believe cable operators are well positioned to deliver next-generation voice, video and dataTo offer these expanded services, because cable operatorsMSOs have invested significantly over the past few yearsto convert their systems to digital networks and continue to upgrade their cable plants to digital networks. These upgrades allow them to leverageincrease the speed of their incumbent video and high speed data positions further. Many cable operatorscommunication 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 over 90%most of their subscribers through their existing hybrid fiber co-axial (HFC) infrastructure.
We believe that we have been able to provide many of the products and services sought by cable operatorsMSOs as they establish and expand their services and territories. Our relationships with our principal vendors, Scientific-Atlanta and Motorola, provide solutionsus with products that are requiredimportant to implementcable operators as they maintain and support existing cable operators.expand their systems. These relationships and our inventory are key factors, that drivewe believe, in our prospects for revenue and profit growth.
We are focused on the opportunities provided by technological changes inresulting from the implementation of fiber-to-the premises,home (“FTTH”) by several large telephone companies, the continued expansion of bandwidth signals by MSOs, and our recent appointment as a Scientific-Atlanta International Distributor forthe increased sales to customers in Latin and South America. We will 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 one-stop shopping, access to "hard-to-find" products and reduce customer downtime because we have the product in stock. Our experienced sales support staff has the technical know-how to consult with our customers regarding solutions for various products and configurations. Through our seveneight service centers that provide warranty and out-of-warranty repairs, we continue to reach new customers.
Recent Business Developments
On December 12, 2005, we announced Tulsat’s signing of a three-year extension on its Master Distributor Contract with Scientific-Atlanta. This extension authorizes the subsidiary to carry and resell the entire line of Scientific-Atlanta current and legacy equipment. Under the terms of the agreement, Tulsat also continues to be the exclusive distributor for select Scientific-Atlanta headend and transmission products for U.S. customers through January 15, 2009. On June 7, 2006 Tulsat extended its Third Party Service Agreement with Scientific-Atlanta through May, 2008. This service agreement allows Tulsat to act as an authorized service provider for select Scientific-Atlanta equipment within the United States.
On June 22, 2006 we purchased the assets of Broadband Remarketing International. This acquisition expanded our product offerings to include refurbished digital converter set-top boxes and equipment destruction services. On September 19, 2006, we completed the purchase of approximately 100,000 surplus digital set-top boxes from Adelphia Communication Corporation for approximately $1,800,000. During the fourth quarter we also purchased an additional 15,000 boxes from other sources for various amounts totaling approximately $200,000. These boxes will require an additional investment of approximately $2.0 to $3.0$1.8 million and began to refurbish these boxes and prepareoffer them for resale.sale. During the first quarter offiscal 2007 we have started to inventory the refurbishedpurchased approximately 40,000 additional surplus digital set-topset top boxes and have begun marketingsold approximately 57,000 boxes to U.S. and selling this new product line.
We believe there is a strong demand in the U.S. forinternational customers generating incremental revenues from this product line asof approximately $4.3 million. At the end of the 2007 fiscal year, we inventoried approximately 78,000 surplus digital set top boxes provide consumers the ability to translate high definition signals (HD-TV) and receive other services such as video on demand (VOD) and digital video recording (DVR). with a combined value of approximately $2.7 million.
The boxes that we purchasedpurchase and currently market are considered legacy boxes as the security features (which allow the MSO or cable operatorMSOs to control channel access and services) are not separable from digital boxes. The FCC hasFederal Communications Commission ("FCC") issued a ban on MSOs purchasing these legacy boxes after July 1, 2007 in the attempt to force the cable industry to transition to digital boxes with separable security features. By separating the security features from the digital boxes, the FCC believes the equipment can be more widely distributed through commercial retailers (such as Wal-Mart, Best Buy and Circuit City). Because of the uncertainty of equipment availability
Several large and higher acquisition costs associated with the new digital boxes with separable security features, several largesmall MSOs have filed petitions with the FCC requesting at least partial, if not full, waivers to the regulation. In addition, certain Congress members have formally requested the FCC extend the July 1, 2007 deadlineA few of these MSOs received waivers and, as a result, are able to give the industry timecontinue to develop more cost effective solutions. We believe the ban has created an increased demand for thepurchase these legacy boxes as MSOs will want to build their inventoryfor a specified period of these cost effective legacy boxes prior to the ban date. In addition, we believetime. We expect there will continue to be demand for these boxes after the ban date, eitheron a limited basis in the U.S. iffor those companies that have obtained waivers, are obtained or the FCC deadline is extended, orand internationally where no ban exists and they are widely used. However, our ability to continue to obtain surplus digital converter boxes as well as generate sales of certain boxes currently in inventory are risk factors further disclosed in “Item 1A. Risk Factors”.
We expect to add the set-top digital boxes with separable security features to our refurbished digital box product line as surplus boxes become available.
Products and Services
We offer our customers a wide range of new, surplus new and refurbished products that are used in connection with the cable television signal.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. Among theIn this category, we currently offer products offered areincluding optical transmitters, fiber optic cable, receivers, couplers, splitters and compatible accessories. These products convert RFradio 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 Scientific Atlanta and Motorola digital converter boxes and modems.
OtherWe also inventory and sell to our customers other hardware such as test equipment, connector and cable products are also inventoried and sold to our customers.
Revenues by Geographic Areas
Our revenues by geographic areas were as follows:
Year Years ended September 30,
200620052004| | | 2007 | | | 2006 | | | 2005 |
| Geographic Area | | | | | | | | |
United States | | $ | 59,756,983 | | | $ | 48,713,482 | | | $ | 47,863,096 |
Latin America | | | | | | | | | | | |
and Other | | | 5,889,102 | | | | 3,827,727 | | | | 2,410,099 |
| | | | | | | | | | | | |
| Total | | $ | $65,646,085 | | | $ | 52,541,209 | | | $ | 50,273,195 |
| | | | | | | | | | | | |
Geographic Area
United States $48,713,482 $47,863,096 $46,163,254
Latin America,
and Other 3,827,727 2,410,099 908,075
Total $52,541,209$50,273,195$47,071,329
Revenues attributed to geographic areas are based on the location of the customer. All of our long-lived assets are located in the United States.
Sales and Marketing
In fiscal 2006,2007, sales of new products represented 73%69% of our revenuetotal revenues and re-manufactured product sales represented 17% of our revenues.23%. Repair and other services contributed the remaining 10%8% of our revenues.
We market and sell our products to franchise and private cable operators,MSOs, telephone companies, system contractors and others directly.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 particularvarious geographic areas. The majority of our sales activity is generated through personal relationships developed by our sales personnel and executives, referrals from manufacturers we represent, advertising in trade journals, telemarketing and direct mail to our customer base in the United States. We have developed contacts with the major CATV operatorsMSOs in the United States and we are constantly in touch with these operators regarding their plans for upgrading or expansion andas well as their needs to either purchase or sell equipment.
We market ourselves as an "On Hand - On Demand" distributor. We maintain the largest inventory 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, Latin and South America, Europe and the Far East. Sales in Latin America and South America continue to grow as we expand our relationshiprelationships with international cable operators in this region. Recently, Scientific-Atlanta has appointed one of our subsidiaries, Tulsat Corporation, to become one of its non-exclusive distributors in Latin and South America.
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 bandwidths.products. We do extend credit on a limited creditbasis to international customers that purchase products on a regular basis and make timely payments. However, for most international sales we require prepayment of purchasessales or letters of credit confirmed by U.S. banks prior to shipment of products.
Suppliers
In fiscal 2006,2007, we purchased approximately $16.5$14.4 million of new inventory directly from Scientific-Atlanta and approximately $5.0$7.2 million of new inventory directly from Motorola. These purchases represented approximately 60%53% of our total inventory purchases for fiscal 2006.2007. The concentration of our inventory suppliers subjects us to risk which is further discuseddiscussed in "Item 1A. Risk Factors." We also purchase a large amount of our inventory from cable operatorsMSOs 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 capital requirements. 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 face competition from manufacturers and other vendors supplying new products. Duecompete 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 hold an advantage over these suppliers as we carry most inventory we generallyin stock and can have the ability to ship and supply products to our customers without having to wait for the manufacturers to supply the items.it delivered in a very short timeframe.
Working capital practices in the industry center on inventory and accounts receivable. We choose to carry a largerlarge inventory and continue to reinvest excess cash flow 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 bulk purchases. Our working capital requirements are generally met by cash flow from operations and a bank revolving credit facility which currently permits borrowingborrowings up to $7,000,000. We believe we$7,000,000.We expect to have sufficient funds available from these sources 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 over 1,4002,000 active accounts. Sales to our largest customer Power and Telephone Supply, accounted for approximately 10.5%9% of our revenues in fiscal 2006.2007. Approximately 32%34% of our revenues for fiscal year 20062007 and approximately 28%32% for 20052006 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.
On July 1, 2006, one of our larger customers, Adelphia Communications Corporation sold its remaining cable systems to Time Warner and Comcast. Sales to these cable system locations, under their new ownership, were negligible during our fiscal fourth quarter, 2006 and impacted our quarterly performance. While we can not forcast the purchasing activity from these cable systems, we expect sales to these systems to resume in fiscal 2007.
Personnel
At September 30, 2006,2007, we had 167 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.
Each of the following risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. Additional risks not presently known, or which we currently consider immaterial also may adversely affect us.
We are highly dependent upon our principal executive officers who also own a significant amount of our outstanding stock.stock. At September 30, 2006,2007, David Chymiak, Chairman of the Board, and Kenneth Chymiak, President and Chief Executive Officer, owned approximately 43% of our outstanding common stock and 100% of our outstanding preferred stock. Our performance is highly dependent upon the skill, experience and availability of these two persons. Should either of them become unavailable to us, our performance and results of operations would probablycould be adversely affected to a material extent. In addition, they continue to own a significant interest in us, thus limiting our ability to take any action without their approval or acquiescence. Likewise, as shareholders, they may elect to take certain actions which may be contrary to the interests of the other shareholders.
Our business is dependent on our customers' capital budgets. Our performance is impacted by our customers' capital spending for constructing, rebuilding, maintaining or upgrading their broadband communicationsand telecommunications systems. Capital spending in the CATV and telecommunications industry is cyclical. A variety of factors will affect the amount of capital spending, and therefore, our sales and profits, including:
·consolidations ·consolidations and recapitalizations in the cable television industry;
·general ·general economic conditions;
·availability ·availability and cost of capital;
·other ·other demands and opportunities for capital;
·regulations; ·regulations;
·demands ·demands for network services;
·competition ·competition and technology; and
·real ·real or perceived trends or uncertainties in these factors.
Developments in the industry and in the capital markets in recent years have reducedcan reduce access to funding for certain customers, causing delays in the timing and scale of deployments of our equipment, as well as the postponement or cancellation of certain projects by our customers.projects.
On the other hand, a significant increase in the capital budgets of our customers could also impact us in a negative fashion. Much of our inventory consists ofLarge upgrades or complete system upgrades are typically sourced with equipment purchased directly from OEMs. Not only do these upgrades negatively impact new product sales, they can also negatively impact recurring refurbished and surplus-newrepair business as the new equipment and materialsinstalled typically carries an OEM warranty that we have acquired from other cable operators. If our customers seek higher end, more expensive equipment,allows the demandcustomer to exchange bad products for ournew products may suffer.directly with the manufacturer.
The markets in which we operate are very competitive, and competitive pressures may adversely affect our results of operations. The markets for broadband communication equipment are extremely competitive and dynamic, requiring the companies that compete in these markets to react quickly and capitalize on change. This will requirerequires us to make quick decisions and deploy substantial resources in an effort to keep up with the ever-changing demands of the industry. We compete with national and international manufacturers, distributors, resellers and wholesalers including many companies larger than we are.us.
The rapid technological changes occurring in the broadband markets may lead to the entry of new competitors, including those with substantially greater resources than we have. Because the markets in which we compete are characterized by rapid growth and, in some cases, low barriers to entry, smaller niche market companies and start-up ventures also may become principal competitors in the future. Actions by existing competitors and the entry of new competitors may have an adverse effect on our sales and profitability.
Consolidations in the CATV and telecommunications industry could result in delays or reductions in purchases of products, which would have a material adverse effect on our business. The CATV and telecommunications industry has experienced the consolidation of many industry participants, and this trend is expected to continue. We, and our competitors, may each supply products to businesses that have merged, such as the recent purchase of Adelphia Communications Corporation by Time Warner and Comcast, or will merge in the future. Consolidations could result in delays in purchasing decisions by the merged businesses and we could play either a greater or lesser role in supplying the communications products to the merged entity. These purchasing decisions of the merged companies could have a material adverse effect on our business. Mergers among the supplier base also have increased, such as the recent acquisition of Scientific-Atlanta by Cisco, and this trend may continue. The larger combined companies may be able to provide better solution alternatives forto customers and potential customers. The larger breadth of product offerings by these consolidated suppliers could result in customers electing to trim their supplier base for the advantages of one-stop shopping solutions for all of their product needs.
Our success depends in large part on our ability to attract and retain qualified personnel in all facets of our operations. Competition for qualified personnel is intense, and we may not be successful in attracting and retaining key executives, marketing engineering and sales personnel, which could impact our ability to maintain and grow our operations. Our future success will depend, to a significant extent, on the ability of our management to operate effectively. The loss of services of any key personnel, the inability to attract and retain qualified personnel in the future or delays in hiring required personnel, particularly engineers and other technical professionals, could negatively affect our business.
We are substantially dependent on certain manufacturers, and an inability to obtain adequate and timely delivery of products could adversely affect our business. We are a value added reseller and master stocking distributor for Scientific-Atlanta and a value added reseller of Motorola broadband and transmission products. During fiscal 2006,2007, our inventory purchases from these two companies totaled approximately $21.5$21.6 million, or 59%53% of our total inventory purchases. Should these relationships terminate or deteriorate, or should either manufacturer be unable or unwilling to deliver the products needed by us for our customers, our performance could be adversely impacted. An inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supplies could affect our ability to ship products on a timely basis. Any inability to reliably ship our products on timetimely could damage relationships with current and prospective customers and harm our business.
We have a large investment in our inventory which could become obsolete or outdated. Determining the amounts and types of inventory requires us to speculate to some degree as to what the future demands of our customers will be. Consolidation in the industry or competition from other types of broadcast media could substantially reduce the demands for our inventory, which could have a material adverse effect upon our business and financial results. The broadband communications industry is characterized by rapid technological change. In the future, technological advances could lead to the obsolescence of a substantial portion of our current inventory, which could have a material adverse effect on our business. The Company's largest asset is its inventory. Over the past few years, our inventory growth has been primarily in new products. However, the Company continues to maintain a large investment in used, refurbished, remanufactured or surplus new equipment.
We have purchasedpurchased a large quantity of legacy digital converter boxes which could become obsolete or outdated. RecentlyOver the past 14 months we have purchased approximately 115,000 of140,000 used digital converter boxes forand continue to maintain approximately $2.0 million and plan to invest an additional $2.0 million to $3.0 million to prepare them for resale.78,000 boxes in inventory. The boxes we purchased and currently market are considered legacy boxes as the security features (which allow the MSOMSOs or cable operators to control channel access and services) are not separable from digitalthe boxes. The FCC has issued a ban purchasingon the purchase of these types of legacy boxes after July 1, 2007, which is further discussed in “Item 1. Business. Recent Business Developments”.
If we fail to sell our current inventory of legacy digital boxes and the FCC fails to issue waivers or delay the enforcement date, such that no additional sales of legacy inventory can be made in the U.S. after July 1, 2007, and there is a lack of demand for these boxes in the international market, an adjustment may be needed to write down the value of any remaining legacy boxes in inventory and this adjustment may have an adverse affecteffect on our financial performance.
Access to surplus digital converter boxes may become limited which would limit future sales of this product line. During fiscal 2007 we sold approximately 57,000 legacy converter boxes generating incremental revenues of approximately $4.3 million. Recently, the availability of surplus boxes in the market has become limited as MSOs are no longer selling excess boxes but rather choosing to keep the legacy boxes and reuse them. As a result, future revenues from this product line could be negatively impacted by the limited supply of surplus boxes. Our outstanding common stock is very thinly traded. While we have approximately 10.2 million shares of common stock outstanding, 43% of these shares are beneficially owned at December 12, 200610, 2007 by David Chymiak and Kenneth Chymiak. As a consequence, only about 57% of our shares of common stock are held by nonaffiliated, public investors and available for public trading. The average daily trading volume of our common stock is low.sometimes so low that small trades have an impact on the price of our stock. Thus, investors in our common stock may encounter difficulty in liquidating their investment in a timely and efficient manner.
We have not paid any dividends on our outstanding common stock and have no plans to pay dividends in the future. We currently plan to retain our earnings and have no plans to pay dividends on our common stock in the future. We may also enter into credit agreements or other borrowing arrangements which may restrict our ability to declare dividends on our common stock.
Our principal executive officers and shareholders have a number ofcertain conflicts of interest with us. Certain of During fiscal 2007 the Company purchased an office and warehouse facility from an entity owned by our principal executive officers. In addition, certain office and warehouse properties arecontinue to be leased from two entities owned by our principal executive officers. Also,We also redeemed all of the outstanding shares of preferred stock held by these executives have made loansofficers subsequent to us in various amounts in the past and were paid interest on these loans.our fiscal year end. These transactions are described in the proxy statement that is incorporated by reference into this report. These arrangements create certain conflicts of interest between these executives and us that may not always be resolved in a manner most beneficial to us.
Our sales to international operations customers may be adversely affected by a number of factors. Although the majority of our business efforts are focused in the United States, we have international operationssell direct to customers in the Philippines, Taiwan, Korea, Japan, Australia, Brazil, Ecuador, Dominican Republic, Honduras, Panama, Mexico, Columbia and a few other Latin American countries. We currently have no binding agreements or commitments to make any material international investment. Our foreign operationssales may be adversely affected by a number of factors, including:
·local political and economic developments could restrict or increase the cost of our| ● | local political and economic developments could restrict or increase the cost of selling to foreign locations; |
● | exchange controls and currency fluctuations; |
● | tax increases and retroactive tax claims for profits generated from international sales; |
| ● | expropriation of our property could result in loss of revenue and inventory; |
| ● | import and export regulations and other foreign laws or policies could result in loss of revenues; and |
| ● | laws and policies of the United States affecting foreign trade, taxation and investment could restrict our ability to fund foreign business or make foreign business more costly |
foreign operations;
·exchange controls and currency fluctuations;
·tax increases and retroactive tax claims could increase costs of our foreign operations;
·expropriation of our property could result in loss of revenue, property and equipment;
·import and export regulations and other foreign laws or policies could result in loss of
revenues; and
·laws and policies of the United States affecting foreign trade, taxation and investment could restrict our ability to fund foreign operations or make foreign
operations more costly
Not applicable.
