UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30,DECEMBER 31, 2005, OR
[ ] TRANSITION REPORT UNDERPURSUANT TO 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
(Registrants(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for muchsuch 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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
July 27,
2005January 31, 2006 were 10,070,172.
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Page10,115,647.
Part I - Financial Information Page
Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets
June 30,December 31, 2005 (Unaudited) and September 30, 20042005 3
Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three Months and Nine Months Ended June 30,December 31, 2005 and 2004 5
Consolidated Statements of Cash Flows (Unaudited)
NineThree Months Ended June 30,December 31, 2005 and 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2.
ManagementsManagement's Discussion and Analysis of Financial
Condition and Results of Operations 109
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 1413
Item 4.
Controls and Procedures 1513
Part II - Other Information
Item 6. Exhibits 1513
Signatures 1614
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,December 31, September 30,
2005 2004
-------- -------------2005
(Unaudited) (Audited)
Assets
Current assets:
Cash $ 601,756733,607 $ 1,316,239449,219
Accounts receivable, net of allowance of
$72,398$222,000 and $68,063 5,311,040 4,787,749$92,000 at December 31, and
September 30, 2005 respectively 6,460,061 7,671,549
Inventories, net of allowance for excess and
obsolete inventory of $1,093,000 22,750,879 20,978,714$1,575,395 at
December 31, and September 30, 2005
repectively 27,763,873 25,321,149
Deferred income taxes 782,000 651,000
----------- -----------1,024,000 968,000
Total current assets 29,445,675 27,733,70235,981,541 34,409,917
Property and equipment, at cost:
Machinery and equipment 2,226,248 2,138,7982,414,874 2,357,182
Land and buildings 1,356,459 1,302,5271,598,808 1,591,413
Leasehold improvements 525,006 521,972565,945
------------ -----------
-----------
4,107,713 3,963,2974,538,688 4,514,540
Less accumulated depreciation and amortization (1,730,014) (1,561,698)
-----------(1,858,406) (1,811,784)
------------ -----------
Net property and equipment 2,377,699 2,401,5992,680,282 2,702,756
Other assets:
Deferred income taxes 917,000 1,042,000784,000 786,000
Goodwill,net 1,150,060 1,150,060
Other assets 128,333 31,222
-----------237,925 220,275
------------ -----------
Total other assets 2,195,393 2,223,282
-----------2,171,985 2,156,335
------------ -----------
Total assets $34,018,767 $32,358,583
=========== ===========$40,833,808 $39,269,008
See notes to unaudited consolidated financial statements.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,December 31, September 30,
2005 2004
------------ -------------2005
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,258,5114,260,223 $ 1,758,6954,958,834
Accrued expenses 823,758 1,011,9111,140,976 1,876,523
Accrued income taxes 238,479 120,748791,979 110,691
Bank revolving line of credit 1,897,064 3,225,1833,312,632 2,234,680
Notes payable - current portion 1,238,510 1,237,0471,239,589 1,239,071
Dividends payable 210,000 210,000
----------- ----------------------- ------------
Total current liabilities 6,666,322 7,563,58410,955,399 10,629,799
Notes payable 6,218,185 7,147,3345,598,074 5,908,199
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; 10,091,27210,095,897 and 10,081,78910,093,147 shares
issued and outstanding, respectively 100,913 100,818100,959 100,931
Paid-in capital (7,268,724) (7,285,564)(7,261,833) (7,265,930)
Retained earnings 16,305,926 12,886,57519,392,561 17,860,967
Accumulated other comprehensive income:
Unrealized gain on interest rate swap
50,309 -(net of $65,000 and $55,000 in taxes) 102,812 89,206
------------ -----------
21,188,424 17,701,829------------
24,334,499 22,785,174
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
------------ -----------
Total stockholders' equity 21,134,260 17,647,665
------------ -----------24,280,335 22,731,010
Total liabilities and stockholders' equity $34,018,767 $32,358,583$40,833,808 $39,269,008
See notes to unaudited consolidated financial statements.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended June 30, Nine Months Ended June 30,December 31,
2005 2004
2005 2004
----------- ----------- ----------- -----------
Net sales income $11,129,027 $11,459,409 $30,927,842 $32,097,424$ 13,540,949 $ 11,117,284
