UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30,
2005, OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM----------------FROM------------------- TO ----------------
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1351610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 E. Iola
Broken Arrow, Oklahoma 74012
(Address of principal executive office) (Zip Code)
(918) 251-9121
(Registrant's(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for much shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ----- No X
Shares outstanding of the issuer's $.01 par value common stock as of April 29,July 27,
2005 were 10,070,172.
-1-
Page
Part I - Financial Information ----
Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31,June 30, 2005 (Unaudited) and September 30, 2004 3
Consolidated Condensed Statements of Income and Comprehensive
Income (Unaudited)
Three Months and SixNine Months Ended March 31,June 30, 2005 and 2004 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
SixNine Months Ended March 31,June 30, 2005 and 2004 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management'sManagements Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1514
Item 4. Controls and Procedures 15
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 15
Signatures 16
Signatures 17
- 2 -
-2-
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31,(UNAUDITED)
June 30, September 30,
2005 2004
(Unaudited) (Audited)
----------- ----------------- -------------
Assets
Current assets:
Cash $ 577,551601,756 $ 1,316,239
Accounts receivable, net of allowance of
$52,871$72,398 and $68,063 3,857,4405,311,040 4,787,749
Income taxes receivable 291,496 -
Inventories, net of allowance for excess and
obsolete inventory of $1,093,000 23,281,96022,750,879 20,978,714
Deferred income taxes 756,000782,000 651,000
---------- --------------------- -----------
Total current assets 28,764,44729,445,675 27,733,702
Property and equipment, at cost:
Machinery and equipment 2,190,1262,226,248 2,138,798
Land and buildings 1,302,5271,356,459 1,302,527
Leasehold improvements 525,006 521,972
521,972
---------- ----------
4,014,625----------- -----------
4,107,713 3,963,297
Less accumulated depreciation and amortization (1,670,489)(1,730,014) (1,561,698)
---------- --------------------- -----------
Net property and equipment 2,344,1362,377,699 2,401,599
Other assets:
Deferred income taxes 933,000917,000 1,042,000
Goodwill 1,150,060 1,150,060
Other assets 227,103128,333 31,222
----------- -----------
Total other assets 2,310,1632,195,393 2,223,282
----------- -----------
Total assets $ 33,418,746 $ 32,358,583$34,018,767 $32,358,583
=========== ===========
See notes to unaudited consolidated condensed financial statements.
- 3 -
-3-
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31,(UNAUDITED)
June 30, September 30,
2005 2004
(Unaudited) (Audited)
----------- --------------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,977,3462,258,511 $ 1,758,695
Accrued expenses 695,893823,758 1,011,911
Accrued income taxes -238,479 120,748
Bank revolving line of credit 1,835,7501,897,064 3,225,183
Notes payable-currentpayable - current portion 1,237,9541,238,510 1,237,047
Dividends payable 210,000 210,000
----------- -----------
Total current liabilities 6,956,9436,666,322 7,563,584
Notes payable 6,528,0356,218,185 7,147,334
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$1.00 par value, at stated value:
Series B, 7% cumulative; 300,000 shares issued and
outstanding with a stated value of
$40 per share 12,000,000 12,000,000
Common stock, $.01 par value; 30,000,000 shares authorized;
10,091,272 and 10,081,789 shares issued,
respectively 100,913 100,818
Paid-in capital (7,268,724) (7,285,564)
Retained earnings 15,069,50016,305,926 12,886,575
Accumulated other comprehensive income:
Unrealized gain on interest rate swap 86,24350,309 -
---------------------- -----------
19,987,93221,188,424 17,701,829
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
---------------------- -----------
Total stockholders' equity 19,933,76821,134,260 17,647,665
---------------------- -----------
Total liabilities and stockholders' equity $ 33,418,746 $ 32,358,583
=========== ===========$34,018,767 $32,358,583
See notes to unaudited consolidated condensed financial statements.