Each subsidiary owns or leases property for office, warehouse and service center facilities.
| · | Broken Arrow, Oklahoma - On November 20, 2006 Tulsat purchased a facility consisting of an office, warehouse and service center of approximately 100,000 square feet on ten acres, with an investment of $3,250,000,$3.3 million, financed by a loan of $2,760,000,$2.8 million, due in monthly payments through 2021at2021 at an interest rate of LIBOR plus 1 1/2%1.4%. At December 1, 2006, Tulsat also continues to lease a total of approximately 80,000 square feet of warehouse facilities in three buildings from entities which are controlled by David E. Chymiak, Chairman of the Board,Company, and Kenneth A. Chymiak, President and Chief Executive Officer.Officer of the Company. Each lease has a renewable five-year term, expiring at different times through 2008. At December 1, 2006, monthlyMonthly rental payments on these leases totaledtotal $26,820. |
Subsequent to fiscal 2007, Tulsat completed the construction of a 62,500 square foot warehouse facility on the rear of its existing property in Broken Arrow, OK. The new facility cost approximately $1.65 million to complete and the construction was financed with cash flow from operations.
| · | 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 $567,000,$0.6 million, financed by loans of $419,000,$0.4 million, due in monthly payments through 2013 at an interest rate of 5.5% through 2008, converting thereafter to prime minus ¼%0.25%. NCS also rents property of approximately 2,0004,000 square feet, with monthly rental payments of $1,250$2,490 through December 2006.2008. |
| · | Sedalia, Missouri - ComTech Services owns land and an office, warehouse and service center of approximately 25,00042,300 square feet. Subsequent to fiscal 2007, ComTech Services completed the construction of an 18,000 square foot warehouse facility on the back of its existing property in Sedalia, MO. The new facility cost approximately $0.4 million to complete and the construction was financed with cash flow from operations. |
| · | New Boston, Texas - Tulsat-Texas owns land and an office, warehouse and service center of approximately 13,000 square feet. |
| · | Suwanee,Suwannee, Georgia - Tulsat-Atlanta leases an office and service center of approximately 5,000 square feet. The lease provides for 36 monthly lease payments of $3,500 ending on March 31, 2008. |
| · | Oceanside, California - Jones Broadband leases an office, warehouse and service center of approximately 15,000 square feet for $12,000$12,600 a month. The lease runs through November 30, 2007includes a 3% annual increase in lease payments starting June 2008 and has a one year renewal option.the lease term ends June 2010. |
| · | Stockton, California - Jones Broadband leases a warehouse of approximately 45,00030,000 square feet for $6,032$4,110 a month. The lease ends February 28, 2007 and has a one-year renewal option.2008. |
· ● | Chambersburg, Pennsylvania - Broadband Remarketing International leases an office, warehouse, and service center of approximately 10,000 18,000 square feet. The lease is month to month and the lease payment varies based on the volume of warehouse space used. The average rent for the year was $4,667$9,000 per month. |
We believe that our current facilities are adequate to meet our needs.
From time to time in the ordinary course of business, we have become a defendant in various types of legal proceedings. We do not believe that these proceedings,
individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
There were no matters submitted to a vote of our stockholders in the fourth quarter of fiscal 2006.
| There were no matters submitted to a vote of our stockholders in the fourth quarter of fiscal 2007. |
PART II
The table sets forth the high and low sales prices on the American Stock Exchange for the quarterly periods indicated.indicated, except for the fourth quarter of fiscal 2007, which also reflects the sales prices on the NASDAQ stock market, as we moved our listing to this exchange on September 13, 2007.
| Year Ended September 30, 2006 | High | Low | |
| Year Ended September 30, 2007 | | | High | | | Low |
| | | | | | | |
| First Quarter | $7.10 | $3.51 | | $ | 4.55 | | | $ | 2.66 |
| Second Quarter | $9.09 | $5.75 | | $ | 3.74 | | | $ | 2.77 |
| Third Quarter | $6.86 | $4.63 | | $ | 5.30 | | | $ | 3.85 |
| Fourth Quarter | $4.97 | $3.55 | | $ | 9.28 | | | $ | 4.88 |
| | | | | | | | | |
| Year Ended September 30, 2005 | | |
| Year Ended September 30, 2006 | | | | | | | | |
| | | | | | | | | |
| First Quarter | $6.30 | $3.85 | | $ | 7.10 | | | $ | 3.51 |
| Second Quarter | $5.94 | $3.95 | | $ | 9.09 | | | $ | 5.75 |
| Third Quarter | $4.25 | $3.03 | | $ | 6.86 | | | $ | 4.63 |
| Fourth Quarter | $4.05 | $3.10 | | $ | 4.97 | | | $ | 3.55 |
Holders.
Substantially all of the holders of our common stock maintain ownership of their shares in “street name” accounts and are not, individually, shareholders of record. As of September 30, 2006,2007, there were approximately 1,4002,200 beneficial owners of our common stock.
Dividend Policy.
We have never declared or paid a cash dividend on our common stock. It has been the policy of our Board of Directors to use all available funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board of Directors. Under
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 | | | 110,350 | | | $ | 3.15 | | | | 744,966 | |
| Equity compensation plans not approved by security holders | | | 0 | | | | 0 | | | | 0 | |
| Total | | | 110,350 | | | $ | 3.15 | | | | 744,966 | |
Shareholder Performance Graph.
Set forth below is a line graph comparing the terms of our outstanding preferred stock, no dividends may be paidyearly percentage change in the cumulative total shareholder return on our common stock unless all(symbol: AEY) against the cumulative cash dividends duetotal return of the NASDAQ Composite Index (symbol: IXIC), the NASDAQ Telecommunications Index (symbol: IXUT) and American Stock Exchange (symbol: XAX) for the period of five fiscal years commencing October 1, 2002 and ending September 30, 2007. The NASDAQ Composite Index has been added this year as our listing moved to this exchange on September 13, 2007. The graph assumes that the preferredvalue of the investment in our common stock have been paid or provided for.and each index was $100 on September 30, 2002.
Among ADDvantage Technologies Group, Inc., NASDAQ Composite Index, NASDAQ Telecommunications Index and the American Stock Exchange Index
* $100 invested on September 30, 2002 in our stock or on September 30, 2002 in each index including reinvestment of dividends.
| | Cumulative Total Return | | | |
| | 9/30/02 | | 9/30/03 | | | 9/30/04 | | | 9/30/05 | | | 9/30/06 | | 9/30/07 |
| | | | | | | | | | | | | | | |
| ADDvantage Technologies Group, Inc. | $ | 100.00 | | $ | 542.86 | | | $ | 550.00 | | | $ | 555.71 | | | $ | 555.7 | | $ | 1,160.00 |
| | | | | | | | | | | | | | | | | | | | | |
| NASDAQ Composite Index | $ | 100.00 | | $ | 152.26 | | | $ | 161.79 | | | $ | 182.39 | | | $ | 191.23 | | $ | 229.12 |
| | | | | | | | | | | | | | | | | | | | | |
| Nasdaq Telecommunications | $ | 100.00 | | $ | 176.58 | | | $ | 195.65 | | | $ | 217.25 | | | $ | 233.91 | | $ | 327.06 |
| | | | | | | | | | | | | | | | | | | | | |
| American Stock Exchange | $ | 100.00 | | $ | 119.77 | | | $ | 153.74 | | | $ | 209.95 | | | $ | 230.49 | | $ | 291.34 |
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended September 30,
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | 2007 | 2006 | 2005 | 2004 | 2003 |
| | | | | | | | | | | | | |
| Net Sales and service income | | $ | 52,541 | | $ | 50,273 | | $ | 47,071 | | $ | 33,327 | | $ | 25,409 | | $ 65,646 | $ 52,541 | $ 50,273 | $ 47,071 | $ 33,327 |
| | | | | | | | | | | | | | |
| Income from operations | | $ | 8,117 | | $ | 9,973 | | $ | 9,484 | | $ | 6,197 | | $ | 3,550 | | $ 12,543 | $ 8,117 | $ 9,973 | $ 9,484 | $ 6,197 |
| | | | | | | | | | | | | | |
| Net income | | $ | 4,843 | | $ | 5,814 | | $ | 5,814 | | $ | 4,493 | | $ | 2,201 | | |
| Net income applicable to Common Shareholders | | $ 6,590 | $ 4,003 | $ 4,974 | $ 4,574 | $ 3,253 |
| | | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | | |
| Basic | | $ | .39 | | $ | .49 | | $ | .46 | | $ | .33 | | $ | .10 | | $ ..64 | $ .39 | $ .49 | $ .46 | $ .33 |
| Diluted | | $ | .39 | | $ | 49 | | $ | .41 | | $ | .30 | | $ | .10 | | $ .64 | $ .39 | $ 49 | $ .41 | $ .30 |
| | | | | | | | | | | | | | |
| Total assets | | $ | 40,925 | | $ | 39,269 | | $ | 32,359 | | $ | 31,748 | | $ | 26,531 | | $ 49,009 | $ 40,925 | $ 39,269 | $ 32,359 | $ 31,748 |
| | | | | | | | | | | | | | |
| Long-term obligations inclusive | | | | | | | | | | | | | |
| of current maturities | | $ | 9,385 | | $ | 9,382 | | $ | 11,610 | | $ | 6,912 | | $ | 6,276 | | |
| of current maturities & Dividends | | $ 9,009 | $ 9,385 | $ 9,382 | $ 11,610 | $ 6,912 |
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “ Item“Item 1A. Risk Factors.” and elsewhere in this report.
General
We are a Value Added Reseller ("VAR") for selectedselect Scientific-Atlanta and Motorola broadband and new products and we are a distributor for several other manufacturers of cable television ("CATV")CATV equipment. We also specialize in the sale of surplus new and refurbished previously-owned CATV equipment to CATV operatorsMSOs and other broadband communication companies. It is through the development of our supplier network and specialized knowledge of our sales team that we market our products and services to the larger cable multiple system operators ("MSOs")MSOs and Telecommunication Companies ("Telecoms").telephone companies. These customers provide an array of different communications services as well as compete in their ability to offer CATV customers "triple play" transmission services including video, data and telephony.
Overview
Fiscal 2006 was a year of continued product transitionIn fiscal 2007 several large franchise MSOs and consolidationtelephone companies made significant upgrades to their regional communication plants in the industryefforts to compete for the larger MSOs. These customers continuedadditional market share. This trend to upgrade their various cable systems, primarily by expandingregional plants with new equipment is expected to continue as new products are introduced and the bandwidth of their digital communication signal to improve their ‘triple play’ offering of video, dataMSOs, telephone companies, and telephony. As the industry leaderssatellite TV companies continue to offer new services, such as high definition television (HD-TV) and video on demand (VOD), the need for additional bandwidth will continue to drive future upgrades. The larger MSOs also continued their trend toward consolidation and standardization. Many of the large MSOs made strategic acquisitions to expand their coverage area, as was the case when Adelphia Communication Corporation sold it’s remaining cable systems to Time Warner Cable and ComCast on July 1, 2006, while atconverge into the same time others divested themselves“triple play” market. Sales of regional cable systems that could not meet their standard product offerings, as was the case when Charter soldnew products to two MSO customers increased approximately $5.5 million during 2007 due to upgrades being performed to several of their regional systemssystems. Increased new product sales to Suddenlinkthese two customers, combined with the incremental revenues generated from sales of our refurbished digital converter boxes during 2007, were key drivers of our revenue growth for the year.
During the year, we also experienced increased demand for new products due to inefficiencies in the OEM supply chain. Several manufacturers’ delivery lead times increased during the year due to their production commitments associated with the large MSO and New Wave Communications on July 3, 2006.telephone companies' upgrade projects. The increased lead times created opportunities to sell new products to customers that could not wait for the extended delivery times or for which scheduled delivery dates were missed and the products needed to be delivered immediately. While the OEM delivery lead times are not be expected to be as long in 2008 as they were in 2007, we cannot foresee the continued trend of consolidations with our large customers, we docontinue to expect there to be continued spin-offs of regional cable systems that do not meetdemands for same day shipments from plant upgrades being performed throughout the larger MSOs' standard cable platforms.U.S.
To meetNew Product Offering
During the fourth quarter of fiscal 2006, we added digital converter boxes to our product offerings. The digital converter boxes we purchase and currently sell are considered legacy boxes as the security features are not separable from the boxes. We sold approximately 57,000 legacy converter boxes during fiscal 2007, generating revenues of approximately $4.3 million, and are repairing and processing in excess of 78,000 additional legacy converter boxes. The inventory value of the boxes at September 30, 2007 totaled approximately $2.7 million and we expect to invest an additional approximate $0.5 million to repair and process the remaining legacy boxes currently in inventory.
Throughout the fiscal year, we projected strong domestic demand associated withfor our legacy digital converter boxes based on the July 1, 2007 FCC ban deadline for purchasing these types of boxes. However, rather than making large customer upgrades, we have invested heavily in new product inventory that are only available from our OEM suppliers. As these products have been recently introducedpurchases prior to the industryban date, many domestic MSOs chose to petition the FCC for a waiver to the ban requirements and have yetwait to saturatereceive a reply before acquiring any additional boxes. During the market, we are not yet ablequarter ended June 30, 2007, many of the MSOs were granted waivers. The most common type of waiver issued allows the MSO to continue to purchase them through our networkand distribute legacy boxes based on its commitment to convert to the new box type by February, 2009, when the FCC has mandated that all cable transmissions be digitally broadcast.
During the fourth quarter of ‘surplus new’ product sources. Consequently, sales of these new productsfiscal 2007, we received several purchase orders for legacy boxes from domestic MSOs that have put a strain on our gross profit margin percentages. As these new digital products become more widely used, ‘surplus new’obtained waivers and ‘used’ products will become more available,we continue to receive orders from international customers, which we expect to become our predominant customer base for legacy boxes in the future as waivers expire. During the next few years, as domestic MSO customers convert to the new box type, we expect the normal attrition of legacy boxes will enable us to return to higherproduce a surplus supply that will drive down pricing in the international market. If this happens, our margins on legacy digital converter box sales will be impacted. However, we expect the sales prices for the refurbished legacy digital boxes will remain above our product sales.investment costs.
Results of Operations
Year Ended September 30, 2007, compared to Year Ended September 30, 2006 (all references are to fiscal years)
Total Net Sales. Total Net Sales climbed $13.1 million, or 25%, to $65.6 million for 2007 from $52.5 million for 2006. Sales of new equipment increased $6.4 million, or 17%, to $45.0 million in 2007 from $38.6 million in 2006, driven by increases in sales of $5.5 million to two large franchise MSOs that upgraded several of their regional communication systems across the U.S. Refurbished sales increased $6.4 million, or 73% to $15.3 million in 2007 from $8.8 million in 2006. This increase came primarily from sales of refurbished digital converter boxes which contributed incremental revenues of approximately $4.3 million during 2007 along with increased sales of refurbished broadband equipment associated with a specific customer contract totaling approximately $1.3 million. Net repair service revenues increased $0.3 million to $5.4 million for 2007 from $5.1 million in 2006. The increases in service revenues are primarily attributed to the expansion of our repair routes to pick up damaged and broken equipment in the western region of the U.S.
Costs of Sales. Cost of sales include the cost of new and refurbished equipment, on a weighted average cost basis, sold during the period, the equipment costs used in repairs and the related transportation costs and any related charges for inventory obsolescence. Costs of sales this year were 68% of total net sales compared to 69% last year. This decrease was due primarily to the product mix change in refurbished equipment. Sales of refurbished equipment, driven by sales of digital converter boxes, which maintain higher gross margins than new product sales, grew during 2007 at a higher rate than new product sales. As a result, the combined cost of sales percentage dropped for the year.
Gross Profit. Gross profit in 2007 increased $5.1 million to $21.3 million from $16.2 million in 2006. The increased gross profits were attributed to the growth in sales of both new and refurbished products.
Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses include all personnel costs, including fringe benefits, insurance and business taxes, occupancy, communication, professional services and charges for bad debts, among other less significant accounts. Operating, selling, general and administrative expenses increased by $0.6 million to $8.5 million in 2007 from $7.9 million in 2006. This increase was primarily attributable to a $1.0 million increase in payroll associated with the growth of our business offset by a decrease of $0.3 million in bad debt charges absorbed in 2007. During 2006, we also experienced delays in salesrecorded bad debt charges totaling approximately $0.5 million to some of our larger customers due to consolidations, as wascover the case in the fiscal fourth quarter when Adelphia sold its remaining cable systems to Time Warner Cable and Comcast. Sales to these system locations dropped off after the acquisition as the new owners worked through transition issues. Whileoutstanding receivable balance from a customer consolidations can have a direct impact to our quarterly sales results, the cable systems the new owners support will require continual upgrades and repairs. As such, sales to these systems are expected to return.whose collection had become doubtful.
Sales to smaller MSOs and small cable operators were consistent compared to last year as these customers remained focused on maintaining and repairing their existing cable systems. Many of the smaller cable operators continue to delay their decision to upgrade from analog to digital as the projected subscriber revenue generated from the expanded ‘triple play’ offering cannot justify the investment due to the limited subscriber base. The historical average increase in subscriber revenue of $40 must be compared against the estimated $4,200 per plant mile of upgrade dollars needed to enable the delivery of these differentiated services.
We do, however, expect to see more of the smaller MSOs and cable operators begin making the transition to digital in 2007 as the cost to upgrade becomes more affordable. Over the last two years, the larger MSOs have made several digital upgrades that have generated a supply of more cost effective ‘used’ digital equipment in the market. The reduced upgrade costs coupled with the strong customer demand is expected to drive these changes. If these customers begin to upgrade their systems as expected, the sales and margins of our refurbished product line should remain strong in the upcoming year.