Net service income 964,864 1,223,040 3,322,060 3,531,566
----------- ----------- ----------- -----------
12,093,891 12,682,449 34,249,902 35,628,9901,212,662 1,143,841
------------ ------------
Total income 14,753,611 12,261,125
Costs of sales 7,246,552 7,513,326 20,160,265 21,280,0238,833,114 7,373,377
Cost of service 588,752 839,495 2,254,920 2,315,027
----------- ----------- ----------- -----------849,945 831,334
------------ ------------
Gross profit 4,258,587 4,329,628 11,834,717 12,033,9405,070,552 4,056,414
Operating, selling, general and
administrative expenses 1,636,968 1,652,403 4,734,842 4,571,4622,130,412 1,510,542
Depreciation and amortization 59,526 70,589 174,666 201,164
----------- ----------- ----------- -----------46,622 57,031
------------ ------------
Income from operations 2,562,093 2,606,636 6,925,209 7,261,3142,893,518 2,488,841
Interest expense 145,667 37,404 438,858 134,286
----------- ----------- ----------- -----------146,924 146,154
------------ ------------
Income before income taxes 2,416,426 2,569,232 6,486,351 7,127,0282,746,594 2,342,687
Provision for income taxes 970,000 854,000 2,437,000 2,495,000
----------- ----------- ----------- -----------1,005,000 828,000
------------ ------------
Net income 1,446,426 1,715,232 4,049,351 4,632,028
----------- ----------- ----------- -----------1,741,594 1,514,687
Other comprehensive income: ------------ ------------
Unrealized (loss) gain on interest rate swap
(net of ($22,025)$10,000 and $30,834$6,275 in taxes) (35,934) - 50,309 -
----------- ----------- ----------- -----------13,606 10,239
------------ ------------
Comprehensive Income $1,410,492 $1,715,232 $4,099,660 $4,632,028
=========== =========== =========== ===========income $ 1,755,200 $ 1,524,926
------------ ------------
Net income $1,446,426 $1,715,232 $4,049,351 $4,632,028$ 1,741,594 $ 1,514,687
Preferred dividends 210,000 310,000 630,000 930,000
----------- ----------- ----------- -----------210,000
------------ ------------
Net income attributable to common stockholders $1,236,426 $1,405,232 $3,419,351 $3,702,028
=========== =========== =========== ===========stockholders$ 1,531,594 $ 1,304,687
============ ============
Earnings per share:
Basic $ 0.120.15 $ 0.14 $ 0.34 $ 0.370.13
Diluted $ 0.120.15 $ 0.12 $ 0.34 $ 0.330.13
Shares used in per share calculationcalculation:
Basic 10,070,172 10,057,172 10,065,685 10,034,70010,073,297 10,061,756
Diluted 10,097,155 12,130,854 10,109,744 12,114,43310,116,782 10,117,873
See notes to unaudited consolidated financial statements.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NineThree Months Ended
June 30,December 31,
2005 2004
----------- ---------------- ----
Cash Flows from Operating Activities
Net income $ 4,049,3511,741,594 $ 4,632,0281,514,687
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 174,666 201,164
Loss on disposal of property and equipment - 24,41246,622 57,031
Deferred income tax benefit (36,834) (234,000)(64,000) -
Change in:
Receivables (523,291) (2,263,651)1,211,488 (286,618)
Inventories (1,772,165) 830,285(2,442,724) (826,411)
Other assets (15,968) 14,3525,956 (28,732)
Accounts payable 499,816 469,275(698,611) 1,181,148
Accrued liabilities (70,422) 190,124expenses (54,259) (172,961)
------------ ------------
Net cash (used in) provided by operating
activities 2,305,153 3,863,989(253,934) 1,438,144
------------ ------------
Cash Flows from Investing Activities
Additions to property and equipment (150,766) (70,147)(24,148) (9,180)
------------ ------------
Net cash used in investing activities (150,766) (70,147)(24,148) (9,180)
------------ ------------
Cash Flows from Financing Activities
Net change under line of credit (1,328,119) (1,684,903)
Payments on stockholder notes - (648,644)1,077,952 (815,969)
Payments on notes payable (927,686) (109,494)(309,607) (309,111)
Proceeds from stock options exercised 16,935 97,5974,125 3,275
Payments of preferred dividends (630,000) (930,000)(210,000) (210,000)
------------ ------------
Net cash used inprovided by (used in) financing activities (2,868,870) (3,275,444)562,470 (1,331,805)
------------ ------------
Net (decrease) increase in cash (714,483) 518,398284,388 97,159
Cash, beginning of period 449,219 1,316,239 496,283
------------ ------------
Cash, end of period $ 601,756733,607 $ 1,014,6811,413,398
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 438,858146,924 $ 142,328146,154
Cash paid for income taxes $ 2,358,972386,500 $ 2,682,170529,947
See notes to unaudited consolidated financial statements.