- 4 -
-4-
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31, SixJune 30, Nine Months Ended March 31,June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales income $ 8,681,531 $10,473,636 $19,798,815 $20,638,015$11,129,027 $11,459,409 $30,927,842 $32,097,424
Net service income 1,213,355 1,180,405 2,357,196 2,308,526964,864 1,223,040 3,322,060 3,531,566
----------- ----------- ----------- -----------
Total income 9,894,886 11,654,041 22,156,011 22,946,54112,093,891 12,682,449 34,249,902 35,628,990
Costs of sales 5,540,336 7,047,283 12,913,713 13,766,6977,246,552 7,513,326 20,160,265 21,280,023
Cost of service 834,834 773,174 1,666,168 1,475,532588,752 839,495 2,254,920 2,315,027
----------- ----------- ----------- -----------
Gross profit 3,519,716 3,833,584 7,576,130 7,704,3124,258,587 4,329,628 11,834,717 12,033,940
Operating, selling, general and
administrative expenses 1,587,332 1,347,243 3,097,874 2,919,0591,636,968 1,652,403 4,734,842 4,571,462
Depreciation and amortization
58,109 65,586 115,140 130,57559,526 70,589 174,666 201,164
----------- ----------- ----------- -----------
Income from operations 1,874,275 2,420,755 4,363,116 4,654,6782,562,093 2,606,636 6,925,209 7,261,314
Interest expense 147,037 41,129 293,191 96,882145,667 37,404 438,858 134,286
----------- ----------- ----------- -----------
Income before income
taxes 1,727,238 2,379,626 4,069,925 4,557,7962,416,426 2,569,232 6,486,351 7,127,028
Provision for income
taxes 639,000 856,000 1,467,000 1,641,000970,000 854,000 2,437,000 2,495,000
----------- ----------- ----------- -----------
Net income 1,088,238 1,523,626 2,602,925 2,916,7961,446,426 1,715,232 4,049,351 4,632,028
----------- ----------- ----------- -----------
Other comprehensive income:
Unrealized (loss) gain on interest
rate swap (net of $46,584($22,025) and
$52,859$30,834 in taxes) 76,004(35,934) - 86,24350,309 -
----------- ----------- ----------- -----------
Comprehensive income 1,164,242 1,523,626 2,689,168 2,916,796Income $1,410,492 $1,715,232 $4,099,660 $4,632,028
=========== =========== =========== ===========
Net income 1,088,238 1,523,626 2,602,925 2,916,796$1,446,426 $1,715,232 $4,049,351 $4,632,028
Preferred dividends 210,000 310,000 420,000 620,000630,000 930,000
----------- ----------- ----------- -----------
Net income attributable
to common stockholders $ 878,238 $ 1,213,626 $ 2,182,925 $ 2,296,796$1,236,426 $1,405,232 $3,419,351 $3,702,028
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.090.12 $ 0.14 $ 0.34 $ 0.37
Diluted $ 0.12 $ 0.220.12 $ 0.23
Diluted0.34 $ 0.09 $ 0.11 $ 0.22 $ 0.210.33
Shares used in per share calculation
Basic 10,065,128 10,035,613 10,063,441 10,023,46310,070,172 10,057,172 10,065,685 10,034,700
Diluted 10,117,578 12,107,469 10,117,972 12,095,45110,097,155 12,130,854 10,109,744 12,114,433
See notes to unaudited consolidated condensed financial statements.