Between August 2005 and October 2006, we made three strategic acquisitions. On August 17, 2005, we purchased Jones Broadband International, Inc. (“Jones Broadband”), a cable equipment distributor with operations in Oceanside, California and Stockton, California for approximately $3.5 million. The acquisition of Jones Broadband gave us a West Coast sales presence, expanded our customer base in Latin America and added an additional regional service center to our nationwide network. During 2006, Jones Broadband generated approximately $2.5 million of incremental revenue to our consolidated results but failed to contribute to our overall profitability. Throughout the year we addressed several ownership transitional issues including staffing, accounting system conversion and changes in product line offerings. In addition, we also wrote down the inventory value of the fiber optic cable offered by this subsidiary by approximately $400,000 due to its recent market price deterioration. While we will continue to make changes within the Jones Broadband operation, we expect the subsidiary to make a positive contribution to consolidated fiscal 2007 profitability.
On June 30, 2006, we acquired the business and certain assets of Broadband Remarketing International (“BRI”), an equipment remarketing company based in Chambersburg, Pennsylvania that specializes in the resale of digital converter boxes and Certified Destruction Services in exchange for 87,209 shares of our common stock valued at $450,000. During the fourth quarter, BRI purchased approximately 100,000 surplus digital converter boxes from Adelphia Communications Corporation for $1.8 million. We plan to invest an additional $2.0 to $3.0 million to refurbish and market these boxes during fiscal 2007 and we have already begun to make sales of this new product line. Currently, there is an FCC ban on purchasing these legacy digital boxes after July 1, 2007. Our ability to sell any remaining legacy boxes in inventory in the U.S. after the July 1, 2007 date, which depends on the issuance of waivers or extentions by the FCC, is one of our risk factors and further discussed in "Item 1A. Risk Factors”.
On October 10, 2006, we purchased the business and certain assets of Broadband Digital Repair (“BDR”), a premium equipment repair facility located in Mishawaka, IN for approximately $150,000. BDR is an authorized Alpha Repair Facility and retained it’s authorization after the acquisition. BDR was subsequently renamed, ComTech - Indiana and became part of our ComTech subsidiary. The new repair facility expands our service capabilities in Indiana, Illinois, Ohio and Michigan and adds another repair facility to our nationwide network.
ResultsIncome from Operations. Income from operations increased $4.4 million to $12.5 million for 2007 from $8.1 million in 2006. This increase in income was primarily attributable to the growth in revenues.
Interest Expense. Interest expense for 2007 was $0.6 million compared to $0.5 million in fiscal 2006. Interest expense increased $0.2 million associated with the new $2.8 million building loan obtained in November, 2006, offset by approximately $0.1 million reduction in interest associated with lower borrowings on the line of Operationscredit. The weighted average interest rate paid on the line of credit increased to 7% for 2007 from 6% for 2006. The weighted average interest rate for all borrowed funds was 7% for 2007, compared to 6% in 2006.
Income Taxes. The provision for income taxes for fiscal 2007 increased $1.8 million to $4.6 million, or an effective rate of 38%, from $2.7 million, or an effective rate of 36%, in 2006. The increased taxes resulted primarily from higher pre-tax earnings in 2007. Our effective tax rate increased slightly in 2007 as fewer stock options were exercised during the year and, as such, we recognized less tax deductible compensation expense associated with the exercised shares.
Year Ended September 30, 2006, compared to Year Ended September 30, 2005 (all references are to fiscal years)
Net Sales. Net total sales climbed $2.3 million, or 5.0%5%, to $52.6 million for 2006 from $50.3 million for 2005. Sales of new and refurbished equipment increased $1.6 million to $47.4 million from $45.8 million in 2005 and repair service revenues increased $0.6 million to $5.1 million for 2006 from $4.5 million in 2005. The increases in revenues are primarily attributed to the incremental revenues generated from our Jones Broadband. Increased customerBroadband subsidiary, acquired on August 19, 2005, totaling approximately $3.1 million. This increase along with other increased sales from our other subsidiariesto customers during 2006 helped offset the lost revenues from two of our larger customers, Adelphia Communications and Span PrPro Fiber Optics. Sales to these two customers, prior to their business stoppage, declined to $1.6 million in 2006 from $3.8 million in 2005.
CostCosts of Sales. Cost of sales includeincludes the cost of new and refurbished equipment, on a weighted average cost basis, sold during the period, the equipment costs used in repairs and the related transportation costs and any related charges for inventory obsolescence. Cost of sales this year were 68.1%was 69% of net sales compared to 66.4%66% last year. This increase is due to the product mix change in new equipment and an increased charge to inventory obsolescence taken in 2006. Sales of new equipment to our large MSO customers consisted of a higher percentage of 1.0 Ghz bandwidth gear. This product wasThe 1.0 Ghz products were recently introduced to the CATV industry and our supply of this product has come directly from the OEM manufactures.manufacturers. As this product becomes widely used, we expect to be able to purchase surplus product in the market at reduced costs, which will increase our overall margins. The approximate $0.4 million charge to inventory obsolescence was made in connection with the write-downwrite down of certain fiber optic cable currently maintained in inventory. The write-downwrite down of this inventory was made to reduce the cost of the fiber to its current market value.
Gross Profit. Gross profit declined an approximate $0.1$0.2 million to $16.7$16.2 million for 2006 from $16.8$16.4 million in 2005. This decline was the attributed to the increase in the cost of sales partially offset by the additional gross profit produced on the incrementalour increase in revenues.
Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses include all personnel costs, including fringe benefits, insurance and business taxes, occupancy, transportation, communication, professional services and charges for bad debts, among other less significant accounts. Operating, selling, general and administrative expenses increased by $1.8$1.7 million to $8.4$7.9 million from $6.6$6.2 million. This increase was attributable to a $1.0 million of incremental expenses resulting from the addition ofrelated to Jones Broadband, acquired in August 2005, $0.5 million charge to bad debt to increase our reserve to cover the outstanding receivable balance from a customer whose collection has become doubtful, $0.1 million in additional compensation expense representing the fair value of options granted in 2006, resulting from implementing FAS 123R“Share123R “Share based Payments" and $0.2 million of increased expenses associated with the move of our corporate headquarters, recruiting a new chief financial officer and changing our independent public accountants.
Income from Operations. Income from Operationsoperations declined $1.9 million to $8.1 million for 2006 from $10.0 million in 2005. This decrease was due to the additional operating, selling, general and administrative expenses in addition to the decrease in our gross profit.
Interest Expense. Interest expense for fiscal 2006 was $0.5 million compared to $0.6 million in fiscal 2005. Interest expense dropped slightly for the year as we borrowed less money on our line of credit and continued to pay down our $8.0 million term loan..loan. The weighted average interest rate paid on the line of credit increased to 6.4%6% for 2006 from 3.0%3% for 2005. The weighted average interest rate for all borrowed funds for 2006 was 6.1%6% compared to 5.3%5% in 2005.
Income Taxes. The provision for income taxes for fiscal 2006 dropped to $2.7 million, or an effective rate of 36.2%36% from $3.6 million, or an effective rate of 38.2%38%, in 2005. The reduced taxes resulted from lower pre-tax earnings in 2006 and a reduced tax rate. Our effective tax rate dropped primarily due to the increased tax exclusion for compensation expense recorded on stock options exercised during the year.
Year Ended September 30, 2005, Compared to Year Ended September 30, 2004
Net Sales. Net sales climbed $3.2 million, or 6.8%, to $50.3 million for 2005 from $47.1 million for 2004. Sales of new and refurbished equipment increased 8.3% from $42.3 million in 2004 to $45.8 million for 2005, due to new marketing initiatives and a strong fiscal fourth quarter sales volume, resulting from an active hurricane season, the incremental increase in revenues from Jones Broadband, acquired in August 2005, and increased purchases from a large bandwidth upgrade performed by one of our customers. Repair service revenues decreased by 6.3% from $4.8 million last year to $4.5 million this year. The decrease in repair services was due to several recent changes in the market. MSOs have been consolidating headends, thereby reducing the number required to do the job. This in turn has allowed operators to use the extra headends as replacements instead of repairing the ones not working. Finally, several years ago the manufacturers started giving five year warranties on their products. These warranties are set to run out in 2006 and 2007 for products initially sold under these warranties and we expect the repair business will return to us.
Costs of Sales. Costs of sales include the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, the equipment costs used in repairs, and the related transportation costs. Costs of sales this year were 66.4% of net sales compared to 66.1% last year. This increase is due to lower margins associated with the increased sales of new equipment.
Gross Profit. Gross profit climbed $0.9 million, or 5.6%, to $16.9 million for fiscal 2005 from $16.0 million for fiscal 2004. The gross margin percentage was 33.6% for the current year, compared to 33.9% for last year. The small percentage decrease was primarily due to an increase in sales of new and surplus equipment, which have margins lower than those of re-manufactured equipment or repairs.
Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses include all personnel costs, including fringe benefits, insurance and taxes, occupancy, transportation, communication and professional services, among other less significant accounts. Operating, selling, general and administrative expenses increased by $426,000 for fiscal 2005 to $6.6 million from $6.2 million in 2004, an increase of 6.5%. The increase in operating, selling, general and administrative expenses was primarily due to increases in salary and wage related expenses.
Income from Operations. Income from operations increased $.5 million, or 5.3%, to $10.0 million for 2005 from $9.5 million for 2004. This increase was primarily due to increases in sales of new equipment to the larger MSOs, partially offset by the lower margins received and the increase in our operating, selling, general and administrative expenses.
Interest Expense. Interest expense for fiscal 2005 was $558,000 compared to $158,000 in fiscal 2004. The increase was primarily attributable to the $8,000,000 new borrowings incurred to finance our redemption of the Series A Preferred Stock on September 30, 2004. This redemption resulted in our payment in 2005 of $400,000 less dividends. Our interest expense is deductible for federal income tax purposes while the dividends we had been paying were not. The weighted average interest rate paid on the line of credit increased to 2.96% for 2005 from 2.85% for 2004. The weighted average interest rate for all borrowed funds for 2005 was 5.31% compared to 2.85% in 2004.
Income Taxes. The provision for income taxes for fiscal 2005 increased to $3.6 million from $3.5 million in fiscal 2004. The increase was primarily due to higher pre-tax earnings in fiscal 2005.
Inflation. Inflation has had no noticeable impact on our revenues over the last three years. The increase in revenue has been primarily a result of increasing our market share and the increased demand for our products resulting from our increased availability of products for sale.
Liquidity and Capital Resources
We finance our operations primarily through internally generated funds and a bank line of credit. During 2006,2007, we generated approximately $0.2$6.7 million of cash flow from operations including an increase$2.6 million absorbed from changes in inventoryreceivables, inventories, other assets, accounts payable and accrued liabilities.
During fiscal year 2007, we invested approximately $1.9 million of $4.2our available cash flow in land and building purchases in Broken Arrow, Oklahoma and Sedalia, Missouri. In November, 2006, we purchased a 100,000 square foot office and warehouse facility on ten acres of property in Broken Arrow, Oklahoma for approximately $3.3 million. We financed approximately $2.8 million andof the purchase price by executing a trade payables reductionnew 15 year term loan with our primary financial lender. In addition, we constructed a 62,500 square foot warehouse facility at the back section of $2.3 million. Duringthe recently acquired 10 acre property. We paid $1.1 million associated with the construction of this new warehouse during the fiscal year and expect to spend an additional $0.6 million to complete the facility in 2008. These buildings were purchased and constructed to gain additional operating efficiencies by consolidating our operations and multiple outside warehouses located in Broken Arrow, Oklahoma into one facility. During the year we investedalso spent $0.3 million on the construction of an 18,000 square foot warehouse on the back of our property in Sedalia, Missouri. The new building will expand the revenue generating capacity of this location as it increases the square footage of their operation by approximately 30%.
During 2007, we also paid the remaining $0.1 million acquisition price associated with the August 19, 2005 purchase of Jones Broadband International (“JBI”). The combined consideration paid for the acquisition totaled $3.9 million. This consideration consisted of a purchase price of approximately $3.5 million, net of cash acquired of approximately $0.1 million, as well as our assumption of capital assetsthe accounts payable and acquiredaccrued liabilities of JBI totaling approximately $0.3 million. During fiscal 2007, 2006 and 2005, we paid approximately $0.1 million, $0.5 million and $2.9, respectively, of additional assets in an exchange for 87,209 shares of our common stock. We also received approximately $0.3 million from stock options exercised and kept our bank borrowings consistent while and meeting our preferred stock dividend obligations of $0.8 million. These activities resulted in a net decrease in cash of approximately $0.4 million.the total purchase price associated with this acquisition.
CashDuring 2007 we used in financing activities in 2006 was primarily usedapproximately $4.0 million of available cash flow to pay dividends, onretire term debts and reduce our Series B 7% cumulative convertible Preferred Stock (the “Series B Preferred Stock”) and for the note payments resulting from the buy-outrevolving line of Series A Preferred Stock on September 30, 2004.credit. Dividends paid on the Series B 7% Cumulative Preferred Stock total $840,000 annually(“Series B Preferred Stock”) totaled $0.8 million for the year and the outstanding shares arewere beneficially owned, 50% by David E. Chymiak, our Chairman of the Board and 50% by Kenneth A. Chymiak, our President and Chief Executive Officer. The outstanding Series B Preferred Stock has an aggregate preference upon liquidationCompany redeemed these shares on November 27, 2007, at their stated value of $12,000,000.$12.0 million, which is further discussed in “Note 11 – Subseuqent Events” of “Item 8. Fianancial Statements and Supplementary Data.”
We paid $1.2 million in scheduled debt payments on our $8.0 million term note as well as $0.2 million in scheduled debt payments on our $2.8 million term note. Both term notes were financed through our primary financial lender and require monthly payments of principal plus accrued interest. The proceeds from the $8.0 million term note, created September 30, 2004, we redeemedwere used to redeem all of our outstanding shares of Series A 5% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") at its aggregate stated value of $8 million. The outstanding shares of Series A Preferred Stock were held beneficially by David E. Chymiak and Kenneth A. Chymiak. We financedAt September 30, 2007, the redemption through a credit agreement with our primary lender which included a Revolving Credit Commitment in the amount of $7outstanding balance on this term note totaled $4.4 million. The $2.8 million and a Term Loan Commitment in the amount of $8 million. This agreementterm note was amendedcreated in November 2006 to include a second Term Loan Commitmentfinance the purchase of $2.76 million. The proceeds from the $8.0 million term loan were used to redeem the Series A Preferred Stock. At September 30, 2006 this term loan balance was $5.6 million. The proceeds from the $2.76 million term loan were used to purchase certain real estate in November 2006Broken Arrow, Oklahoma from an entity owned by David and Kenneth Chymiak. The remaining unpaid balance of this term note was $2.6 million on September 30, 2007.
We have aalso used $1.7 million of available cash flows to reduce the outstanding balance on our $7.0 million line of credit with our primary lenderfinancial lender. We maintain a line of credit under which we are authorized to borrow up to $7.0 million at a borrowing rate based on the prevailing 30-day LIBOR rate plus 1.75% (7.08%(6.9% at September 30, 20062007 and 6.40%7.0% average for fiscal year 2006)2007). ThisBorrowings under the line of credit providesare limited to the lesser of $7.0 million or the sumnet balance of 80% of qualified accounts receivable andplus 50% of qualified inventory in a revolving line of credit for working capital purposes.less any outstanding term note balances. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles and had an outstanding balance at September 30, 20062007 of $3.5$1.7 million. The line of credit renews annually and is currently due Septemberwas renewed on November 30, 2007.2007 for an additional three year term expiring November 30, 2010. The highest balance against this line in 2006during 2007 was approximately $5.0$3.8 million.
At September 30, 2006, notes2007, we held a note payable secured by real estate of $0.3 million arewith payments due in monthly payments through 2013 with2013. The note bears interest at 5.5% through 2008, converting thereafter to prime minus .25%.
On September 30, 1999, Chymiak Investments, L.L.C., which is owned by David E. Chymiak and Kenneth A. Chymiak, purchased from Tulsat Corporation, certain real estate and improvements comprising office and warehouse space for a price of $1,286,000. The price represented the appraised value of the property less the sales commission and other sales expenses that would have been incurred by Tulsat Corporation if it had sold the property to a third party in an arm’s-length transaction. Tulsat Corporation entered into a five-year lease commencing October 1, 1999 with Chymiak Investments, L.L.C. covering the property. This lease was renewed on October 1, 2004 and will expire on September 30, 2008.
The Company leases various properties, primarily from two companies owned by David E. Chymiak and Kenneth A. Chymiak. Future minimum lease payments under theseall operating leases are as follows:
2007$ 321,840
2008$ 321,840
$ 643,680
Related party rental expense for the years ended September 30, 2006, 2005 and 2004 was $465,840, $465,840 and $466,000, respectively.
| Fiscal Year | | |
| 2008 | | $ | 528,370 |
| 2009 | | | 155,136 |
| 2010 | | | 159,792 |
| 2011 | | | 26,762 |
| | | | |
| Total | | $ | 870,060 |
The following table presents our contractual obligations for aggregate maturitiespayments of long-termall debt, estimated interest payments on long term debt and the minimum lease payments under our lease agreements.
Payments due by period
| Contractual Obligations | | Total | | Less than 1 year | | 1- 3 years | | 3-5 years | | More than 5 years | | | Total | | | Less than 1 year | | | 1- 3 years | | | 3-5 years | | | More than 5 years |
| Long Term Debt | | $ | 9,384, 808 | | $ | 4,718,070 | | $ | 4,489,840 | | $ | 48,765 | | $ | 128,133 | | | $ | 9,008,747 | | | $ | 3,163,098 | | | $ | 3,662,936 | | | $ | 473,931 | | | $ | 1,708,782 |
| Estimated Interest on Long Term Debt (a) | | | | 1,745,253 | | | | 489,109 | | | | 435,128 | | | | 273,275 | | | | 547,741 |
| Capital Leases | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | - | | | | - | | | | - | | | | - | | | | - |
| Operating Leases | | $ | 928,592 | | $ | 541,752 | | $ | 386,840 | | $ | - | | $ | - | | | | 870,060 | | | | 528,370 | | | | 341,690 | | | | - | | | | - |
| Purchase Obligations | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | - | | | | - | | | | - | | | | - | | | | - |
| Total | | $ | 10,313,400 | | $ | 5,259,822 | | $ | 4,876,680 | | $ | 48,765 | | $ | 128,133 | | | $ | 11,624,060 | | | $ | 4,180,577 | | | $ | 4,439,754 | | | $ | 747,206 | | | $ | 2,256,523 |
| (a) | The estimated interest payments are calculated by multiplying the fixed and variable interest rates, associated with the long term debt agreements, by the average debt outstanding for the year(s) presented. To estimate the variable rates, the Company used the average of the rates incurred in fiscal 2007. Actual variable rates may vary from the historical rates used to calculate the estimated interest expense. |
We believe that cash flow from operations, existing cash balances and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital needs.