-6-
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted accounting principlesin the United
States 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, 20042005
have been audited by an
independent registeredcertified public accounting firm.accountants. It is suggested
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, 2004.2005.
Note 2 - Description of Business
ADDvantage Technologies Group, Inc., through its subsidiaries TULSAT
Corporation, ADDvantage Technologies Group of Nebraska, (dba "Lee Enterprise")Tulsat,
Tulsat-Nebraska, Inc., NCS Industries, Inc. ("NCS"), ADDvantage Technologies Group of
Missouri, (dba
"Comtech Services")Inc., ADDvantage Technologies Group of Texas, (dba "Tulsat -
Texas"),Tulsat-Atlanta, LLC,
and Tulsat - Atlanta, LLC ("Tulsat - Atlanta")Jones Broadband International, Inc, (collectively, the "Company"), sells
new, surplus, and refurbished cable television equipment throughout North
America and Latin America in addition to being a repair center for various
cable companies. The Company operates in one business segment.
Note 3 - Earnings Perper Share
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic net earnings per share is computed by dividing net earnings
available to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted net earnings per share gives effect
to all dilutive potential common shares outstanding during a period. In
computing diluted net earnings per share, the average stock price for the
period is used in determining the number of shares assumed to be reacquired
under the treasury stock method from the exercise of stock options.
-7-
Three Months Ended June 30, Nine Months Ended June 30,months ended
December 31,
2005 2004
2005 2004
------------ ----------- ------------ --------------- ----
Basic EPS Computation:
Net income attributable to
common stockholders $ 1,236,4261,531,594 $ 1,405,232 $ 3,419,351 $ 3,702,0281,304,687
Weighted average outstanding
common shares 10,070,172 10,057,172 10,065,685 10,034,70010,073,297 10,061,756
Earnings per Share - Basic$ 0.12Basic $ 0.140.15 $ 0.34 $ 0.37
=========== =========== =========== ===========0.13
============= ============
Diluted EPS Computation:
Net income attributable to
common stockholders $ 1,236,4261,531,594 $ 1,405,232 $ 3,419,351 $ 3,702,028
Add: Dividends on Series A
convertible preferred stock - 100,000 - 300,000
----------- ----------- ----------- -----------
Net income attributable to common
stockholders - Diluted $ 1,236,426 $ 1,505,232 $ 3,419,351 $ 4,002,0281,304,687
Weighted average outstanding
common shares 10,070,172 10,057,172 10,065,685 10,034,70010,073,297 10,061,756
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 26,983 73,682 44,059 79,733
----------- ---------- ----------- -----------43,485 56,117
Weighted average shares outstanding - -------------- ------------
assuming dilution 10,097,155 12,130,854 10,109,744 12,114,43310,116,782 10,117,873
Earnings per Share-Diluted$ 0.12Share - Diluted $ 0.120.15 $ 0.34 $ 0.33
=========== =========== =========== ===========0.13
============== ============
Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At June 30,December 31, 2005, a $1,897,064$3,312,632 balance is outstanding under a $7$7.0 million
line of credit due September 30, 2005,2006, with interest payable monthly based on
the prevailing 30-day LIBOR rate plus 2.0% (5.3%(6.4% at June 30,December 31, 2005). BorrowingsAt
December 31, 2005, $3,687,368 was available for borrowing 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.credit.