- 5 -
-5-
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SixNine Months Ended March 31,June 30,
2005 2004
---------- ----------- ------------
Cash Flows from Operating Activities
Net income $2,602,925 $ 2,916,7964,049,351 $ 4,632,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 115,140 130,575174,666 201,164
Loss on disposal of property and equipment - 24,412
Deferred income tax benefit (48,859) (95,000)(36,834) (234,000)
Change in:
Receivables 638,813 (1,725,635)(523,291) (2,263,651)
Inventories (2,303,246) 1,259,829(1,772,165) 830,285
Other assets (56,779) 9,678(15,968) 14,352
Accounts payable 1,218,651 885,278499,816 469,275
Accrued liabilities (436,766) 12,036
---------- ----------(70,422) 190,124
------------ ------------
Net cash provided by operating activities 1,729,879 3,393,557
---------- ----------2,305,153 3,863,989
------------ ------------
Cash Flows from Investing Activities
Additions to property and equipment (57,677) (24,700)
Disposals of property and equipment - 24,412
---------- ----------(150,766) (70,147)
------------ ------------
Net cash used in investing activities
(57,677) (288)
---------- ----------(150,766) (70,147)
Cash Flows from Financing Activities
Net change under line of credit (1,389,433) (1,521,224)(1,328,119) (1,684,903)
Payments on stockholder loansnotes - (168,877)(648,644)
Payments on notes payable (618,392) (100,687)(927,686) (109,494)
Proceeds from stock options exercised 16,935 65,30997,597
Payments of preferred dividends (420,000) (620,000)
---------- ----------(630,000) (930,000)
------------ ------------
Net cash used in financing activities (2,410,890) (2,345,479)
---------- ----------(2,868,870) (3,275,444)
------------ ------------
Net (decrease) increase in cash (738,688) 1,047,790(714,483) 518,398
Cash, beginning of period 1,316,239 496,283
---------- ---------------------- ------------
Cash, end of period $ 577,551 $1,544,073
========== ==========601,756 $ 1,014,681
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 293,191438,858 $ 104,924142,328
Cash paid for income taxes $1,930,972 $1,723,808$ 2,358,972 $ 2,682,170
See notes to unaudited consolidated condensed financial statements.
- 6 -
-6-
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, the information furnished reflects all adjustments, consisting only of
normal recurring items which are, in the opinion of management, necessary in
order to make the financial statements not misleading. The consolidated
financial statements as of September 30, 2004 have been audited by an
independent registered public accounting firm. It is suggest-
edsuggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2004.
Note 2 - Description of Business
ADDvantage Technologies Group, Inc., through its subsidiaries TULSAT
Corporation, ADDvantage Technologies Group of Nebraska, (dba "Lee Enterprise"),
NCS Industries, Inc. ("NCS"), ADDvantage Technologies Group of Missouri, (dba
"Comtech Services"), ADDvantage Technologies Group of Texas, (dba "Tulsat -
Texas"), and Tulsat - Atlanta, LLC ("Tulsat - Atlanta") (collectively, the
"Company"), sells new, surplus, and refurbished cable television equipment
throughout North America in addition to being a repair center for various cable
companies. The Company operates in one business segment.
Note 3 - Earnings Per Share
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic net earnings per share is computed by dividing net earnings available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net earnings per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be reacquired under the treasury
stock method from the exercise of stock options.
- 7 -
-7-
Three Months Ended March 31, SixJune 30, Nine Months Ended March 31,June 30,
2005 2004 2005 2004
------------ ----------- ------------ ----------- ----------- ----------
Basic EPS Computation:
Net income attributable to
common stockholders $ 878,2381,236,426 $ 1,213,6261,405,232 $ 2,182,9253,419,351 $ 2,296,7963,702,028
Weighted average outstanding
common shares 10,065,128 10,035,613 10,063,441 10,023,46310,070,172 10,057,172 10,065,685 10,034,700
Earnings per Share-Basic $ 0.09 $Share - Basic$ 0.12 $ 0.220.14 $ 0.23
==========0.34 $ 0.37
=========== =========== =========== ===========
Diluted EPS Computation:
Net income attributable to
common stockholders $ 878,2381,236,426 $ 1,213,6261,405,232 $ 2,182,9253,419,351 $ 2,296,7963,702,028
Add: Dividends on Series A
convertible preferred stock - 100,000 - 200,000300,000
----------- ----------- ----------- -----------
Net income attributable to common
stockholders - Diluted $ 878,2381,236,426 $ 1,313,6261,505,232 $ 2,182,9253,419,351 $ 2,496,7964,002,028
Weighted average outstanding
common shares 10,065,128 10,035,613 10,063,441 10,023,46310,070,172 10,057,172 10,065,685 10,034,700
Potentially dilutive securities
- -------------------------------
Assumed conversion of 200,000 shares
of Series A convertible
preferred stock - 2,000,000 - 2,000,000
Effect of dilutive stock
options 52,450 71,856 54,531 71,98826,983 73,682 44,059 79,733
----------- ---------- --------------------- -----------
Weighted average shares
outstanding
- - assuming dilution 10,117,578 12,107,469 10,117,972 12,095,45110,097,155 12,130,854 10,109,744 12,114,433
Earnings per Share
- DilutedShare-Diluted$ 0.12 $ 0.090.12 $ 0.110.34 $ 0.22 $ 0.21
========== ========== ========== ==========0.33
=========== =========== =========== ===========
Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At March 31,June 30, 2005, a $1,835,750$1,897,064 balance is outstanding under a $7 million line
of credit due September 30, 2005, with interest payable monthly based on the
prevailing 30-day LIBOR rate plus 2.0% (4.9%(5.3% at March 31,June 30, 2005). Borrowings
under the line of credit are limited to the lesser of $7 million or the sum of
80% of qualified accounts receivable and 50% of qualified inventory for working
capital purposes. Among other financial covenants, the line of credit
agreement provides that the Company's net worth must be greater than $15
million plus 50% of annual net income (with no deduction for net losses),
determined quarterly. The line of credit is collateralized by inventory,
accounts receivable, equipment and fixtures, and general intangibles.