Critical Accounting Policies and Estimates
Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year 20062007 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.
Inventory Valuation
Our position in the industry requires us to carry large inventory quantities relative to annual sales, but also allows us to realize high overall gross profit margins on our sales. 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 inventories represents our largest risk.
Our inventory consists of new and used electronic components for the cable television industry. Inventory cost is stated at the lower of cost or market and our cost is determined using the weighted average method. At September 30, 20062007 we had total inventory of approximately $30.2$32.2 million, consisting of approximately $21.0$17.2 million in new products and approximately $9.2$15.0 million in used or refurbished products against which we have a reserve of $1.2$0.7 million for excess and obsolete inventory, leaving us a net inventory of $29.0$31.5 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 2006,2007, we increased our reserve for excess and obsolete inventory by approximately $0.4$0.7 million. In addition during 2006,2007, we wrote down the carrying value of certain inventory items by approximately $0.8$1.2 million to reflect deterioration in the market price of that inventory. If actual market conditions are less favorable thenthan 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 costscost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses since the amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, as in the case of the bankruptcy of Adelphia and its affiliates, or weakening in economic trends could have a significant impact on the collectibilitycollectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The reserve for bad debts increaseddecreased to approximately $0.3 million at September 30, 2007 from approximately $0.6 million at September 30, 2006 from2006. The reserve balance was impacted during the year by a large write-off of approximately $0.1$0.5 million at September 30, 2005. This reserve was increased to cover the potential write off fromassociated with a specific customer whose payment capability, management believes, hasaccount that had become doubtful.uncollectible. This reduction was offset by increases in the reserve of approximately $0.2 million to cover other expected losses. At September 30, 2006,2007, accounts receivable, net of allowance for doubtful accounts, amounted to approximately $5.3$6.7 million.
Impact of Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No.159 will have on our operating income or net earnings.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements, using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality, and provides for a one-time cumulative effect transition adjustment. We adopted SAB No. 108 in the first quarter of fiscal year 2007 and its adoption had no impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning October 1, 2008. We do not expect the adoption of SFAS No. 157 to have a material effect on our financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance or retained earnings. In fiscal 2006, we elected early adoption of FIN 48 and there was no impact on our financial statements.
In June 2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on EITF issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43. EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF issue No. 06-2 is effective for us beginning October 1, 2007. We do not expect the adoption of EITF Issue No. 06-2 to result in a material adjustment to our financial statements.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "TheThe Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments"Investments ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than- temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. WeThe Company elected to adopt FSP115-1FSP11-5 in fiscal 2006 and its application had no material impact on ourits financial position.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which revised ARB No. 43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. This Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We elected to adopt SFAS No.151 beginning with fiscal year 2005. The adoption of this standard had no impact on our financial position and results of operations.
In December 2004, the FASB issued SFAS 123R,No. 123(R), Accounting for Share-Based Payment, which replaced SFAS 123 and superseded APB 25. SFAS 123R123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant date fair market values and requires that such recognition begin in the first interim or annual period after June 15, 2005, with early adoption encouraged. Under SFAS 123R,123(R), the pro forma disclosures previously permitted are no longer an alternative to financial statement recognition. In April 2005, the Securities and Exchange Commission (the SEC)"SEC") postponed the effective date of SFAS 123R123(R) until the issuer’s first fiscal year beginning after June 15, 2005. In addition, in March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R123(R) and the valuation of share-based payments for public companies.
We adopted SFAS 123R123(R) in the first quarter of fiscal 2006 and applied the modified prospective method, which required that compensation expense be recorded for all unvested stock options and restricted stock upon adoption of SFAS 123R.123(R). We applied the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which must then be amortized on a straight line basis over the requisite service period. On October 1, 2005 all outstanding options representing 1,214,967144,267 shares were fully vested. Therefore, SFAS 123R123(R) had no impact on our statement of income on the date of adoption of that standard.adoption.
During 2007 and 2006, Stockstock options were granted to certain members of the management and the Board of Directors. We determined the fair value of the options issued, using the Black-Scholes Valuation Model, and are amortizing the calculated value over the vesting term. The costs were primarily recognized in 2006,the year granted with residual amounts beingto be charged against income in 2007, 2008 and 2009.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,) "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes”. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between amountsWe currently present pro forma disclosure of net income (loss) and earnings (loss) per share as if compensation costs from all stock awards were recognized based on the fair value recognition provisions of SFAS 123(R). The Statement requires use of valuation techniques, including option pricing models, to estimate the fair value of employee stock awards. For pro forma disclosures, we use the Black-Scholes option pricing model in estimating the statementsfair value of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as cumulative-effect adjustment recorded to the beginning balance or retained earnings. We do not believe that the adoption of FIN 48 will have a material impact on our financial position.employee stock options.
Off-Balance Sheet Arrangements
NoneNone
Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flow due to adverse changes in market prices, foreign currency exchange rates, and interest rates. Our greatest exposure would be a downturn in the demand forWe maintain no material assets that are subject to market risk and attempt to limit our products. At September 30, 2006, over 87% of our assets were in cash, trade receivables, and inventory, with inventory representing 81% of these assets.
Our exposure to market rate risk foron material debts by entering into swap arrangements that effectively fix the interest rates. In addition, the Company has limited market risk associated with foreign currency exchange rates as all sales and purchases are denominated in U.S. dollars.
We are exposed to market risk related to changes in interest rates relates primarily toon our $7.0 million revolving line of credit. The interest rates under the line of credit and our $2.8 million term note. Borrowings under these obligations bear interest at rates indexed to the stockholder notes fluctuate with the30 day LIBOR rate.rate, which expose us to increased costs if interest rates rise. At September 30, 2006,2007, the outstanding balancesborrowings subject to variable interest rate fluctuations totaled $2.1 million. The$4.3 million, and was as high credit balance for 2006 was approximately $5.0as $6.2 million leaving over $2.0and as low as $4.3 million available for working capital requirements. Future changesat different times during the fiscal year. A hypothetical 20% increase in drawdown requirements and changes in interest rates could causethe published LIBOR rate, causing our borrowing costs to increase.increase, would not have a material impact on our financial results. We do not expect the LIBOR rate to fluctuate more than 20% in the next twelve months.
We maintain no cash equivalents. However,In addition to these debts, we have a $8.0 million term note which also bears interest at a rate indexed to the 30 day LIBOR rate. To mitigate the market risk associated with the floating interest rate, we entered into an interest rate swap on September 30, 2004, in an amount equivalent to the $8$8.0 million notes payable in order to minimize interest rate risk.term note. Although the note bears interest at the prevailing 30-day LIBOR rate plus 2.5%, the swap effectively fixed the interest rate at 6.13%. The fair value of this derivative will increase or decrease opposite any future changes in interest rates.
All sales and purchases are denominated in U.S. dollars.
To the Board of Directors and Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheetsheets of ADDvantage Technologies Group, Inc. and subsidiaries (the “Company”) as of September 30, 2007 and 2006, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the yearyears then ended. Our auditaudits also included the financial schedule of ADDvantage Technologies Group, Inc., listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.audits. The consolidated financial statements of the Company as of September 30, 2005 and for each of the two years in the period ended September 30, 2005 were audited by other auditors whose report dated December 22, 2005 expressed an unqualified opinion on those statements.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits 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, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the yearyears then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related 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/ HOGAN AND SLOVACEK
December 22, 200621, 2007
Tulsa, Oklahoma
The Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheet of ADDvantage Technologies Group, Inc. and subsidiaries (the “Company”) as of September 30, 2005, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows of ADDvantage Technologies Group, Inc. and subsidiaries (the Company) for each of the two yearsyear ended September 30, 2005 and 2004.2005. Our auditsaudit also included the financial schedule of ADDvantage Technologies Group, Inc., listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.audit.
We conducted our auditsaudit 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 provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial positionresults of the operations and the cash flows of ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 2005, andfor the consolidated results of their operations and their cash flows for each of the two years in the periodyear ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related 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/ TULLUIS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
December 22, 2005, except as reflected
in Amendment 1 to the 2006 Form 10-K/A
to which the date is December 5, 2007
| | | September 30, | |
Assets | | 2006 | | 2005 | |
| Current assets: | | | | | |
| Cash | | $ | 98,898 | | $ | 449,219 | |
Accounts receivable, net of allowance of $554,000 | | | | | | | |
| and $92,000, respectively | | | 5,318,127 | | | 7,671,549 | |
| Income tax refund receivable | | | 307,299 | | | - | |
| Inventories, net of allowance for excess and obsolete inventory | | | | | | | |
| of $1,178,000 and $1,575,395, respectively | | | 28,990,696 | | | 25,321,149 | |
| Deferred income taxes | | | 1,074,000 | | | 968,000 | |
| Total current assets | | | 35,789,020 | | | 34,409,917 | |
| | | | | | | | |
| Property and equipment, at cost: | | | | | | | |
| Machinery and equipment | | | 2,697,476 | | | 2,357,182 | |
| Land and buildings | | | 1,668,511 | | | 1,591,413 | |
| Leasehold improvements | | | 205,797 | | | 565,945 | |
| | | | 4,571,784 | | | 4,514,540 | |
| Less accumulated depreciation and amortization | | | (2,033,679 | ) | | (1,811,784 | ) |
| Net property and equipment | | | 2,538,105 | | | 2,702,756 | |
| | | | | | | | |
| Other assets: | | | | | | | |
| Deferred income taxes | | | 702,000 | | | 786,000 | |
| Goodwill | | | 1,560,183 | | | 1,150,060 | |
| Other assets | | | 335,566 | | | 220,275 | |
| Total other assets | | | 2,597,749 | | | 2,156,335 | |
| | | | | | | | |
| Total assets | | $ | 40,924,874 | | $ | 39,269,008 | |
| | | September 30, |
Assets | | 2007 | | | 2006 |
| Current assets: | | | | | |
| Cash | | $ | 60,993 | | | $ | 98,898 |
| Accounts receivable, net of allowance of $261,000 and | | | | | | | |
| $554,000, respectively | | | 6,709,879 | | | | 5,318,127 |
| Income tax refund receivable | | | 153,252 | | | | 307,299 |
| Inventories, net of allowance for excess and obsolete inventory | | | | | | | |
| of $697,000 and $1,178,000, respectively | | | 31,464,527 | | | | 28,990,696 |
| Deferred income taxes | | | 678,000 | | | | 1,074,000 |
| Total current assets | | | 39,066,651 | | | | 35,789,020 |
| | | | | | | | |
| Property and equipment, at cost: | | | | | | | |
| Machinery and equipment | | | 3,144,927 | | | | 2,697,476 |
| Land and buildings | | | 6,488,731 | | | | 1,668,511 |
| Leasehold improvements | | | 205,797 | | | | 205,797 |
| | | | 9,839,455 | | | | 4,571,784 |
| Less accumulated depreciation and amortization | | | (2,341,431) | | | | (2,033,679) |
| Net property and equipment | | | 7,498,024 | | | | 2,538,105 |
| | | | | | | | |
| Other assets: | | | | | | | |
| Deferred income taxes | | | 679,000 | | | | 702,000 |
| Goodwill | | | 1,560,183 | | | | 1,560,183 |
| Other assets | | | 204,843 | | | | 335,566 |
| Total other assets | | | 2,444,026 | | | | 2,597,749 |
| | | | | | | | |
| Total assets | | $ | 49,008,701 | | | | 40,924,874 |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | September 30, | | | September 30, |
Liabilities and Stockholders’ Equity | | 2006 | | 2005 | | | 2007 | | | 2006 |
| Current liabilities: | | | | | | | | | | |
| Accounts payable | | $ | 2,618,490 | | $ | 4,958,834 | | | $ | 4,301,672 | | | $ | 2,618,490 |
| Accrued expenses | | | 1,181,139 | | | 1,876,523 | | | | 1,331,890 | | | | 1,181,139 |
| Accrued income taxes | | | - | | | 110,691 | | |
| Bank revolving line of credit | | | 3,476,622 | | | 2,234,680 | | | | 1,735,405 | | | | 3,476,622 |
| Notes payable - current portion | | | 1,241,348 | | | 1,239,071 | | |
| Notes payable – current portion | | | | 1,427,693 | | | | 1,241,348 |
| Dividends payable | | | 210,000 | | | 210,000 | | | | 210,000 | | | | 210,000 |
| Total current liabilities | | | 8,727,599 | | | 10,629,799 | | | | 9,006,660 | | | | 8,727,599 |
| | | | | | | | | | | | | | | |
| Notes payable | | | 4,666,738 | | | 5,908,199 | | | | 5,845,689 | | | | 4,666,738 |
| | | | | | | | | | | | | | | |
| Stockholders’ equity: | | | | | | | | | | | | | | |
| Preferred stock, 5,000,000 shares authorized, | | | | | | | | |
| $1.00 par value, at stated value: | | | | | | | | |
| Series B, 7% cumulative; 300,000 shares issued and | | | | | | | | |
outstanding with a stated value of $40 per share | | | 12,000,000 | | | 12,000,000 | | |
| Preferred stock, 5,000,000 shares authorized, $1.00 par value, | | | | | | | | |
| at stated value: Series B, 7% cumulative; 300,000 shares | | | | | | | | |
| issued and outstanding with a stated value of $40 per share | | | | 12,000,000 | | | | 12,000,000 |
| Common stock, $.01 par value; 30,000,000 shares authorized; | | | | | | | | | | | | | | |
| 10,252,856 and 10,093,147 shares issued and outstanding, | | | | | | | | |
| respectively | | | 102,528 | | | 100,931 | | |
| Paid-in capital | | | (6,474,018 | ) | | (7,265,930 | ) | |
| 10,270,756 and 10,252,856 shares issued, respectively | | | | 102,708 | | | | 102,528 |
| Paid in capital | | | | (6,383,574) | | | | (6,474,018) |
| Retained earnings | | | 21,863,685 | | | 17,860,967 | | | | 28,454,024 | | | | 21,863,685 |
| Accumulated other comprehensive income: | | | | | | | | | | | | | | |
| Unrealized gain on interest rate swap, net of tax | | | 92,506 | | | 89,206 | | | | 37,358 | | | | 92,506 |
| | | | 27,584,701 | | | 22,785,174 | | | | 34,210,516 | | | | 27,584,701 |
| | | | | | | | | | | | | | | |
| Less: Treasury stock, 21,100 shares at cost | | | (54,164 | ) | | (54,164 | ) | | | (54,164) | | | | (54,164) |
| Total stockholders’ equity | | | 27,530,537 | | | 22,731,010 | | | | 34,156,352 | | | | 27,530,537 |
| | | | | | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 40,924,874 | | $ | 39,269,008 | | | $ | 49,008,701 | | | | 40,924,874 |
See notes to audited consolidated financial statements.
| | | September 30, | | | Years ended September 30, |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | | 2006 | | | 2005 |
| Net sales income | | $ | 47,400,816 | | $ | 45,755,198 | | $ | 42,293,046 | | |
| Net new sales income | | | $ | 44,991,536 | | | $ | 38,585,308 | | | $ | 37,431,223 |
| Net refurbished sales income | | | | 15,264,336 | | | | 8,815,508 | | | | 8,323,975 |
| Net service income | | | 5,140,393 | | | 4,517,997 | | | 4,778,283 | | | | 5,390,213 | | | | 5,140,393 | | | | 4,517,997 |
| Total net sales | | | 52,541,209 | | | 50,273,195 | | | 47,071,329 | | | | 65,646,085 | | | | 52,541,209 | | | | 50,273,195 |
| Cost of sales | | | 35,799,831 | | | 33,401,167 | | | 31,092,890 | | | | 44,336,505 | | | | 36,321,278 | | | | 33,880,881 |
| Gross profit | | | 16,741,378 | | | 16,872,028 | | | 15,978,439 | | | | 21,309,580 | | | | 16,219,931 | | | | 16,392,314 |
| Operating, selling, general and | | | | | | | | | | | |
| administrative expenses | | | 8,377,152 | | | 6,642,641 | | | 6,216,728 | | |
| Operating, selling, general and administrative | | | | | | | | | | | | |
| expenses | | | | 8,458,384 | | | | 7,855,705 | | | | 6,162,927 |
| Depreciation and amortization | | | 247,504 | | | 256,435 | | | 277,352 | | | | 307,752 | | | | 247,504 | | | | 256,435 |
| Income from operations | | | 8,116,722 | | | 9,972,952 | | | 9,484,359 | | | | 12,543,444 | | | | 8,116,722 | | | | 9,972,952 |
| Interest expense | | | 530,004 | | | 557,560 | | | 157,606 | | | | 555,105 | | | | 530,004 | | | | 557,560 |
| Income before income taxes | | | 7,586,718 | | | 9,415,392 | | | 9,326,753 | | | | 11,988,339 | | | | 7,586,718 | | | | 9,415,392 |
| Provision form income taxes | | | 2,744,000 | | | 3,601,000 | | | 3,513,000 | | |
| Provision for income taxes | | | | 4,558,000 | | | | 2,744,000 | | | | 3,601,000 |
| Net income | | | 4,842,718 | | | 5,814,392 | | | 5,813,753 | | | | 7,430,339 | | | | 4,842,718 | | | | 5,814,392 |
| | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | | | | | | | | | |
| Unrealized gain on interest rate swap | | | | | | | | | | | |
| (Net of $2,000 and $54,000 in taxes, respectively). | | | 3,300 | | | 89,206 | | | - | | |
| Comprehensive Income | | $ | 4,846,018 | | $ | 5,903,598 | | $ | 5,813,753 | | |
| Other comprehensive income: | | | | | | | | | | | | |
| Unrealized gain (loss) on interest rate swap, net of ($34,000), $2,000 and $56,000 in (tax benefit) taxes, respectively | | | | (55,148) | | | | 3,300 | | | | 89,206 |
| | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | $ | 7,375,191 | | | $ | 4,846,018 | | | $ | 5,903,598 |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 4,842,718 | | | 5,814,392 | | | 5,813,753 | | | | 7,430,339 | | | | 4,842,718 | | | | 5,814,392 |
| Preferred stock dividends | | | 840,000 | | | 840,000 | | | 1,240,000 | | | | 840,000 | | | | 840,000 | | | | 840,000 |
| Net income attribute | | | | | | | | | | | |
| to common stockholders | | $ | 4,002,718 | | $ | 4,974,392 | | $ | 4,573,753 | | |
| | | | | | | | | | | | |
| Net income attributable to common stockholders | | | $ | 6,590,339 | | | $ | 4,002,718 | | | $ | 4,974,392 |
| | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.39 | | $ | 0.49 | | $ | 0.46 | | | $ | 0.64 | | | $ | 0.39 | | | $ | 0.49 |
| Diluted | | $ | 0.39 | | $ | 0.49 | | $ | 0.41 | | | $ | 0.64 | | | $ | 0.39 | | | $ | 0.49 |
| | | | | | | | | | | | |
| Shares used in per share calculation | | | | | | | | | | | |
| Shares used in per share calculation: | | | | | | | | | | | | |
| Basic | | | 10,152,472 | | | 10,067,277 | | | 10,041,197 | | | | 10,237,331 | | | | 10,152,472 | | | | 10,067,277 |
| Diluted | | | 10,201,474 | | | 10,109,854 | | | 12,104,541 | | | | 10,250,835 | | | | 10,201,474 | | | | 10,109,854 |
See notes to audited consolidated financial statements.