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
-8-
of credit. The resulting overdraft balance, consisting of outstanding checks,
was $398,949$43,783 at June 30,December 31, 2005, and is included in the bank revolving line of
credit.
An $8 million amortizing term note with Bank of Oklahoma was obtained to
finance the redemption of the outstanding shares of the Series A Convertible
Preferred Stock at September 30, 2004. The outstanding balance on this note
was $7.1$6.5 million at June 30,December 31, 2005. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50% (6.9% at
December 31, 2005). 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'sour risk management objective and strategy
-8-
for undertaking the hedge along with methods for assessing the swap's
effectiveness. At June 30,December 31, 2005, the fair market value of the interest
rate swap approximated its carrying value of $81,143.$167,812. Notes payable secured
by real estate of $356,695$337,663 are due in monthly payments through 2013 with
interest at 5.5% through 2008, converting thereafter to prime minus .25%.
-9-Note 5 - Stock Option Plans
Effective October 1, 2005, the Company adopted SFAS 123R which 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. On October 1, 2005, all outstanding options representing 144,767
shares were fully vested. Therefore, the adoption of SFAS 123R had no impact
on the Company's results of operations. Employees exercised 2,750 shares
during the quarter ended December 31, 2005, and no new options were granted.
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 that we have focused our initiative to market our products
and services to the larger cable multiple system operators ("MSOs"). As a
result, our overall sales increased for the first three months of fiscal 2006.
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
June 30,- --------------------------------------------------------------
December 31, 2005 and June 30,December 31, 2004
- ---------------------------------------
Net Sales. Net sales decreased $589,000,increased $2.5 million, or 4.6%20.3%, to $12.1$14.8 million in the
thirdfirst quarter of fiscal 2005,2006, from $12.7$12.3 million for the same period in fiscal
2004. Sales2005, primarily due to the positive results of newour marketing initiatives and
distributor relationships discussed in the previous paragraph. New equipment
increased 1.1%sales were up 19.5% to $9.0$10.6 million for the current period, compared with
$8.9 million for the same period of fiscal 2004.2005. Sales of remanufactured
equipment decreased by 17.0%increased 27.0% to $2.1$2.8 million for the current period, compared
with $2.5$2.2 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%were
up 6.1% to $965,000$1.21 million for the current quarter, compared with $1.2$1.14 million
for the same period last year. The decrease inacquisition of Jones Broadband accounted
for 26.3% of the total net sales increase and all of the 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.
Costsincome
increase.
Cost of Sales. CostsCost of sales includes (i) the costscost of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costscost used in repairs, (iii) the related transportation costs,cost, and (iv)
the labor and overhead directly related to these sales. CostsCost of sales
decreased-9-
increased to $7.2$9.7 million for the thirdfirst quarter of fiscal 20052006 from $7.5$8.2
million for the same period of fiscal 2004.2005. The decreaseincrease was primarily due to
the decreaseincrease in sales for the period. Costsperiod and the Jones Broadband acquisition, which
was responsible for 20.5% of increased cost of sales. Cost of sales for new and
refurbished equipment decreased slightly to 65.1%65.2% of net sales income for 20052006
from 65.6%66.3% of net sales income for 2004. This decrease was primarily due to the allowance for
obsolete inventory recorded during 2004. Costs2005. Cost of sales for repair services
decreased to 61.0%70.1% of net service income for 20052006 from 68.6%72.7% of net service
income for 2004.2005.
Gross Profit. Gross profit decreased $71,000,climbed $1.0 million, or 1.6%25.0%, to $4.26$5.1 million for
the thirdfirst quarter of fiscal 20052006 from $4.33$4.1 million for the same period in
fiscal 2004.2005. The gross margin percentage was 35.2%34.4% for the current quarter,
compared to 34.1%33.1% for the same quarter last year. The percentage increase was
primarily due to the allowance for obsolete inventory recorded during 2004
discussedincrease in sales described 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 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 of equipment orders during the
second quarter of 2005. New equipment sales were down 1.2% to $24.6 million for
the current period, compared with $24.9 million for the same period of fiscal
2004. Sales of remanufactured equipment decreased by 12.0% to $6.3 million for
the current period, compared with $7.2 million in the same period last year.