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
- 8 -
-8-
of credit. The resulting overdraft balance, consisting of outstanding checks,
was $540,679$398,949 at March 31,June 30, 2005, and is included in the bank revolving line of
credit.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding shares of the Series A Convertible
Preferred Stock at September 30, 2004. The outstanding balance on this note
was $7.4$7.1 million at March 31,June 30, 2005. The note is due on September 30, 2009, with
monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the note on September 30, 2004,
which fixed the interest rate at 6.13%. Upon entering into this interest rate
swap, the Company designated this derivative as a cash flow hedge by
documenting the company'sCompany's risk management objective and strategy for
undertaking the hedge along with methods for assessing the swap's
effectiveness. At March
31,June 30, 2005, the fair market value of the interest rate
swap approximated its carrying value of $139,102.$81,143. Notes payable secured by real
estate of $365,989$356,695 are due in monthly payments through 2013 with interest at
5.5% through 2008, converting thereafter to prime minus .25%.
- 9 -
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Value Added Reseller ("VAR") for selected Scientific-Atlanta and
Motorola broadband new products. We also specialize in the sale of
refurbished, previously-owned cable television ("CATV") equipment to CATV
operators and other broadband communication companies. Within the last three
years, we have become distributors for several different manufacturers of
equipment and other related products. It is through our development of these
relationships that we have focused our initiative to market our products and
services to the larger cable multiple system operators ("MSOs"). We continue
to believe that as cable companies look at expanding their services in key
markets and to remain competitive during this period of economic recovery,
there will be an emphasis on minimizing their costs, thus creating a higher
demand for our repair services and surplus-new equipment.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31,June 30, 2005
and March 31,June 30, 2004
Net Sales. Net sales decreased $1.76 million,$589,000, or 15.1%4.6%, to $9.9$12.1 million in the
secondthird quarter of fiscal 2005, from $11.7$12.7 million for the same period in fiscal
2004. Sales of new equipment increased 1.1% to $9.0 million for the current
period, compared with $8.9 million for the same period of fiscal 2004. Sales
of remanufactured equipment decreased by 17.0% to $2.1 million for the current
period, compared with $2.5 million in the same period last year. This quarter
continues the trend of a changing product mix whereby remanufactured equipment
sales are progressively being replaced with sales of new equipment. Repair
service revenues decreased 21.1% to $965,000 for the current quarter, compared
with $1.2 million for the same period last year. The decrease in repair
service revenues is reflective of many MSOs electing to upgrade equipment with
newer technology instead of repairing existing equipment in response to
improving economic conditions and increased competition with other forms of
broadband and transmission providers.
Costs of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
decreased to $7.2 million for the third quarter of fiscal 2005 from $7.5
million for the same period of fiscal 2004. The decrease was primarily due to
the decrease in sales for the period. Costs of sales for new and refurbished
equipment decreased to 65.1% of net sales income for 2005 from 65.6% of net
sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs of sales for repair services
decreased to 61.0% of net service income for 2005 from 68.6% of net service
income for 2004.