Years ended September 30, 2007, 2006 2005 and 20042005
| | | | | | | Series A | | Series B | | | | Retained | | Other | | | | | | | | | | | | | Series B | | | | | | Retained | | | Other | | | | | | |
| | | Common Stock | | Preferred | | Preferred | | Paid-in | | Earnings | | ComComprehensive | | T Treasury | | | | | Common Stock | | | Preferred | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | |
| | | Shares | | Amount | | Stock | | Stock | | Capital | | (Deficit) | | Income | | Stock | | Total | | |
| Balance, September 30, 2003 | | | 10,030,414 | | $ | 100,304 | | $ | 8,000,000 | | $ | 12,000,000 | | ($7,389,197 | ) | $ | 8,312,822 | | - | | ($54,164 | ) | $ | 20,969,765 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | - | | - | | - | | - | | 5,813,753 | | - | | - | | 5,813,753 | | |
| Preferred stock dividends | | | - | | - | | - | | - | | - | | (1,240,000 | ) | | - | | - | | (1,240,000 | ) | |
| Stock options exercised | | | 51,375 | | 514 | | - | | - | | 103,633 | | - | | - | | - | | 104,147 | | |
| Redemption of Series A | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | - | | - | | (8,000,000 | ) | | - | | - | | - | | - | | - | | (8,000,000 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares | | | Amount | | | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total |
| Balance, September 30, 2004 | | | 10,081,789 | | $ | 100,818 | | - | | $ | 12,000,000 | | ($7,285,564 | ) | $ | 12,886,575 | | - | | ($54,164 | ) | $ | 17,647,665 | | | | 10,081,789 | | | $ | 100,818 | | | $ | 12,000,000 | | | $ | (7,285,564) | | | $ | 12,886,575 | | | | - | | | $ | (54,164) | | | $ | 17,647,665 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | - | | - | | - | | - | | 5,814,392 | | - | | - | | 5,814,392 | | | | - | | | | - | | | | - | | | | - | | | | 5,814,392 | | | | - | | | | - | | | | 5,814,392 |
| Preferred stock dividends | | | - | | - | | - | | - | | - | | (840,000 | ) | | - | | - | | (840,000 | ) | | | - | | | | - | | | | - | | | | - | | | | (840,000 | ) | | | - | | | | - | | | | (840,000) |
| Stock options exercised | | | 11,358 | | 113 | | - | | - | | 19,634 | | - | | - | | - | | 19,747 | | | | 11,358 | | | | 113 | | | | - | | | | 19,634 | | | | - | | | | - | | | | - | | | | 19,747 |
| Unrealized gain on interest swap | | | - | | - | | - | | - | | - | | - | | 89,206 | | - | | 89,206 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 89,206 | | | | - | | | | 89,206 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2005 | | | 10,093,147 | | $ | 100,931 | | - | | $ | 12,000,000 | | ($7,265,930 | ) | $ | 17,860,967 | | $ | 89,206 | | ($54,164 | ) | $ | 22,731,010 | | | | 10,093,147 | | | $ | 100,931 | | | $ | 12,000,000 | | | $ | (7,265,930) | | | $ | 17,860,967 | | | $ | 89,206 | | | $ | (54,164) | | | $ | 22,731,010 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | - | | - | | - | | - | | $ | 4,842,718 | | - | | - | | 4,842,718 | | | | - | | | | - | | | | - | | | | - | | | | 4,842,718 | | | | - | | | | - | | | | 4,842,718 |
| Preferred stock dividends | | | - | | - | | - | | - | | - | | (840,000 | ) | | - | | - | | (840,000 | ) | | | - | | | | - | | | | - | | | | - | | | | (840,000) | | | | - | | | | - | | | | (840,000) |
| Stock options exercised | | | 72,500 | | 725 | | - | | - | | 244,674 | | - | | - | | - | | 245,399 | | | | 72,500 | | | | 725 | | | | - | | | | 244,674 | | | | - | | | | - | | | | - | | | | 245,399 |
| Unrealized gain on interest swap | | | - | | - | | - | | - | | - | | - | | 3,300 | | - | | 3,300 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,300 | | | | - | | | | 3,300 |
| Share based compensation expense | | | - | | - | | - | | - | | 98,110 | | - | | - | | - | | 98,110 | | | | - | | | | - | | | | - | | | | 98,110 | | | | - | | | | - | | | | - | �� | | | 98,110 |
| Shares issued in exchange for certain assets | | | 87,209 | | 872 | | - | | - | | 449,128 | | - | | - | | - | | 450,000 | | | | 87,209 | | | | 872 | | | | - | | | | 449,128 | | | | - | | | | - | | | | - | | | | 450,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2006 | | | 10,252,856 | | $ | 102,528 | | | - | | $ | 12,000,000 | | | ($6,474,018 | ) | $ | 21,863,685 | | $ | 92,506 | | | ($54,164 | ) | $ | 27,530,537 | | | | 10,252,856 | | | $ | 102,528 | | | $ | 12,000,000 | | | $ | (6,474,018) | | | $ | 21,863,685 | | | $ | 92,506 | | | $ | (54,164) | | | $ | 27,530,537 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | - | | | | - | | | | - | | | | - | | | | 7,430,339 | | | | - | | | | - | | | | 7,430,339 |
| Preferred stock dividends | | | | - | | | | - | | | | - | | | | - | | | | (840,000) | | | | - | | | | - | | | | (840,000) |
| Stock options exercised | | | | 17,900 | | | | 180 | | | | - | | | | 33,193 | | | | - | | | | - | | | | - | | | | 33,373 |
| Unrealized loss on interest swap | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (55,148) | | | | - | | | | (55,148) |
| Share based compensation expense | | | | - | | | | - | | | | - | | | | 57,251 | | | | - | | | | - | | | | - | | | | 57,251 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
| | | Years ended September 30, |
| | | 2007 | | | 2006 | | | 2005 |
Cash Flows from Operating Activities | | | | | | | | |
| Net income | | $ | 7,430,339 | | | $ | 4,842,718 | | | $ | 5,814,392 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | |
| Depreciation and amortization | | | 307,752 | | | | 247,504 | | | | 256,435 |
| Provision for losses on accounts receivable | | | 185,000 | | | | 445,541 | | | | 40,080 |
| Provision for exess and obsolete inventories | | | 746,000 | | | | 439,625 | | | | 482,395 |
| Loss on disposal of property and equipment | | | 100,971 | | | | 76,829 | | | | - |
| Deferred income tax benefit | | | 419,000 | | | | (22,000) | | | | (3,000) |
| Share based compensation expense | | | 60,314 | | | | 98,111 | | | | - |
| Change in: | | | | | | | | | | | |
| Receivables | | | (1,422,705) | | | | 1,600,582 | | | | (2,174,498) |
| Inventories | | | (3,219,831) | | | | (4,109,172) | | | | (1,927,585) |
| Other assets | | | 75,575 | | | | (132,276) | | | | (51,577) |
| Accounts payable | | | 1,683,182 | | | | (1,985,706) | | | | 2,855,516 |
| Accrued liabilities | | | 296,585 | | | | (660,242) | | | | 233,181 |
| Net cash provided by operating activities | | | 6,662,182 | | | | 841,514 | | | | 5,525,339 |
| | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | |
| Additions to machinery and equipment | | | (381,471) | | | | (99,520) | | | | (446,534) |
| Additions of land and buildings | | | (4,820,220) | | | | - | | | | - |
| Investment in Jones Broadband International | | | (145,834) | | | | (500,471) | | | | (2,884,614) |
| Acquisition of business and certain assets | | | (166,951) | | | | | | | | |
| Net cash used in investing activities | | | (5,514,476) | | | | (599,991) | | | | (3,331,148) |
| | | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | | |
| Net change under bank revolving line of credit | | | (1,741,217) | | | | 1,241,942 | | | | (990,503) |
| Proceeds on notes payable | | | 2,760,291 | | | | - | | | | - |
| Payments on notes payable | | | (1,394,995) | | | | (1,239,184) | | | | (1,250,455) |
| Proceeds from stock options exercised | | | 30,310 | | | | 245,398 | | | | 19,747 |
| Payments of preferred dividends | | | (840,000) | | | | (840,000) | | | | (840,000) |
| Net cash used in financing activities | | | (1,185,611) | | | | (591,844) | | | | (3,061,211) |
| | | | | | | | | | | | |
| Net (decrease) in cash | | | (37,905) | | | | (350,321) | | | | (867,020) |
| | | | | | | | | | | | |
| Cash, beginning of year | | | 98,898 | | | | 449,219 | | | | 1,316,239 |
| | | | | | | | | | | | |
| Cash, end of year | | $ | 60,993 | | | $ | 98,898 | | | $ | 449,219 |
| | | | | | | | | | | | |
| Supplemental Cash Flow Information | | | | | | | | | | | |
| Cash paid for interest | | $ | 558,605 | | | $ | 531,596 | | | $ | 557,560 |
| Cash paid for income taxes | | $ | 4,089,459 | | | $ | 3,019,768 | | | $ | 3,582,616 |
Value of shares issued in exchange for business and certain assets. | | $ | | | | $ | 450,000 | | | $ | |
See notes to audited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | September 30, | |
| | | | |
Cash Flows from Operating Activities | | 2006 2005 2004 | |
| Net income | | $ | 4,842,718 | | $ | 5,814,392 | | $ | 5,813,753 | |
| Adjustments to reconcile net income | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 247,504 | | | 256,435 | | | 277,352 | |
| Provision for losses on accounts receivable | | | 445,541 | | | 40,080 | | | - | |
| Provision for excess and obsolete inventories | | | 439,625 | | | 482,395 | | | 645,900 | |
| Loss on disposal of property and equipment | | | 76,829 | | | - | | | 24,412 | |
| Deferred income tax benefit | | | (22,000 | ) | | (3,000 | ) | | (172,000 | ) |
| Change in: | | | | | | | | | | |
| Receivables | | | 1,600,582 | | | (2,174,498 | ) | | (1,004,069 | ) |
| Inventories | | | (4,109,172 | ) | | (1,927,585 | ) | | 506,482 | |
| Other assets | | | (132,276 | ) | | (51,577 | ) | | 8,406 | |
| Accounts payable | | | (2,340,344 | ) | | 3,027,827 | | | (872,526 | ) |
| Accrued liabilities | | | (806,075 | ) | | 687,191 | | | 208,086 | |
| Net cash provided by operating activities | | | 242,932 | | | 6,151,660 | | | 5,435,796 | |
| | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | |
| Additions to property and equipment | | | (99,520 | ) | | (446,534 | ) | | (77,201 | ) |
| Investment in Jones Broadband International, | | | | | | | | | | |
| net of cash acquired of $100,322 | | | - | | | (3,510,935 | ) | | - | |
| Net cash used in investing activities | | | (99,520 | ) | | (3,957,469 | ) | | (77,201 | ) |
| | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | |
| Net change under bank revolving line of credit | | | 1,241,942 | | | (990,503 | ) | | (1,960,719 | ) |
| Proceeds on notes payable | | | - | | | - | | | 8,000,000 | |
| Payments on notes payable | | | (1,239,184 | ) | | (1,250,455 | ) | | (1,342,067 | ) |
| Proceeds from stock options exercised | | | 343,509 | | | 19,747 | | | 104,147 | |
| Payments of preferred dividends | | | (840,000 | ) | | (840,000 | ) | | (1,340,000 | ) |
| Redemption of preferred stock | | | - | | | - | | | (8,000,000 | ) |
| Net cash used in financing activities | | | (493,733 | ) | | (3,061,211 | ) | | (4,538,639 | ) |
| | | | | | | | | | | |
| Net increase (decrease) in cash | | | (350,321 | ) | | (867,020 | ) | | 819,956 | |
| Cash, beginning of year | | | 449,219 | | | 1,316,239 | | | 496,283 | |
| | | | | | | | | | | |
| Cash, end of year | | $ | 98,898 | | $ | 449,219 | | $ | 1,316,239 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | | |
| Cash paid for interest | | $ | 531,596 | | $ | 557,560 | | $ | 172,426 | |
| Cash paid for income taxes | | $ | 3,019,768 | | $ | 3,582,616 | | $ | 3,669,170 | |
| Value of shares issued in exchange for business and | | | | | | | | | | |
| certain assets | | $ | 450,000 | | | - | | | - | |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2007, 2006 2005 and 20042005
Note 1 -– Summary of Significant Accounting Policies
Description of business
ADDvantage Technologies Group, Inc. and its subsidiaries (the “Company”) sell new, surplus, and re-manufactured cable television equipment throughout North America, Latin America and South America in addition to being a repair center for various cable companies. The Company operates in one business segment.
Principles of consolidation and segment reporting
The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries: Tulsat Corporation ("Tulsat"), NCS Industries, Inc. ("NCS"), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Missouri, Inc. (dba "ComTech Services"), Tulsat-Nebraska, Inc., ADDvantage Technologies Group of Texas, Inc. (dba "Tulsat Texas"), Jones Broadband International, Inc. ("Jones Broadband") 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 are aggregated for segment reporting purposes.
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-offwritten off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written-offwritten 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 properly reflect inventory at 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 line and accelerated methodsmethod over the estimated useful lives of the related assets. Leasehold improvements are amortized over the remainder of the lease agreement. Repairs and maintenance are expensed as incurred, whereas major improvements are capitalized. Depreciation and amortization expense was $247,504, $256,435$0.3 million, $0.2 million and $277,352$0.3 million for the years ended September 30, 2007, 2006 2005 and 2004,2005, respectively.
Income taxes
The Company provides for income taxes in accordance with the liability method of accounting pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, “AccountingAccounting for Income Taxes.”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, remanufacturedrefurbished 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 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 customers. Accruals are established for expected returns based on historical activity. Revenue for services is recognized when the repair is completed and the product is shipped back to the customer.
Derivatives
SFAS No. 133, “AccountingAccounting for Derivative Instruments and Hedging Activities”, as amended, requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in Other Comprehensive Income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in other income (expense).
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. The Company has designated its interest rate swap as a cash flow hedge on the $8.0 million term note payable. As there arewere no differences between the critical terms of the interest rate swap and the hedged debt obligations the Company assumesapplied the “Short Cut Method”, as defined in SFAS 133, and assumed no ineffectiveness in the hedging relationship. Interest expense on this note iswas adjusted to include the payment made or received under the interest rate swap agreement.
Freight
Amounts billed to customers for shipping and handling represent revenues earned and are included in Net New Sales Income, Net Refurbished Sales Income and Net Service Income in the accompanying Consolidated Statements of Income. Actual costs for shipping and handling of these sales isare included in Costs of Sales.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $385,485, $335,487$0.4 million, $0.4 million and $265,112$0.3 million for the years ended September 30, 2007, 2006 2005 and 2004,2005, respectively.
Management estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Any significant, unanticipated changes in product demand, technological developments or continued economic trends affecting the cable industry could have a significant impact on the value of the Company's inventory and operating results.
Concentrations of credit risk
The Company holds cash with one major financial institution which at times exceedexceeds 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. Sales to oneThe Company had no customer accounted for approximately 11%in fiscal 2007 that contributed in excess of 10% of the total net revenues for 2006.sales. Sales to foreign (non-U.S. based customers) total approximately $5.9 million, $3.8 million and $2.4 million and $0.9 million infor the three fiscal years ended September 30, 2006.2007, 2006 and 2005, respectively. In 2006,2007, the Company purchased approximately 46%35% of our inventory from Scientific-Atlanta and approximately 14%18% of our inventory from Motorola. The concentration of suppliers of our inventory subjects us to risk.
Goodwill
AnnualThe Company performed annual goodwill impairment testing indicatestests on each operating segment of the Company. The annual impairment tests performed indicated that goodwill iswas not impaired as of September 30, 20062007 or 2005.2006.
Employee stock-based awards
In the first quarter of fiscal year 2006, the company adopted Statement of Financial Accounting StandardsSFAS 123(R), "ShareShare Based Payment" ("SFAS 123R")Payment. SFAS 123R 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. The Company has elected the modified-prospective transition method of adopting SFAS 123R which requires the fair value of unvested options be calculated and amortized as compensation expense over the remaining vesting period. SFAS 123R does not require the Company to restate prior periods for the value of vested 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.
Fair value of financial instruments
The carrying amounts of accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of the Company’s line of credit approximates fair value since the interest rate fluctuates periodically based on the primea floating interest rate. Management believes that the carrying value of the Company’s borrowings approximate fair value based on credit terms currently available for similar debt.
Impact of recently issued accounting standards
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company plans to adopt SFAS No. 159 beginning in the first quarter of fiscal 2009. The Company does not expect the adoption of SFAS No. 159 will have a material impact on its financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements being both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. The Company adopted SAB No. 108 in the first quarter of fiscal year 2007 and its adoption had no impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for the Company beginning October 1, 2008. The Company does not expect the adoption of SFAS No. 157 will have a material effect on its financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance or retained earnings. In fiscal 2006, the Company elected early adoption of FIN 48 and there was no impact on its financial statements.
In June 2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on EITF issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43. EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF issue No. 06-2 is effective for us beginning October 1, 2007. The Company does not expect the adoption of EITF Issue No. 06-2 to result in a material adjustment to its financial statements.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "TheThe Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments"Investments ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than- temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The Company elected to adopt FSP11-5 in fiscal 2006 and its application had no material impact on its financial position.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which revised ARB No. 43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. This Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company elected to adopt SFAS No.151 beginning with fiscal year 2005. The adoption of this standard had no impact on the Company's financial position and results of operations.