Repair service revenues were down 5.9% to $3.3 million for the current period,
compared with $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 $22.4 million for the nine months ended June 30, 2005 from $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 65.2% of net sales income for 2005 from 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 67.9% of net service income for 2005 from 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 $199,000, or 1.7%, to $11.8 million for
the nine months ended June 30, 2005 from $12.0 million for the same period in
fiscal 2004. The gross margin percentage was 34.6% for the current period,
compared to 33.8% for the same period 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
-11-
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $163,000 for$620,000 in the nine months ended June 30, 2005,first quarter of fiscal 2006, to $4.7$2.13 million
from $4.6$1.51 million for the same period in 2004,2005, an increase of 3.6%41.0%. TheOver
half of the increase in operating, selling, general and administrative expenses was
primarily due to increasesincreased operating costs associated with the
Jones Broadband acquisition in salariesAugust of 2005. The additional increase was due
to increased expenses related to the growth of the Company's sales and wages and the recovery in fiscal
2004 of a bad debt previously written off.related
activities.
Income from Operations. Income from operations decreased $336,000,rose $405,000, or 4.6%16.3%, to
$6.9$2.9 million for the nine months ended June 30, 2005first quarter of fiscal 2006 from $7.3$2.5 million for the
same period last year. This decreaseincrease was primarily due to the decreaseincreases in sales,
andpartially offset by the increase in operating selling, general and administrative
expenses, offset by the decrease in costs of sales in 2005.
Interest Expense. Interest expense for the nine months ended June 30, 2005 was
$438,858 compared to $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 5.6% for 2005 from 2.75% for 2004.costs.
Income Taxes. The provision for income taxes for fiscal 2005 decreased2006 increased to
$2.4
million$1,005,000 from $2.5 million$828,000 in fiscal 2004.2005. This decreaseincrease was primarily due to lowerhigher
pre-tax earnings in fiscal 2005.2006.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal
year 20042005 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.
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Inventory Valuation
-------------------
Inventory consists of new and used electronic components for the cable
television industry. Inventory is stated at the lower of cost or market.
Market is defined principally as net realizable value. Cost is determined
using the weighted average method.
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products 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
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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 pricingpricing. 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 handhand. 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 anNo
change to the allowance for excess andor obsolete inventories totaling $1,093,000. No addition to this
allowanceinventory was recorded during
the nine monthsquarter ended June 30,December 31, 2005. An
allowance of $656,000 was recorded during the nine months ended June 30, 2004
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 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 June 30,December 31, 2005,
accounts receivable, net of allowance for doubtful accounts of approximately
$72,000,$222,000,
amounted to $5.3$6.5 million. The $130,000 increase in the doubtful accounts,
during the first fiscal quarter ended December 31, 2005, is based on the
analysis of a few of the Company's customers' change in paying habits.
Stock-based Compensation
------------------------
In December 2004, the FASB issued SFAS 123R, which replaced SFAS 123 and
superseded APB 25. SFAS 123R 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,
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with early adoption encouraged. In April 2005, the Securities and Exchange
Commission (the SEC) postponed the effective date of SFAS 123R until the
issuer's first fiscal year beginning after June 15, 2005. Under SFAS 123R,
the pro forma disclosures previously permitted no longer will be an alternative
to financial statement recognition. We adopted SFAS 123R effective
October 1, 2005, and will apply the Black-Scholes valuation model in
determining the fair value of share-based payments to employees, which will
then be amortized on a straight line basis over the requisite service period.
We will apply the modified prospective method, which requires that compensation
expense be recorded for all unvested stock options and restricted stock upon
adoption of SFAS 123R. On October 1, 2005, all outstanding options
representing 144,767 shares were fully vested. Employees exercised 2,750 shares
during the quarter ended December 31, 2005 and no new options were granted.