Gross Profit. Gross profit decreased $71,000, or 1.6%, to $4.26 million for
the third quarter of fiscal 2005 from $4.33 million for the same period in
fiscal 2004. The gross margin percentage was 35.2% for the current quarter,
compared to 34.1% for the same quarter last year. The percentage increase was
primarily due to the allowance for obsolete inventory recorded during 2004
discussed above.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
-10-
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
decreased by approximately $15,000 in the third quarter of fiscal 2005, to
$1.64 million from $1.65 million for the same period in 2004, a decrease of
0.9%.
Income from Operations. Income from operations decreased approximately
$45,000, or 1.7%, to $2.56 million for the third quarter of fiscal 2005 from
$2.61 million for the same period last year. This decrease was primarily due
to the decrease in sales of refurbished equipment and repairs offset by the
decrease in costs of sales in 2005.
Interest Expense. Interest expense for the three months ended June 30, 2005
was $145,667 compared to $37,404 for the same period last year. The increase
was primarily attributable to the increase in notes payable at September 30,
2004. The weighted average interest rate paid on our outstanding borrowings
increased to 6.1% for 2005 from 2.75% for 2004.
Income Taxes. The provision for income taxes for fiscal 2005 increased to
$970,000 from $854,000 in fiscal 2004. This increase was primarily due to an
increase in the company's effective tax rate.
Comparison of Results of Operations for the Nine Months Ended June 30, 2005 and
- -------------------------------------------------------------------------------
June 30, 2004
- -------------
Net Sales. Net sales decreased $1.4 million, or 3.9%, to $34.2 million for the
nine months ended June 30, 2005, from $35.6 million for the same period in
fiscal 2004, primarily due to weather andin the timing of orders.second quarter. Heavier than
normal snowfall in the U.S. Northeast and excessive rainfall in the western
parts of the country contributed to a decline or postponement of equipment orders.
Also, several pending orders were awaitingduring the
outcomesecond quarter of the customer's
obtainment of financing arrangements.2005. New equipment sales were down 20.8%1.2% to $6.7$24.6 million for
the current period, compared with $8.4$24.9 million for the same period of fiscal
2004. Sales of remanufactured equipment decreased by 2.4%12.0% to $2.0$6.3 million for
the current period, compared with $2.1$7.2 million in the same period last year.
Repair service revenues were up 2.8%down 5.9% to $1.21$3.3 million for the current quarter,period,
compared with $1.18$3.5 million for the same period last year.
Costs of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
decreased to $5.5$22.4 million for the second quarter of fiscalnine months ended June 30, 2005 from $7.0$23.6
million for the same period of fiscal 2004. The decrease was primarily due to
the decrease in sales for the period. Costs of sales for new and refurbished
equipment decreased to 63.8%65.2% of net sales income for 2005 from 67.3%66.3% of net
sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs of sales for repair services
increased to 68.8%67.9% of net service income for 2005 from 65.5%65.6% of net service
income for 2004. This increase was due primarily to more high-end hybrid and
fiber optic equipment being repaired, which involves a higher relative cost of
material.
Gross Profit. Gross profit decreased $314,000,$199,000, or 8.2%1.7%, to $3.5$11.8 million for
the second quarter of fiscalnine months ended June 30, 2005 from $3.8$12.0 million for the same period in
fiscal 2004. The gross margin percentage was 35.6%34.6% for the current quarter,period,
compared to 32.9%33.8% for the same quarterperiod last year. The percentage increase was
primarily due to a decrease in sales of new and surplus equipment, which are accompanied
by margins lower than that of re-manufactured equipment and repairs, and the allowance for obsolete inventory recorded during 2004
discussed above.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
- 10 -
-11-
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $240,000 in$163,000 for the second quarter of fiscalnine months ended June 30, 2005, to $1.59$4.7 million
from $1.35$4.6 million for the same period in 2004, an increase of 17.8%3.6%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the recovery in fiscal
2004 of a bad debt previously written off.