In December 2004, the FASB issued SFAS 123R,No. 123(R), Accounting for Share-Based Payment, which replaced SFAS 123 and superseded APB 25. SFAS 123R123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant date fair market values and requires that such recognition begin in the first interim or annual period after June 15, 2005, with early adoption encouraged. Under SFAS 123R,123(R), the pro forma disclosures previously permitted are no longer an alternative to financial statement recognition. In April 2005, the Securities and Exchange Commission (the SEC) postponed the effective date of SFAS 123R123(R) until the issuer’s first fiscal year beginning after June 15, 2005. In addition, in March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R123(R) and the valuation of share-based payments for public companies.
The Company adopted SFAS 123R123(R) in the first quarter of fiscal 2006 and applied the modified prospective method, which required that compensation expense be recorded for all unvested stock options and restricted stock upon adoption of SFAS 123R.123(R). The Company applied the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which must then be amortized on a straight line basis over the requisite service period. On October 1, 2005 all outstanding options representing 1,214,967144,267 shares were fully vested. Therefore, SFAS 123R123(R) had no impact on the Company's statement of income on the date of adoption.
During 2007 and 2006, stock options were granted to certain members of management and the Board of Directors. The Company determined the fair value of the options issued, using the Black-Scholes Valuation Model and is amortizing the calculated value over the vesting term. The costs were primarily recognized in 2006,the year granted with residual amounts being charged against income in 2007, 2008 and 2009.
The Company currently presents pro forma disclosure of net income (loss) and earnings (loss) per share as if compensation costs from all stock awards were recognized based on the fair value recognition provisions of SFAS 123.123(R). The Statement requires use of valuation techniques, including option pricing models, to estimate the fair value of employee stock awards. For pro forma disclosures, we use a Black-Scholes option pricing model in estimating the fair value of employee stock options.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,) "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes”. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance or retained earnings. Management does not believe that the adoption of FIN 48 will have a material impact on the Company's financial position.
Reclassifications
Certain reclassifications have been made to the 20042005 and 20052006 financial statements to conform to the 20062007 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Note 2 -– Inventories
Inventories are summarized as follows:
| | | 2006 | | 2005 | | | 2007 | | | 2006 |
| New | | $ | 21,012,912 | | $ | 20,066,957 | | | $ | 17,155,976 | | | $ | 21,012,912 |
| Used | | | 9,155,784 | | | 6,829,587 | | |
| Refurbished | | | | 15,005,551 | | | | 9,155,784 |
| Allowance for excess and obsolete inventory | | | (1,178,000 | ) | | (1,575,395 | ) | | | (697,000) | | | | (1,178,000) |
| | | $ | 28,990,696 | | $ | 25,321,149 | | | | | | | | |
| | | | $ | 31,464,527 | | | $ | 28,990,696 |
New inventory includes products purchased from the manufacturers plus “surplus-new” which is unused products purchased from other distributors or multiple system operators. UsedRefurbished 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 a chargecharges to allow for obsolete inventory during fiscal years ending September 30, 2007 and 2006, increasing the cost of sales by approximately $0.7 million and $0.4 million. The Company recorded a charge to allow for obsolete inventory at September 30, 2004, increasing the cost of sales by approximately $0.6 million.million, respectively.
Note 3 – Business Combination
On August 19, 2005, the Company purchasedacquired 100% of the outstanding stock of Jones Broadband International, Inc. ("JBI") for a combined consideration consisting of approximately $2.4$3.9 million. This consideration consisted of a purchase price of approximately $3.5 million, in debtnet of cash acquired from JBI of approximately $0.1 million, as well as the assumption includingof JBI’s accounts payable and accrued liabilities totaling approximately $0.3 million. In accordance with the terms of the “JBI Sale and cashPurchase Agreement,” the Company paid approximately $0.1 million, $0.5 million and $2.9 of approximately $1.6 million. the total purchase price associated with this acquisition during fiscal years ended September 30, 2007, 2006 and 2005, respectively.
The total purchase price represented the approximate book value of JBI, consisting of $2.6 million of inventory, after an approximate $0.5 million write down to market, and $1.3 million of other assets including receivables and fixed assets. JBI’s main office is in Oceanside, California and it has a warehouse in Stockton, California. Results of JBI’s operations are included in the Company’s consolidated statements of income from the acquisition date.
Note 3 -4 – Line of Credit, Stockholder Notes, Notes Payable and Interest Rate Swap
At September 30, 2006, a $3,476,6222007, approximately $1.7 million balance iswas outstanding under athe $7.0 million Revolving Credit Commitment (“line of credit”) with its primary financial lender. The line of credit due November 30, 2006, withrequires monthly interest payable monthlypayments based on the prevailing 30-day LIBOR rate plus 1.75%. (7.07% (6.88% at September 30, 20062007 with a 6.4%7.02% combined weighted average during fiscal year 2006)2007). Borrowings under the line of credit are limited to the lesser of $7.0 million or the sumnet balance of 80% of qualified accounts receivable andplus 50% of qualified inventory for working capital purposes.less any outstanding term note balances. Among other financial covenants, the line of credit agreement provides that the Company’s net worth must be greater than $15.0 million plus 50% of annual net income (with no deduction for net losses), determined quarterly. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.intangibles and was to mature on November 30, 2007. Subsequent to year end, the Company renewed the $7.0 million Revolving Credit Commitment for an additional three year term exiring November 30, 2010, which is further discussed in “Note 11 – Subsequent Events”.
Cash receipts are applied from the Company’s lockbox account directly against the bank line of credit, and checks clearing the bank are funded from the line of credit. The resulting overdraft balance, consisting of outstanding checks, was $1,334,946approximately $1.7 million at September 30, 2006,2007, and is included in the bank revolving line of credit.
On November 20, 2006, the Company purchased real estate, consisting of an office and warehouse facility located on ten acres in Broken Arrow, Oklahoma for $3.3 million from Chymiak Investments, LLC. Chymiak Investments, LLC is owned by David E. Chymiak, Chairman of the Company and Kenneth A. Chymiak President and Chief Executive Officer of the Company. The purchased facility contains approximately 100,000 square feet of gross building area and is currently being utilized as the Company’s corporate headquarters and the office and warehouse of the Tulsat subsidiary. The Company financed the purchase with cash flows from operations and the execution of a $2.8 million Term Note on November 20, 2006, under the Third Amendment to the Revolving Credit and Term Loan Agreement with its primary financial lender. The balance of this Term Note was approximately $2.6 million on September 30, 2007 and is due on November 20, 2021 with monthly principal payments of $15,334 plus accrued interest. Interest accrues on the note at the prevailing 30-day LIBOR rate plus 1.75% (6.87% at September 30, 2007). The Revolving Credit and Term Loan Agreement also includes a $7.0 million Revolving Credit Commitment and an $8.0 million Term Note, discussed separately herein.
On September 30, 2004, the Company redeemed all of the outstanding shares of its Series A 5% Cumulative Convertible Preferred Stock at its aggregate stated value of $8$8.0 million. All of the outstanding shares of Series A Preferred Stock were held beneficially by David E. Chymiak, Chairman of the Board of the Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company. The Company financed the redemption with a new creditthe proceeds from an $8.0 million Term Note agreement with its bankprimary financial lender executed on September 30, 2004. The September 30, 2007 balance of this note was $4.4 million and is due on September 30, 2009, with monthly principal payments of $0.1 million plus accrued interest. Interest accrues on the note at the prevailing 30-day LIBOR rate plus 2.50% (7.63% at September 30, 2007).
An interest rate swap was entered into simultaneously with the $8.0 million Term Note on September 30, 2004, which includesfixed the interest rate at 6.13%. The Company receives monthly the variable interest rate of LIBOR based on a Revolving Credit Commitmentone month interval, plus 2.5% on the interest rate swap. This amount is subsequently reclassified into interest expense as a yield adjustment in the amount of $7 millionsame period in which the related interest on the floating-rate debt obligation affects earnings. Upon entering into this interest rate swap, which expires September 30, 2009, the Company designated this derivative as a cash flow hedge by documenting its risk management objective and a Term Loan Commitment instrategy for undertaking the amount of $8 million. The proceeds fromhedge along with methods for assessing the Term Loan were used to redeem the Series A Preferred Stock.swap's effectiveness. At September 30, 20062007, the term loannotional value of the swap was $4.4 million and the fair market value of the interest rate swap was valued at approximately $0.1 million, which is included in other non-current assets on the Company’s consolidated balance was $5,600,000.sheet.
On September 29, 2004, the Company’s majority shareholders, David Chymiak and Ken Chymiak, entered into a stock purchase agreement in which they sold 500,000 shares of their common stock to Barron Partners, LP ("Barron"), a private investment partnership, for $3.25 per share. Under this agreement, Barron also received options to purchase up to three million additional shares of the common stock owned by these majority shareholders. During 2006, Barron exercised its options to purchase thesethe three million shares. The Company filed a registration statement covering the resale of the shares of common stock sold as well as the shares of common stock issuable upon exercise of the options. The Company did not receive any of the proceeds from the sale of the shares and did not receive any of the proceeds from the exercise of the options, but paid the costcosts of registering the shares for resale by the selling shareholders.
An $8 million amortizing term note with the Company's primary lender was obtained to finance the redemption of the outstanding shares of the Series A Preferred Stock at September 30, 2004. The September 30, 2006 balance of this note is $5,600,000 and is due on September 30, 2009, with monthly principal payments of $100,000 plus accrued interest, and the note bears interest at the prevailing 30-day LIBOR rate plus 2.50% (7.82% at September 30, 2006). An interest rate swap was entered into simultaneously with the note on September 30, 2004, which fixed the interest rate at 6.13%. The Company receives monthly the variable interest rate of LIBOR based on a one month interval, plus 2.5% on the interest rate swap. This amount is subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the floating-rate debt obligation affects earnings. Upon entering into this interest rate swap (which expires September 30, 2009), the Company designated this derivative as a cash flow hedge by documenting our risk management objective and strategy for undertaking the hedge along with methods for assessing the swap's effectiveness. At September 30, 2006, the notional value of the swap was $8,000,000 and the fair market value of the interest rate swap is an asset of approximately $149,000, which is included in other non-current assets on the Company’s consolidated balance sheet.
NotesOther notes payable secured by real estate of $308,086$0.3 million are due in monthly payments through 2013 with interest at 5.5% through 2008, converting thereafter to prime minus .25%.
The aggregate maturities of notes payable and the line of credit for the five years ending September 30, 20112012 are as follows:
0; 2007 | | $ | 4,718,070 | |
0; 2008 | | | 1,243,685 | |
0; 2009 | | | 3,246,155 | |
0; 2010 | | | 48,765 | |
0; 2011 | | | 51,522 | |
0; Thereafter | | | 76,611 | |
| | | | | |
0; Total | | $ | 9,384,808 | |
| | | | | |
| 2008 | | $ | 3,163,098 |
| 2009 | | | 3,430,163 |
| 2010 | | | 232,773 |
| 2011 | | | 235,529 |
| 2012 | | | 238,442 |
| Thereafter | | | 1,708,782 |
| | | | |
| Total | | $ | 9,008,787 |
Note 4 -5 – Income Taxes
The provisions for income taxes consist of:
| | | 2006 | | 2005 | | 2004 | | | 2007 | | | 2006 | | | 2005 |
| Current | | $ | 2,766,000 | | $ | 3,604,000 | | $ | 3,685,000 | | | $ | 4,139,000 | | | $ | 2,766,000 | | | $ | 3,604,000 |
| Deferred | | | (22,000 | ) | | (3,000 | ) | | (172,000 | ) | | | 419,000 | | | | (22,000) | | | | (3,000) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | 2,744,000 | | $ | 3,601,000 | | $ | 3,513,000 | | | $ | 4,558,000 | | | $ | 2,744,000 | | | $ | 3,601,000 |
The following table summarizes the differences between the U.S. federal statutory rate and the Company’s effective tax rate for financial statement purposes for the year ended September 30:
| | | 2006 | | 2005 | | 2004 | | | 2007 | | | 2006 | | | 2005 |
| Statutory tax rate | | | 34.0% | | | 34.0% | | | 34.0% | | | | 34.0% | | | | 34.0% | | | | 34.0% |
| State income taxes, net of U.S. | | | | | | | | | | | | | | | | | | | | | |
| federal tax benefit | | | 4.9% | | | 4.7% | | | 4.7% | | | | 4.8% | | | | 4.9% | | | | 4.7% |
| Tax credits and exclusions | | | (1.7%) | | | ( .5%) | | | (0.6%) | | | | (0.8%) | | | | (1.7%) | | | | (0.5%) |
| Other | | | (1.0%) | | | | | | (0.4%) | | | | - | | | | (1.0%) | | | | - |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | 36.2% | | | 38.2% | | | 37.7% | | |
| Company's effective tax rate | | | | 38.0% | | | | 36.2% | | | | 38.2% |
Deferred tax assets consist of the following at September 30:
| | | 2006 | | 2005 | | | 2007 | | | 2006 |
| Net operating loss carryforwards | | $ | 1,117,000 | | $ | 1,239,000 | | | $ | 1,016,000 | | | $ | 1,117,000 |
| Financial basis in excess of tax basis | | | | | | | | | | | | | |
| of certain assets | | | (321,000 | ) | | (397,000 | ) | | | (403,000) | | | | (321,000) |
| Accounts Receivable | | | 211,000 | | | 27,000 | | | | 99,000 | | | | 211,000 |
| Inventory | | | 718,000 | | | 834,000 | | | | 492,000 | | | | 718,000 |
| Other, net | | | 51,000 | | | 51,000 | | | | 153,000 | | | | 51,000 |
| | | | | | | | | | | | | | |
| Deferred tax assets, net | | $ | 1,776,000 | | $ | 1,754,000 | | | $ | 1,357,000 | | | $ | 1,776,000 |
| | | | | | | | | |
| Deferred tax assets are classified as: | | | | | | | | | | |
| Current | | $ | 1,074,000 | | $ | 968,000 | | | $ | 678,000 | | | $ | 1,074,000 |
| Non-Current | | | 702,000 | | | 786,000 | | | | 679,000 | | | | 702,000 |
| | | | | | | | | | | | | | | |
| | | $ | 1,776,000 | | $ | 1,754,000 | | | $ | 1,357,000 | | | $ | 1,776,000 |
Utilization of ADDvantage’sthe Company’s net operating loss carryforward, oftotaling approximately $2,938,000$2.7 million at September 30, 2007, to reduce future taxable income is limited to an annual deductable amount of approximately $265,000.$0.3 million. The NOL carryforward expires in varying amounts from 2010 to 2014.2020.
In accordance with SFAS 109, 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.
Note 5 -6 – Stockholders’ Equity
The 1998 Incentive Stock Plan (the "Plan") provides for the award to officers, directors, key employees and consultants of stock options and restricted stock. The Plan provides that upon any issuance of additional shares of common stock by the Company, other than pursuant to the Plan, the number of shares covered by the Plan will increase to an amount equal to 10% of the then outstanding shares of common stock. Under the Plan, option prices will be set by the Board of Directors and may be greater than, equal to, or less than fair market value on the grant date.
At September 30, 2006, 1,009,6522007, 1,024,656 million shares of common stock were reserved for the exercise of stock awards under the 1998 Incentive Stock Plan. Of the shares reserved for exercise of stock awards, 759,652744,966 shares were available for future grants at September 30, 2006.grants.
A summary of the status of the Company's stock options at September 30, 2007, 2006 2005 and 20042005 and changes during the years then ended is presented below.
| | | 2006 | | 2005 | | 2004 | | 2007 | | | 2006 | | 2005 |
| | | | | Wtd. Avg. | | | | Wtd. Avg | | | | Wtd. Avg. | | | | Wtd. Avg. | | | | | | Wtd. Avg | | | | | Wtd. Avg. |
| | | Shares | | Ex. Price | | Shares | | Ex. Price | | Shares | | Ex. Price | | Shares | | Ex. Price | | | Shares | | | Ex. Price | | Shares | | | Ex. Price |
| Outstanding, beginning of year | | | 144,767 | | $ | 3.23 | | 131,125 | | $ | 2.83 | | 179,000 | | $ | 1.97 | | | 104,750 | | $ | 4.01 | | | | 144,767 | | | $ | 3.23 | | | 131,125 | | | $ | 2.83 |
| Granted | | | 35,000 | | $ | 5.78 | | 25,000 | | $ | 4.62 | | 4,000 | | $ | 4.40 | | | 30,000 | | $ | 3.45 | | | | 35,000 | | | $ | 5.78 | | | 25,000 | | | $ | 4.62 |
| Exercised | | | (72,500 | ) | $ | 3.38 | | (11,358 | ) | $ | 1.74 | | (51,375 | ) | $ | 2.03 | | | (16,900) | | $ | 1.69 | | | | (72,500) | | | $ | 3.38 | | | (11,358) | | | $ | 1.74 |
| Canceled | | | (2,517 | ) | $ | 1.50 | | | - | | | - | | | (500 | ) | $ | 1.50 | | | (-) | | | (-) | | | | (2,517) | | | $ | 1.50 | | | (-) | | | | (-) |
| | | | | | | | | | | | | | | | |
| Outstanding, end of year | | | 104,750 | | $ | 4.01 | | | 144,767 | | $ | 3.23 | | | 131,125 | | $ | 2.83 | | | 117,850 | | $ | 4.20 | | | | 104,750 | | | $ | 4.01 | | | 144,767 | | | $ | 3.23 |
| | | | | | | | | | | | | | | | |
| Exercisable, end of year | | | 94,750 | | $ | 3.83 | | | 144,767 | | $ | 3.23 | | | 108,500 | | $ | 3.08 | | | 110,350 | | $ | 3.15 | | | 94,750 | | | $ | 3.83 | | | 144,767 | | | $ | 3.23 |
The following table summarizes information about fixed stock options outstanding at September 30, 2006:2007:
| Options Exercisable |
| | Number | Remaining | |
| | Outstanding | Contractual | |
Exercise Price | At 9/30/06 | Life | |
| $5.780 | 25,000 | 9.5 years | |
| $4.620 | 25,000 | 8.5 years | |
| $4.400 | 4,000 | 7.5 years | |
| $1.900 | 10,000 | 6.5 years | |
| $1.650 | 2,000 | 6.5 years | |
| $0.810 | 2,000 | 5.5 years | |
| $1.500 | 13,750 | 4.5 years | |
| $3.125 | 13,000 | 3.5 years | |
| | 94,750 | | |
Options Exercisable |
| | Number | Remaining |
| | Outstanding | Contractual |
| Exercise Price | At 9/30/07 | Life |
| $ | 3.450 | | 30,000 | 9.5 years |
| $ | 5.780 | | 27,500 | 8.5 years |
| $ | 4.620 | | 25,000 | 7.5 years |
| $ | 4.400 | | 4,000 | 6.5 years |
| $ | 1.650 | | 2,000 | 5.5 years |
| $ | 0.810 | | 2,000 | 4.5 years |
| $ | 1.500 | | 6,850 | 3.5 years |
| $ | 3.125 | | 13,000 | 2.5 years |
| | | | 110,350 | |
Prior to fiscal year 2006, the Company accounted for stock awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees' ("APB 25") and related interpretations. Accordingly, the companyCompany historically recognized no compensation expense for grants of stock options to employees because all stock options had an exercise price equal to the market price of the underlying common stock on the date of the grant.