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$7.0 million at a borrowing rate based on the
prevailing 30-day LIBOR rate plus 2.0% (5.3%(6.4% at June 30,December 31, 2005.) This line
of credit will provide the lesser of $7$7.0 million or the sum of 80% of
qualified accounts receivable and 50% of qualified inventory in a revolving
line of credit for working capital purposes. At December 31, 2005,
$3,687,368 was available for borrowing under the line of credit. The line of
credit is collateralized by inventory, accounts receivable, equipment and
fixtures, and general intangibles and had an outstanding balance at
June 30,December 31, 2005, of $1.9$3.3 million, due September 30, 2005.2006. We intend to
renew the agreement at the maturity date under similar terms.
Cash decreased approximately $714,000 during the first nine months of
fiscal 2005. During the first nine months of fiscal 2005, operating activities
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provided approximately $2,305,000 of cash. Non-cash items included in net
income provided approximately $138,000 of cash, and changes in receivables used
approximately $523,000 of cash. Changes in inventories, accounts payable,
accrued liabilities and other assets used approximately $1,359,000 of cash.
Cash used by investing activities was approximately $151,000 for property and
equipment expenditures. Financing activities used approximately $1,328,000 to
pay down the line of credit, approximately $928,000 for payments on notes
payable, and $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 $7.1$6.5 million at June 30,December 31, 2005. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50% (6.9% at
December 31, 2005). 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 $356,695$337,663 are due in monthly payments through
2013 with interest at 5.5% through 2008, converting thereafter to prime minus
.25%..25%.
We finance our operations primarily through internally generated funds and
the bank line of credit. Monthly minimum payments of principal for notes
payable and loans used to purchase buildings totalwill be slightly over $1.2 million
in the next 12 months. We expect to fund these payments through cash flows
from operations.
Forward-LookingForward 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
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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 June 30,December 31, 2005, the
outstanding balances subject to variable interest rate fluctuations totaled
$1.9$3.3 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 notesnote 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, $81,143$167,812 at June 30,December 31, 2005, will increase or decrease opposite
any future changes in interest rates. All sales and purchases are denominated
in U.S. dollars.
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Item 4. Controls and Procedures
Based on his evaluation, our Chief Executive Officer and PrincipalChief Financial
Officer has concluded that, subject to the following sentence, our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report 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. We plan to implement increased education
of relevant personnel of the timing requirements for the reports required under
the Exchange Act and to adopt procedures which should result in better
coordination between our personnel responsible for reporting and our securities
counsel.
During the period covered by this report on Form 10-Q, there have been no
changes in our internal controlscontrol over financial reporting that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
PART II-OTHERII - OTHER INFORMATION
OTHER INFORMATION
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 Pursuantpursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
-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)
------------------------------
Date: July 29, 2005 Kenneth A. Chymiak,
President and Chief Executive
Officer
(Principal Executive Officer and
Principal Financial Officer)
------------------------------
Date: July 29, 2005 Dee Cooper,
Controller
(Chief Accounting Officer)
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Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. Description
31.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 302 of the
Sarbanes Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-13-
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: February 13, 2006 Kenneth A. Chymiak,
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
/s/ James W. Brown
-------------------------------------
Date: February 13, 2006 James W. Brown,
Vice President and Secretary
(Chief Accounting Officer)
-14-
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 pursuant to 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.
-15-
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth A. Chymiak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ADDvantage
Technologies Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15-(e))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
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Date: February 13, 2006
/s/ Kenneth A. Chymiak
-------------------------------------------
Kenneth A. Chymiak
Chief Executive Officer and Chief Financial
Officer
-17-
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURUSANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of ADDvantage
Technologies Group, Inc. (the "Company") for the fiscal quarter ended
December 31, 2005, as filed with the Securities and Exchange Commission on the
date hereof (the "Report") I, Kenneth A. Chymiak, the Chief Executive Officer
and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained on the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Kenneth A. Chymiak
----------------------------------------
Name: Kenneth A. Chymiak
Title: Chief Executive Officer and
Chief Financial Officer
Date: February 13, 2006