Income from Operations. Income from operations decreased $546,000,$336,000, or 22.6%4.6%,
to $1.87$6.9 million for the second quarter of fiscalnine months ended June 30, 2005 from $2.42$7.3 million for
the same period last year. This decrease was primarily due to the decrease in
sales of new equipment and the increase in operating, selling, general and administrative
expenses, partially offset by the decrease in costs of sales in 2005.
Interest Expense. Interest expense for the threenine months ended March 31,June 30, 2005 was
$147,037$438,858 compared to $41,129$134,286 for the same period last year. The increase was
primarily attributable to the increase in notes payable at September 30, 2004.
The weighted average interest rate paid on our outstanding borrowings increased
to 5.9%5.6% for 2005 from 2.75% for 2004.
Income Taxes. The provision for income taxes for fiscal 2005 decreased to $639,000 from $856,000 in fiscal 2004. This decrease was primarily due to
lower pre-tax earnings in fiscal 2005.
Comparison of Results of Operations for the Six Months Ended March 31, 2005 and
March 31, 2004
Net Sales. Net sales decreased $791,000, or 3.4%, to $22.2 million for the six
months ended March 31, 2005, from $22.9 million for the same period in fiscal
2004, primarily due to weather and the timing of orders in the second quarter.
Heavier than normal snowfall in the U.S. Northeast and excessive rainfall in
the western parts of the country contributed to a decline or postponement of
equipment orders. Also, several pending orders were awaiting the outcome of
the customer's obtainment of financing arrangements. New equipment sales were
down 2.5% to $15.6 million for the current period, compared with $16.0 million
for the same period of fiscal 2004. Sales of remanufactured equipment
decreased by 9.3% to $4.2 million for the current period, compared with $4.7
million in the same period last year. Repair service revenues were up 2.1%
to $2.36 million for the current period, compared with $2.31 million for the
same period last year.
Costs of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
decreased to $12.9 million for the six months ended March 31, 2005 from $13.8
million for the same period of fiscal 2004. The decrease was primarily due to
the decrease in sales for the period. Costs of sales for new and refurbished
equipment decreased to 65.2% of net sales income for 2005 from 66.7% of net
sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs of sales for repair services
increased to 70.7% of net service income for 2005 from 63.9% of net service
income for 2004. This increase was due primarily to more high-end hybrid and
fiber optic equipment being repaired, which involves a higher relative cost of
material.
Gross Profit. Gross profit decreased $128,000, or 1.7%, to $7.6 million for the
six months ended March 31, 2005 from $7.7 million for the same period in fiscal
2004. The gross margin percentage was 34.2% for the current period, compared
to 33.6% for the same period last year. The percentage increase was primarily
due to a decrease in sales of new and surplus equipment, which are accompanied
by margins lower than that of re-manufactured equipment and repairs, and the
allowance for obsolete inventory recorded during 2004 discussed above.
- 11 -
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $179,000 for the six months ended March 31, 2005, to $3.1$2.4
million from $2.9 million for the same period in 2004, an increase of 6.1%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the recovery in fiscal
2004 of a bad debt previously written off.
Income from Operations. Income from operations decreased $292,000, or 6.3%,
to $4.4 million for the six months ended March 31, 2005 from $4.7 million for
the same period last year. This decrease was primarily due to the decrease in
sales of new and refurbished equipment and the increase in operating, selling,
general and administrative expenses, partially offset by the decrease in costs
of sales in 2005.
Interest Expense. Interest expense for the six months ended March 31, 2005 was
$293,191 compared to $96,882 for the same period last year. The increase was
primarily attributable to the increase in notes payable at September 30, 2004.
The weighted average interest rate paid on our outstanding borrowings increased
to 5.5% for 2005 from 2.75% for 2004.
Income Taxes. The provision for income taxes for fiscal 2005 decreased to
$1.47 million from $1.64$2.5 million in fiscal 2004. This decrease was primarily due to
lower pre-tax earnings in fiscal 2005.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal
year 2004 includes a summary of the significant accounting policies or methods
used in the preparation of our Consolidated Financial Statements. Some of those
significant accounting policies or methods require us to make estimates and
assumptions that affect the amounts reported by us. We believe the following
items require the most significant judgments and often involve complex
estimates.