In the first quarter of fiscal year 2006, the Company adopted Statement of Financial Accounting Standards 123 (R)SFAS 123(R), "ShareShare Based Payment" ("SFAS 123R")Payment. SFAS 123R123(R) requires all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their grant date fair value. The Company has elected the modified-prospective transition method of adopting SFAS 123R123(R) which requires the fair value of unvested options be calculated and amortized as compensation expense over the remaining vesting period. SFAS 123R does123(R) did not require the companyCompany to restate prior periods for the value of vested 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. On October 1, 2005, all outstanding options, representing 144,767 shares, were fully vested. Therefore, SFAS 123R123(R) had no impact on the Company's statement of income on the date of its adoption.
On March 6, 2007 and 2006, the Company issued nonqualified stock options to outside directors and executives covering a total of 30,000 and 35,000 shares, to directors and executives. A portion of these options vested at the grant date and the remaining vest over 4 years.respectively. The Company estimatesestimated 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 estimatesestimated 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 it'sits common stock, consistent with SFAS 123R123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB No. 107). The Company basesbased the risk-free rate that iswas 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 term. 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 usesused 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 usesused historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.
& #160; Twelve Months Ended & #160; Twelve Months EndedSeptember 30, 2006
Average expected life 5.5
| | | 2007 | | | 2006 | |
| Average expected life | | | 5.5 | | | | 5.5 | |
| Average expected volatility factor | | | 25% | | | | 63% | |
| Average risk-free interest rate | | | 4.5% | | | | 4.7% | |
| Average expected dividends yield | | | ----- | | | | ----- | |
Average expected volatility factor 63%
Average risk-free interest rate 4.7%
Average expected dividends yield -----
The estimated fair value of the options granted on March 6, 2007 and 2006 totaled $120,510. The$48,060 and $120,510, respectively. All of the options granted in fiscal 2007 were fully vested and, as such, their calculated fair value was expensed on the grant date. During fiscal 2006, the Company recorded compensation expense of $98,110$98,111 for the options that vested during the year and the remaining $22,399 was to be recorded over the vesting term of certain options. During fiscal year 2006.2007, the Company recorded compensation expense of $12,254 related to these options. The remaining $23,401 represents thefair value of the unvested portion2006 non-vested options as of the options issued and willSeptember 30, 2007, to be amortized as compensation expenseexpensed in over thetheir remaining 43 year vesting, term.term totaled $10,145.
Under the requirements of FAS 123(R), the Company presents pro forma disclosure of net income and earnings per share as if compensation costs from all stock awards issued during periods presented were recognized based on the fair value recognition provisions of SFAS 123. Pro forma information regarding net income and earnings per share has been determined as if the Company has accounted for its employee stock options under the fair value method of that statement for 2005 and 2004.2005. The compensation expense from the options issued in 2007 and 2006 areis included in the net income as reported. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 |
| Expected life in years | 5.5 | 6.0 | 6.0 | 5.5 | 5.5 | 6.0 |
| Expected volatility | 63.0% | 55.0% | 142.0% | 25% | 63.0% | 55.0% |
| Risk-free interest rate | 4.7% | 4.3% | 2.0% | 4.5% | 4.7% | 4.3% |
| Expected dividend yeild | - | - | |
| Expected dividend yield | | ----- | - |
The following table illustrates the pro forma effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123:
60; Fiscal Year Ended September 30,
| | | 2006 | | 2005 | | 2004 | | | 2007 | | | 2006 | | | 2005 |
| | | (In thousands) | | | (In thousands) |
| Net income as reported | | $ | 4,003 | | $ | 4,974 | | $ | 4,574 | | | $ | 6,590 | | | $ | 4,003 | | | $ | 4,974 |
| Pro forma compensation expense from stock options | | | 0 | | | (65 | ) | | (10 | ) | | | 0 | | | | 0 | | | | (65) |
| Pro forma net income | | $ | 4,003 | | $ | 4,909 | | $ | 4,564 | | | $ | 6,590 | | | $ | 4,003 | | | $ | 4,909 |
| | | | | | | | | | | | | | | | | | | | | | |
| Earnings per common share as reported: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .39 | | $ | .49 | | $ | .46 | | | $ | .64 | | | $ | .39 | | | $ | .49 |
| Diluted | | $ | .39 | | $ | .49 | | $ | .41 | | | $ | .64 | | | $ | .39 | | | $ | .49 |
| Proforma earings per common share | | | | | | | | | | | |
| Proforma earrings per common share | | | | | | | | | | | | |
| Basic | | $ | .39 | | $ | .49 | | $ | .46 | | | $ | .64 | | | $ | .39 | | | $ | .49 |
| Diluted | | $ | .39 | | $ | .49 | | $ | .41 | | | $ | .64 | | | $ | .39 | | | $ | .49 |
The Series B Preferred Stock has priority over the Company’s common stock with respect to the payment of dividends and the distribution of assets. Cash dividends on the Series B Preferred Stock shall be payable quarterly when and as declared by the Board of Directors. Interest accrues on unpaid dividends at the rate of 7% per annum. No dividends may be paid on any class of stock ranking junior to the Series B Preferred Stock unless Series B Preferred Stock dividends have been paid. Liquidation preference is equal to the stated value per share. The Preferred Stock is redeemable at any time at the option of the Board of Directors at a redemption price equal to the stated value per share. Holders of the Series B Preferred Stock do not have any voting rights unless the Company fails to pay dividends for four consecutive dividend payment datesdates.
Note 6 -7 – Related Parties
Cash used in financing activities in 20062007 was primarily used to pay dividends on the Company’s Series B Preferred Stock, which is beneficially owned by David E. Chymiak, Chairman of the BoardCompany and Kenneth A. Chymiak, President and Chief Executive Officer of the Company, and for the note payments foron a term loan that was used to finance the buy-out of Series A Preferred Stock on September 30, 2004. On September 30, 2004, the Company redeemed, at the $8 million stated value, all of the Series A Preferred Stock, which waswere also beneficially owned by David E. Chymiak and Kenneth A. Chymiak. With the redemption of the Series A Preferred Stock on September 30, 2004,The dividends on the remaining Series B Preferred Stock total $840,000 annually.
During 2006, the Company leased a recently renovated facility owned by Chymiak Investments, LLC, for the purpose of consolidating its headquarters and the office and warehouse operations of Tulsat. The leased facility contains approximately 100,000 square feet of gross building area on ten acres in Broken Arrow, OK. Chymiak Investments, LLC is owned by David E. Chymiak, Chairman of the Company and Kenneth A. Chymiak President and Chief Executive Officer of the Company. During 2006, the Company began consolidating its warehouses into the newly leased facility and was able to vacate several properties that were also being leased from Chymiak Investments, LLC. During fiscal 2006, the Company made no lease payments to Chymiak Investments, LLC on the new facility. The Company continued to make lease payments on the vacated facilities until September 30, 2006, when the leases associated with the vacated properties were cancelled without penalty.
On November 20, 2006, the Company purchased the newly leased facility for approximately $3.3 million from Chymiak Investments, LLC. The amount paid for the facility represented the combined acquisition cost and modification costs paid for the facility by Chymiak Investments LLC. The Company financed the purchase with cash flows from operations as well as executing a $2.8 million Term Note, on November 20, 2006, under the Third Amendment to the Revolving Credit and Term Loan Agreement with its primary financial lender.
The Company leases several warehouse properties in Broken Arrow, OK from two companies owned by David E. Chymiak and Kenneth A. Chymiak. The total payments made on the leases to these two companies for the years ended September 30, 2007, 2006 and 2005 totaled $0.3 million, $0.5 million and $0.5 million, respectively.
The future minimum lease payments under these related party leases are as follows:
2007 $ 321,840
2008 321,840
$ 643,680
The outstanding common and preferred stock is beneficially owned as of September 30, 2007, by the Company's principal shareholders are reflected in the following table.
| Stock Ownership | | |
Name of Beneficial Owner | Percent of Common Stock Beneficially Owned | Percent of Series B Preferred Stock Beneficially Owned |
| | | |
| David E. Chymiak | 23% | 50.0% |
| Kenneth A. Chymiak | 20% | 50.0% |
Stock Ownership:
| | Name of Beneficial Owner | Percent of Common Stock Beneficially Owned | Percent of Series B Preferred Stock Beneficially Owned (A) | |
| | David E. Chymiak | 23% | 50.0% | |
| | Kenneth A. Chymiak | 20% | 50.0% | |
In Fiscal 1999, Chymiak Investments, L.L.C., which is owned by David E. Chymiak and Kenneth A. Chymiak, purchased from Tulsat Corporation on September 30, 1999 certain real estate and improvements consisting of office and warehouse space of for a price of $1,286,000. The price represented the appraised value of the property less the sales commission and other sales expenses that would have been incurred by Tulsat Corporation if it had sold the property to a third party in an arm’s-length transaction. Tulsat Corporation entered into a five-year lease commencing October 1, 1999 with Chymiak Investments, L.L.C. covering the property. This lease was renewed on October 1, 2004 and will expire on September 30, 2008.
In fiscal 2001, ADDvantage Technologies Group of Texas, Inc. borrowed $150,000 on June 26, 2001 from Chymiak Investments, L.L.C for the purchase of a building consisting of office and warehouse space at the location in Texas. The note accrued interest at the rate of 7.5% per annum and was payable over 10 years. Total interest paid in 2004 and 2003 was $4,898 and $9,869, respectively. The note was repaid in April 2004.
During 2006, the Company moved its headquarters into a recently renovated office and warehouse property owned by Chymiak Investments, LLC. The Company vacated several leased properties as a result of the move that were being leased from Chymiak Investments, LLC. The Company utilized the new office and warehouse facility rent free in 2006 but continued to make lease payments on the vacated properties. The lease agreements associated with the vacated properties were cancelled on September 30, 2006 without penalty.
The Company continues to lease various properties primarily from two companies owned by David E. Chymiak and Kenneth A. Chymiak. Future minimum lease payments under these leases are as follows:
2007321,840
2008321,840
$ 643,680
Related party rental expense for the years ended September 30, 2006, 2005 and 2004 was $465,840, $465,840 and $466,000, respectively.
Note 7 -8 – Retirement Plan.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. Pension expense under the 401(k) plan was $186,079 duringfor the yearyears ended September 30, 2007, 2006 $186,304 during the year ended September 30,and 2005 was $0.3 million, $0.2 million and $161,644 during the year ended September 30, 2004.$0.2 million, respectively.
Note 8 -9 – Earnings per Share
| | | | | | | | |
| | | Year ended | | Year ended | | Year Ended | |
| | | September 30, | | September 30, | | September 30, | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Net income | | $ | 4,842,718 | | $ | 5,814,392 | | $ | 5,813,753 | |
| Dividends on preferred stock | | | 840,000 | | | 840,000 | | | 1,240,000 | |
| Net income attributable to | | | | | | | | | | |
| common shareholders - basic | | | 4,002,718 | | | 4,974,392 | | | 4,573,753 | |
| Dividends on Series A | | | | | | | | | | |
| Preferred Stock | | | - | | | - | | | 400,000 | |
| Net income attributable to common | | | | | | | | | | |
| shareholders - diluted | | $ | 4,002,718 | | $ | 4,974,392 | | $ | 4,973,753 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Weighted average shares outstanding | | | 10,152,472 | | | 10,067,277 | | | 10,041,197 | |
| | | | | | | | | | | |
| Potentially dilutive securities | | | | | | | | | | |
| Assumed conversion of 200,000 shares of | | | | | | | | | | |
| Series A Preferred Stock | | | - | | | - | | | 2,000,000 | |
| Effect of dilutive stock options | | | 49,002 | | | 42,577 | | | 63,344 | |
| | | | | | | | | | | |
| Weighted average shares outstanding - | | | | | | | | | | |
| assuming dilution | | | 10,201,474 | | | 10,109,854 | | | 12,104,541 | |
| | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | |
| Basic | | $ | 0.39 | | $ | 0.49 | | $ | 0.46 | |
| Diluted | | $ | 0.39 | | $ | 0.49 | | $ | 0.41 | |
| | 2007 | | | 2006 | | | 2005 |
| | | | | | | | |
| Net income | $ | 7,430,339 | | | $ | 4,842,718 | | | $ | 5,814,392 |
| Dividends on preferred stock | | 840,000 | | | | 840,000 | | | | 840,000 |
Net income attributable to common shareholders | | 6,590,339 | | | | 4,002,718 | | | | 4,974,392 |
| | | | | | | | | | | |
| Weighted average shares outstanding | | 10,237,331 | | | | 10,152,472 | | | | 10,067,277 |
| | | | | | | | | | | |
| Potentially dilutive securities | | | | | | | | | | |
| Effect of dilutive stock options | | 13,504 | | | | 49,002 | | | | 42,577 |
| | | | | | | | | | | |
| Weighted average shares outstanding – assuming dilution | | 10,250,835 | | | | 10,201,474 | | | | 10,109,854 |
| | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | |
| Basic | $ | 0.64 | | | $ | 0.39 | | | $ | 0.49 |
| Diluted | $ | 0.64 | | | $ | 0.39 | | | $ | 0.49 |
Note 10 – Commitments and Contingencies
The Company has entered into construction agreements to build two buildings on existing real estate. One agreement specifies the construction of a 62,500 square foot warehouse building on the Company’s ten acre facility in Broken Arrow, Oklahoma. The contractor has estimated the cost for constructing the new facility to be approximately $1.7 million. The agreement calls for the Company to be responsible for all construction costs incurred plus a specified contractor mark-up percentage. As of September 30, 2007, the Company had incurred approximately $1.1 million of the estimated facility costs. The Company expects the construction to be complete in December 2007 and does not expect the final costs to be materially different than the contractor’s initial estimate.
The second agreement specifies the construction of an 18,000 square foot warehouse building in Sedalia, Missouri for a flat fee of $0.4 million. As of September 30, 2007, the Company had incurred approximately $0.3 million of the agreed upon construction costs. The building was completed subsequent to year end and the total payments for the construction of the facility were consistent with the initial agreement.
The Company is financing the construction of both facilities with cash flows from operations.
The Company leases and rents various office and warehouse properties in Oklahoma, California, Georgia, Indiana and Pennsylvania. The properties leased in Oklahoma consist of three separate warehouses, totaling approximately 80,000 square feet, from two companies owned by David E. Chymiak and Kenneth A. Chymiak. The terms of each lease require monthly rental payments, utilities as well as require the Company to pay for maintenance and property taxes. All of the three operating leases have similar terms and expire September 30, 2008.
The Company leases seven other warehouse and office facilities in California, Georgia, Indiana and Pennsylvania. The terms on these operating leases vary but all mature in 4 years or less and contain renewal options.
Rental payments associated with leased properties in fiscal 2007, 2006 and 2005 totaled approximately $0.7 million, $0.7 million and $0.6 million, respectively. The Company’s minimum future obligations as of September 30, 2007 under all existing operating leases are as follows:
| Fiscal Year | | Rental Payments | |
| 2008 | | $ | 528,370 | |
| 2009 | | | 155,136 | |
| 2010 | | | 159,792 | |
| 2011 | | | 26,762 | |
| | | | | |
| Total | | $ | 870,060 | |
Note 911 - Subsequent Events
On November 20th,27, 2007 the Company purchased real estate, consisting of an office and warehouse facility located on ten acres in Broken Arrow, OK, from Chymiak Investments, LLC for $3,250,000. The office and warehouse facility is currently being utilized as the Company's headquarters and the office and warehouse of our Tulsat Corporation. The office and warehouse facility contains approximately 100,000 square feet of gross building area and was recently renovated and modified to for specific use of the Company. The price paid for the property represents less than the appraised value of the property.
On November 20th, ADDvantage Technologies Group, Inc. executed the ThirdFourth Amendment to Revolving Credit and Term Loan Agreement with its primary financial lender.lender, Bank of Oklahoma. The ThirdFourth Amendment renewedrenews the $7,000,000$7.0 Million Revolving Line of Credit (“Line of Credit”) and extends the maturity date to November 30, 2010. The Fourth Amendment also extends the maturity of and increases the $8.0 Million Term Loan Commitment to $16.3 million.
The $7.0 Million Line of Credit will continue to be used to finance the Company’s working capital requirements. The lesser of $7.0 million or the total of 80% of the Company’s qualified accounts receivable, plus 50% of the Company’s qualified inventory, less the outstanding balances under of the term loans identified in the agreement, is available to the Company under the revolving credit facility. The entire outstanding balance on the revolving credit facility is due on maturity.
The outstanding balance of the $8.0 million Term Loan prior to being amended was $4.3 million. The $12.0 million of additional funds available under the amended $16.3 million Term Loan were fully advanced at closing and the proceeds were used to redeem all of the issued and outstanding shares of the Company’s Series B 7% Cumulative Preferred Stock. These shares of preferred stock were beneficially held by David A. Chymiak, Chairman of the Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company, and his spouse. The $16.3 million Term Loan is payable over a 5 year period with quarterly payments beginning the last business day of January 2008 of approximately $0.4 million plus accrued interest.
The Revolving Line of Credit and extends the maturity date on the credit facility to September 30, 2007. The Third Amendment also established a new $2,760,000 Term Note to the Agreement. The $2,760,000 Term Note was executed to finance the purchase of the Company's new headquarters building located in Broken Arrow, OK, discussed above. The new loan matures over fifteen years and payments are due monthly, beginning December 31, 2006, at $15,334 plus accrued interest. Interest accrues at a calculated rate of 1.5% plus the prevailing 30-day LIBOR rate.