General
-------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates and judgments on historical
experience, current market conditions, and various other factors we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to the carrying value of our inventory and, to
a lesser extent, the adequacy of our allowance for doubtful accounts.
Inventory Valuation
-------------------
Inventory consists of new and used electronic components for the cable
television industry. Inventory is stated at the lower of cost or market.
Market is defined principally as net realizable value. Cost is determined
using the weighted average method.
- 12 -
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products of which manufacturers have
discontinued production, or are seeking shipment on a same-day basis. Our
position in the industry requires us to carry large inventory quantities
-12-
relative to quarterly sales, but also allows us to realize high overall gross
profit margins on our sales. Carrying these large inventories represents our
largest risk. For individual inventory items, we may carry inventory
quantities that are excessive relative to market potential, or we may not be
able to recover our acquisition costs for sales we are able to make in a
reasonable period. Over the past two years, our investment in inventory has
shifted to become predominantly new products purchased from manufacturers and
"surplus-new" products, which are unused products purchased from other
distributors or MSOs.
In order to address the risks associated with our investment in
inventory, we regularly review inventory quantities on hand and reduce the
carrying value by recording a provision for excess and obsolete inventory
based primarily on inventory aging and forecasts of product demand and pricing.pricing
The broadband industry is characterized by changing customer demands and
changes in technology that could result in significant increases or decreases
of inventory pricing or increases in excess or obsolete quantities on hand.hand
Our estimates of future product demand may prove to be inaccurate; in which
case the provision required for excess and obsolete inventory may have been
understated or overstated. Although every effort is made to ensure the
accuracy of internal forecasting, any significant changes in demand or prices
could have a significant impact on the carrying value of our inventory and
reported operating results. Demand for some of the items in our inventory has
been impacted by recent economic conditions present in the cable industry. As
of September 30, 2004, we have reduced inventories by recording an allowance
for excess and obsolete inventories totaling $1,093,000. No addition to this
allowance was recorded during the sixnine months ended March 31,June 30, 2005. An
allowance of $413,000$656,000 was recorded during the sixnine months ended March 31, 2004.June 30, 2004
Accounts Receivable Valuation
-----------------------------
Management judgments and estimates are made in connection with
establish-
ingestablishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer creditworthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer creditworthiness, or weakening in
economic trends could have a significant impact on the collectibility of
receivables and our operating results. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. At March 31,June 30, 2005,
accounts receivable, net of allowance for doubtful accounts of $53,000,approximately
$72,000, amounted to $3.9$5.3 million.
Liquidity and Capital Resources
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $7 million at a borrowing rate based on the
prevailing 30-day LIBOR rate plus 2.0% (4.9%(5.3% at March 31,June 30, 2005.) This line of
credit will provide the lesser of $7 million or the sum of 80% of qualified
accounts receivable and 50% of qualified inventory in a revolving line of
credit for working capital purposes. The line of credit is collateralized by
inventory, accounts receivable, equipment and fixtures, and general intangibles
and had an outstanding balance at March 31,June 30, 2005, of $1.8$1.9 million, due
- 13 -
September
30, 2005. We intend to renew the agreement at the maturity date under similar
terms.
Cash decreased $739,000approximately $714,000 during the first sixnine months of
fiscal 2005. During the first six monthnine months of fiscal 2005, operating activities
-13-
provided $1,730,000approximately $2,305,000 of cash. Net earnings adjusted for noncashNon-cash items included in net
income provided $2,669,000approximately $138,000 of cash, and changes in receiveables provided $639,000receivables used
approximately $523,000 of cash. Changes in inventories, accounts payable,
accrued liabilities and other assets used $1,578,000approximately $1,359,000 of cash.