The Revolving line of Credit and term Loan Agreement also includes a Term Loan Commitment of $8,000,000 established September 2004.$2.8 million. This loan was usedsecured to finance the redemptionpurchase of the outstanding shares of the Company's Series A Preferred Stock andCompany’s headquarters facility located in Broken Arrow, OK on November 20, 2006. The $2.8 million Term Loan matures over five15 years ending September 30, 2009.and payments are due monthly at $15,334 plus accrued interest.
Interest rates on the $7.0 million Revolving Line of Credit, the $16.3 million Term Loan and the $2.8 million Term Loan were also amended to accrue at a calculated rate of 1.4% plus LIBOR.
Note 10 -12 – Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended September 30, 20062007 and 2005.2006.
60; Three months ended
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31 | | | March 31 | | | June 30 | | September 30 |
Fiscal year ended 2007 | | | | | | | | | | | |
| Net sales and service income | | | $ | 14,748,517 | | | $ | 16,040,551 | | | $ | 17,563,101 | | $ | 17,293,916 |
| Gross profit | | | | 4,679,157 | | | | 5,222,011 | | | | 6,077,642 | | | 5,330,770 |
| Net income | | | | 1,638,279 | | | | 1,771,254 | | | | 2,210,411 | | | 1,810,395 |
| Basic earnings per common share | | | | .14 | | | | .15 | | | | .20 | | | .16 |
| Diluted earnings per common share | | | | .14 | | | | .15 | | | | .19 | | | .16 |
| | | December 31 | | March 31 | | June 30 | | September 30 | | | | | | | | | | | | | | | |
Fiscal year ended 2006 | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales and service income | | | 14,753,611 | | | 12,419,157 | | | 13,199,459 | | | 12,168,982 | | | $ | 14,753,611 | | | $ | 12,419,157 | | | $ | 13,199,459 | | $ | 12,168,982 |
| Gross profit | | | 5,070,522 | | | 4,095,811 | | | 4,195,569 | | | 3,379,446 | | | | 4,922,541 | | | | 3,947,800 | | | | 4,047,558 | | | 3,302,032 |
| Net income | | | 1,741,594 | | | 1,076,798 | | | 1,342,699 | | | 681,627 | | | | 1,741,594 | | | | 1,076,798 | | | | 1,342,699 | | | 681,627 |
| Basic earnings per common share | | | .15 | | | .09 | | | .11 | | | .05 | | | | .15 | | | | .09 | | | | .11 | | | .05 |
| Diluted earnings per common share | | | .15 | | | .09 | | | .11 | | | .05 | | | | .15 | | | | .09 | | | | .11 | | | .05 |
| | | | | | | | | | | | | | | |
Fiscal year ended 2005 | | | | | | | | | | | | | | |
| Net sales and service income | | $ | 12,261,125 | | $ | 9,894,886 | | $ | 12,093,891 | | $ | 16,023,293 | | |
| Gross profit | | | 4,056,414 | | | 3,519,716 | | | 4,258,587 | | | 5,037,311 | | |
| Net income | | | 1,514,687 | | | 1,088,238 | | | 1,446,426 | | | 1,765,041 | | |
| Basic earnings per common share | | | 0.13 | | | 0.09 | | | 0.12 | | | 0.15 | | |
| Diluted earnings per common share | | | 0.13 | | | 0.09 | | | 0.12 | | | 0.15 | | |
On January 17, 2006 we received notification from Tullius Taylor Sartain & Sartain ("Tullius"), our independent registered public accounting firm, that they would resign upon completion of Tullius' review of our Quarterly Report on Form 10-Q for the first quarterly period ended December 31, 2005. Tullius’ resignation became effective when we filed our Form 10-Q on February 13, 2006.
In connection with the auditsaudit of our financial statements for each of the two fiscal yearsyear ended September 30, 2005, and in the subsequent interim period preceding the effective resignation date, there were no disagreements with Tullius on any matters of accounting principles or practices, financial statement disclosures or auditing scope and procedures which disagreements, if not resolved to the satisfaction of Tullius, would have caused Tullius to make reference to the matter in their reports on the Company’s consolidated financial statements for such periods.period.
In addition, during the Company's two fiscal yearsyear ended September 30, 2005, and for the period from October 1, 2005, through February 13, 2006, there were no reportable events as defined by paragraph (a) (1) (v) of Item 304 of Regulation S-K promulgated by the Securities and Exchange Commission.
On January 26, 2006, the Audit Committee of the Board of Directors engaged Hogan & Slovacek to serve as our independent registered public accounting firm for the current fiscal year.2006 and continued their engagement through fiscal 2007.
Evaluation of Disclosure Controls and Procedures.
Our management carried out an evaluation pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of ourWe maintain disclosure controls and procedures (as defined in RulesExchange Act Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon) that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effectivedesigned to ensure that information required to be disclosed by us in the reports that we file or furnishsubmit to the Securities and Exchange Commission under the Securities Exchange Act areof 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commissionby the Commission’s rules and forms.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, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Controls
During the period covered by this report on Form 10-K, 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.
Not applicable for this filing.
None.
PART III
The information required by this item concerning our officers, directors, compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, and our Code of Business Conduct and Ethics is incorporated by reference to the information in the sections entitled “Identity“Identification of Officers,” “Election of Directors,” “Compliance with Section“Section 16(a) of the Exchange Act,Beneficial Ownership Reporting Compliance,” and “Code of Ethics,”Ethics” and "Audit Committee," respectively, of our Proxy Statement for the 20072008 Annual Meeting of Shareholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2006.2007.
The information required by this item concerning executive compensation is incorporated by reference to the information set forth in the section entitled “Compensation of Directors and Executive Officers” of our Proxy Statement.
The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of our Proxy Statement.
The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section entitled “Certain Relationships and Related Transactions” of our Proxy Statement.
The information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth in the section entitled "Appointment Of Independent Auditors""Principal Accounting Fees and Services" of our Proxy Statement.
PART IV
(a)1.| (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 2005. |
| |
| Report of Independent Registered Public Accounting Firm for 2006 and 2007. |
| |
| Consolidated Balance Sheets as of September 30, 2007 and 2006. |
| |
| Consolidated Statements of Income for the years ended September 30, 2007, 2006 and 2005. |
| |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2007, 2006 and 2005. |
| |
| Consolidated Statements of Cash Flows for the years ended September 30, 2007, 2006 and 2005. |
| |
| Notes to Consolidated Financial Statements. |
| |
| 2. | The following financial statement Schedule II – Valuation and Qualifying Accounts for the years ended September 30, 2007, 2006 and 2005 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. |
Report of Independent Registered Public Accounting Firm for 2005Schedule II – Valuation and 2004.Qualifying Accounts
Report of Independent Registered Public Accounting Firm for 2006.| | | Balance at | | | Charged to | | | | | | | | | Balance at |
| | | Beginning | | | Costs and | | | | | | | | | End |
| | | of Period | | | Expenses | | | Write offs | | | Recoveries | | | of Period |
Period Ended September 30, 2007 | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 554,000 | | | $ | 185,337 | | | | (478,337) | | | | - | | | $ | 261,000 |
| Allowance for Excess and Obsolete Inventory | | | 1,178,000 | | | | 745,836 | | | | (1,226,836) | | | | - | | | | 697,000 |
| Valuation Allowance of Deferred Tax Asset | | | - | | | | - | | | | - | | | | - | | | | - |
| | | | | | | | | | | | | | | | | | | | |
Period Ended September 30, 2006 | | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 92,000 | | | $ | 445,541 | | | | - | | | $ | 16,459 | | | $ | 554,000 |
| Allowance for Excess and Obsolete Inventory | | | 1,575,395 | | | | 439,625 | | | | (837,020) | | | | - | | | | 1,178,000 |
| Valuation Allowance of Deferred Tax Asset | | | - | | | | - | | | | - | | | | - | | | | - |
| | | | | | | | | | | | | | | | | | | | |
Period Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 68,063 | | | $ | 40,080 | | | | (16,143) | | | | - | | | $ | 92,000 |
| Allowance for Excess and Obsolete Inventory | | | 1,093,000 | | | | 482,395 | | | | - | | | | - | | | | 1,575,395 |
| Valuation Allowance of Deferred Tax Asset | | | - | | | | - | | | | - | | | | - | | | | - |
Consolidated Balance Sheets as of September 30, 2006 and 2005.
Consolidated Statements of Income for the years ended September 30, 2006, 2005 and 2004.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2006, 2005 and 2004.
Consolidated Statements of Cash Flows for the years ended September 30, 2006,2005 and 2004.
Notes to Consolidated Financial Statements.
2.The following financial statement Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2006, 2005 and 2004 is filed as part of this report. All other financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the financial statements or notes thereto contained in Part II, Item 8 of this current report.
Schedule II - Valuation and Qualifying Accounts
| | | Balance at | | Charged to | | | | | | Balance at | |
| | | Beginning | | Costs and | | | | | | End | |
| | | of Period | | Expenses | | Write-offs | | Recoveries | | of Period | |
Period Ended September 30, 2006 | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 92,000 | | $ | 445,541 | | | - | | $ | 16,459 | | $ | 554,000 | |
| Allowance for Excess and Obsolete Inventory | | | 1,575,395 | | | 439,625 | | | (837,020 | ) | | - | | | 1,178,000 | |
| Valuation Allowance of Deferred Tax Asset | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | |
Period Ended September 30, 2005 | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 68,063 | | $ | 40,080 | | | (16,143 | ) | | - | | $ | 92,000 | |
| Allowance for Excess and Obsolete Inventory | | | 1,093,000 | | | 482,395 | | | - | | | - | | | 1,575,395 | |
| Valuation Allowance of Deferred Tax Asset | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | |
Period Ended September 30, 2004 | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | $ | 78,359 | | $ | - | | | (19,968 | ) | $ | 9,672 | | $ | 68,063 | |
| Allowance for Excess and Obsolete Inventory | | | 447,100 | | | 645,900 | | | - | | | - | | | 1,093,000 | |
| Valuation Allowance of Deferred Tax Asset | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | |
3.The following documents are included as exhibits to this Form 10-K.
ExhibitDescription
| 3.1 | | Certificate of Incorporation of the Company and amendments thereto incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission by the Company on January 10, 2003. |
| | |
| 3.2 | | Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on January 10, 2003. |
| | |
| 4.1 | | Certificate of Designation, Preferences, Rightsrights and Limitations of ADDvantage Media Group, Inc. Series A 5% Cumulative Convertible Preferred Stock and Series B 7% Cumulative Preferred Stock as filed with the Oklahoma Secretary of State on September 30, 1999 incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on October 14, 1999. |
| | 10.1 | | Lease Agreement dated September 15, 1999 by and between Chymiak Investments, L.L.C. and Tulsat Corporation (formerly named DRK Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on December 30, 1999. |
| 10.2 | | Schedule of documents substantially similar to Exhibit 10.1 incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on December 30, 1999. |
10.3 Form of promissory notes issued by Tulsat to David Chymiak and to KenChymiak Revocable Trust and Susan C. Chymiak Revocable
Trust dated as of February 7, 2000 incorporated by reference to Exhibit 10.7 to the Annuak Report to Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
| 10.4 | | Revolving Credit and Term Loan Agreement dated September 30, 2004 ("(“Revolving Credit and Term Loan Agreement"Agreement”), incorporated by reference to Exhibit 10.5 to the Company'sCompany’s Form 10-K filed December 22, 2004. |
| | 10.5 |
| 10.2 | Third Amendment to Revolving Credit and Term Loan Agreement dated November 20, 2006, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K filed December 27, 2006. |
| | 10.6 |
| 10.3 | Fourth Amendment to Revolving Credit and Term Loan Agreement dated November 27, 2007. |
| |
| 10.4 | The ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated by reference to Appendix A to the Company'sCompany’s Proxy Statement relating to the Company'sCompany’s 1998 Annual Meeting, filed April 28, 1998. |
| | 10.7 |
| 10.5 | First Amendment to ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed November 20, 2003. |
Company's Registration Statement on Form S-8 filed November 20, 2003.
10.8 Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage Technologies, Group, Inc. dated November 20,
2006, incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission
by the Company on November 20, 2006.
10.9 Senior Management Incentive Compensation Plan and employment agreement between the Company and Dan O'Keefe, incorporated by
reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006.
14.1 Amended Code of Business Conduct and Ethics for directors, officers and employees of the Company, incorporated by reference to the
Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006.
16.1 Letter regarding change in certifying accountant, incorporated by reference to the Current Report on Form 8-K filed with the by reference
to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on February 13, 2006.
21.1 Listing of the Company's subsidiaries.
23.1 Consent of Hogan & Slovacek.
23.2 Consent of Tullius Taylor Sartain & Sartain LLP
| | 31.1 |
| 10.6 | Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage Technologies, Group, Inc. dated November 20, 2006, incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on November 20, 2006. |
| |
| 10.7 | Senior Management Incentive Compensation Plan, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 9, 2007. |
| |
| 14.1 | Amended Code of Business Conduct and Ethics for directors, officers and employees of the Company, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006. |
| |
| 16.1 | Letter regarding change in certifying accountant, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on February 13, 2006. |
| |
| 21.1 | Listing of the Company’s subsidiaries. |
| |
| 23.1 | Consent of Hogan & Slovacek. |
| |
| 23.2 | Consent of Tullius Taylor Sartain & Sartain LLP. |
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| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| 31.2 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADDvantage Technologies Group, Inc.
Date: December 27, 200628, 2007 By: /s/ Kenneth A. Chymiak
Kenneth A. Chymiak, President
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 27, 2006 /s/ David E. Chymiak David E. Chymiak, Chairman of the Board of Directors
Date: December 27, 2006 /s/ Kenneth A. Chymiak
Kenneth A. Chymiak, President, Director (Principal Executive| Date: December 28, 2007 | /s/ David E. Chymiak |
| David E. Chymiak, Chairman of the Board of Directors |
| |
| Date: December 28, 2007 | /s/ Kenneth A. Chymiak |
| Kenneth A. Chymiak, President (Principal Exectuive Officer) and Director |
| |
| Date: December 28, 2007 | /s/ Daniel E. O'Keefe |
| Daniel E. O’Keefe, Chief Financial Officer (Principal Financial Officer) and Director |
| |
| Date: December 28, 2007 | /s/ Henry F. McCabe |
| Henry F. McCabe, Director |
| |
| Date: December 28, 2007 | /s/ James C. McGill |
| James C. McGill, Director |
| |
| Date: December 28, 2007 | /s/ Paul F. Largess |
| Paul F. Largess, Director |
| |
| Date: December 28, 2007 | /s/ Stephen J Tyde |
| Stephen J. Tyde, Director |
| |
| Date: December 28, 2007 | /s/ Thomas J. Franz |
| Thomas J. Franz, Director |
Date: December 27, 2006 /s/ Daniel E. O'Keefe
Daniel E. O'Keefe, Chief Financial Officer (Principal Financial Officer)
Date: December 27, 2006 /s/ Stephen J. Tyde
Stephen J. Tyde, Director
Date: December 27, 2006 /s/ Freddie H. Gibson
Freddie H. Gibson, Director
Date: December 27, 2006 /s/ Henry F. McCabe
Henry F. McCabe, Director
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K.
ExhibitDescription
| 3.1 | | Certificate of Incorporation of the Company and amendments thereto incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission by the Company on January 10, 2003. |
| | |
| 3.2 | | Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on January 10, 2003. |
| | |
| 4.1 | | Certificate of Designation, Preferences, Rightsrights and Limitations of ADDvantage Media Group, Inc. Series A 5% Cumulative Convertible Preferred Stock and Series B 7% Cumulative Preferred Stock as filed with the Oklahoma Secretary of State on September 30, 1999 incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on October 14, 1999. |
| | 10.1 | | Lease Agreement dated September 15, 1999 by and between Chymiak Investments, L.L.C. and Tulsat Corporation (formerly named DRK Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on December 30, 1999. |
| 10.2 | | Schedule of documents substantially similar to Exhibit 10.1 incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission by the Company on December 30, 1999. |
10.3 Form of promissory notes issued by Tulsat to David Chymiak and to KenChymiak Revocable Trust and Susan C. Chymiak Revocable
Trust dated as of February 7, 2000 incorporated by reference to Exhibit 10.7 to the Annuak Report to Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
| 10.4 | | Revolving Credit and Term Loan Agreement dated September 30, 2004 ("(“Revolving Credit and Term Loan Agreement"Agreement”), incorporated by reference to Exhibit 10.5 to the Company'sCompany’s Form 10-K filed December 22, 2004. |
| | 10.5 |
| 10.2 | Third Amendment to Revolving Credit and Term Loan Agreement dated November 20, 2006, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K filed December 27, 2006. |
| | 10.6 |
| 10.3 | Fourth Amendment to Revolving Credit and Term Loan Agreement dated November 27, 2007. |
| |
| 10.4 | The ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated by reference to Appendix A to the Company'sCompany’s Proxy Statement relating to the Company'sCompany’s 1998 Annual Meeting, filed April 28, 1998. |
| | 10.7 |
| 10.5 | First Amendment to ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed November 20, 2003. |
Company's Registration Statement on Form S-8 filed November 20, 2003.
10.8 Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage Technologies, Group, Inc. dated November 20,
2006, incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission
by the Company on November 20, 2006.
10.9 Senior Management Incentive Compensation Plan and employment agreement between the Company and Dan O'Keefe, incorporated by
reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006.
14.1 Amended Code of Business Conduct and Ethics for directors, officers and employees of the Company, incorporated by reference to the
Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006.
16.1 Letter regarding change in certifying accountant, incorporated by reference to the Current Report on Form 8-K filed with the Securities
Securities and Exchange Commission by the Company on February 13, 2006.
21.1 Listing of the Company’s subsidiaries.
23.1 Consent of Hogan & Slovacek.
23.2 Consent of Tullius Taylor Sartain & Sartain LLP
| | 31.1 |
| 10.6 | Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage Technologies, Group, Inc. dated November 20, 2006, incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on November 20, 2006. |
| |
| 10.7 | Senior Management Incentive Compensation Plan, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 9, 2007. |
| |
| 14.1 | Amended Code of Business Conduct and Ethics for directors, officers and employees of the Company, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 6, 2006. |
| |
| 16.1 | Letter regarding change in certifying accountant, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on February 13, 2006. |
| |
| 21.1 | Listing of the Company’s subsidiaries. |
| |
| 23.1 | Consent of Hogan & Slovacek. |
| |
| 23.2 | Consent of Tullius Taylor Sartain & Sartain LLP. |
| |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| 31.2 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002. |