Cash used by investing activities was $58,000approximately $151,000 for property and
equipment expenditures. Financing activities used $1,390,000approximately $1,328,000 to
pay down the line of credit, $618,000approximately $928,000 for payments on notes
payable, and $420,000$630,000 for payments of preferred dividends, while approximately
$17,000 of cash was provided from the exercise of stock options.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding shares of our Series A Convertible
Preferred Stock at September 30, 2004. The outstanding balance on this note
was $7.4$7.1 million at March 31,June 30, 2005. The note is due on September 30, 2009, with
monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the note on September 30, 2004,
which fixed the interest rate at 6.13%. Notes payable secured by real estate
of $365,989$356,695 are due in monthly payments through 2013 with interest at 5.5%
through 2008, converting thereafter to prime minus .25%.
We finance our operations primarily through internally generated funds and
the bank line of credit. Monthly payments of principal for notes payable and
loans used to purchase buildings total $1.2 million in the next 12 months. We
expect to fund these payments through cash flows from operations.
Forward-Looking Statements
Certain statements included in this report which are not historical facts
are forward-looking statements. These forward-looking statements are based on
current expectations, estimates, assumptions and beliefs of management; and
words such as "expects," "anticipates," "intends," "plans," "believes,"
"projects," "estimates" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including, but not limited to, the future prospects for our
business, our ability to generate or to raise sufficient capital to allow it
to make additional business acquisitions, changes or developments in the cable
television business that could adversely affect our business or operations, the
continued availability to us of our key management personnel, general economic
conditions, the availability of new and used equipment and other inventory and
our ability to fund the costs thereof, and other factors which may affect our
ability to comply with future obligations. Accordingly, actual results may
differ materially from those expressed in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its revolving line of credit. The interest rates under
the line of credit fluctuate with the LIBOR rate. At March 31,June 30, 2005, the
outstanding balances subject to variable interest rate fluctuations totaled
$1.8$1.9 million. Future changes in interest rates could cause our borrowing costs
to increase or decrease.
The Company maintains no cash equivalents. However, the Company entered
into an interest rate swap on September 30, 2004, in an amount equivalent to
the $8 million notes payable in order to minimize interest rate risk. Although
the note bears interest at the prevailing 30-day LIBOR rate plus 2.50%, the
swap effectively fixed the interest rate at 6.13%. The fair value of this
derivative, $139,102$81,143 at March 31,June 30, 2005, will increase or decrease opposite any
future changes in interest rates. All sales and purchases are denominated in
U.S. dollars.
-14-
Item 4. Controls and Procedures
Based on his evaluation, our Chief Executive Officer and Principal
Financial Officer has concluded that our disclosure controls and procedures
(as
- 14 -
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report on Form 10-Q are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
During the period covered by this report on Form 10-Q, there have been no
changes in our internal controls over financial reporting that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held in Broken
Arrow, Oklahoma at the Corporate Offices of ADDvantage Technologies Group, Inc.
on March 8, 2005. At the meeting, the following directors were elected for one
year terms (with the votes as indicated).
FOR WITHHELD
--- --------
Kenneth A. Chymiak 9,758,806 396
David E. Chymiak 9,758,806 396
Stephen J. Tyde 9,758,806 396
Freddie H. Gibson 9,754,466 4,736
Henry F. McCabe 9,754,466 4,736
The shareholders also approved the appointment of Tullius, Taylor, Sartain
& Sartain as the Company's auditors for the 2005 fiscal year with 9,758,231
votes FOR, 471 votes AGAINST, and 500 votes ABSTAINING.
- 15 -
Item 6. Exhibits
Exhibit No. Description
31.1 Certification of Chief Executive Officer and Chief
Financial Officer under Section 302 of the Sarbanes
Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-OxleySarbanes-
Oxley Act of 2002.
- 16 -
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
/s/ Kenneth A. Chymiak
-------------------------------------------------------------
Date: May 3,July 29, 2005 Kenneth A. Chymiak,
President and Chief Executive
Officer
(Principal Executive Officer and
Principal Financial Officer)
/s/ Dee Cooper
-------------------------------------------------------------
Date: May 3,July 29, 2005 Dee Cooper,
Controller
(Chief Accounting Officer)
- 17 -
-16-
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. Description
31.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- 18 --17-