UNITED STATES
SECURITIES AND EXCHANGEEXHCANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 orOR 15(d) OF THE SECURITIESSECURTIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,DECEMBER 31, 2004, OR
[ ]TRANSITION] 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 73-135161073 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 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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
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 July 23,
2004January
31, 2005 were 10,081,789.10,061,789.
Part I - Financial Information Page
Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30,December 31, 2004 (Unaudited) and September 30, 20032004 3
Consolidated Condensed Statements of Income and Comprehensive
Income (Unaudited)
Three Months and Nine Months Ended June 30,December 31, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
NineThree Months Ended June 30,December 31, 2004 and 2003 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 1413
Item 4.
Controls and Procedures 1413
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K14
Signatures 15
Signatures 16
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,December 31, September 30,
2004 20032004
(Unaudited) (Audited)
----------- ------------ -------------
Assets
Current assets:
Cash $ 1,014,6811,413,398 $ 496,2831,316,239
Accounts receivable, net of allowance of approximately $79,000 6,047,331 3,783,680$68,063 5,074,367 4,787,749
Inventories, net of allowance for excess and
obsolete inventory of $1,103,000 and $447,000,
respectively 21,300,811 22,131,096$1,093,000 21,805,125 20,978,714
Deferred income taxes 628,000 367,000673,000 651,000
----------- -----------
Total current assets 28,990,823 26,778,05928,965,890 27,733,702
Property and equipment, at cost:
Machinery and equipment 2,131,745 2,061,5982,141,629 2,138,798
Land and buildings 1,302,527 1,326,9391,302,527
Leasehold improvements 521,972 521,972
----------- -----------
3,966,128 3,963,297
Less accumulated depreciation and amortization (1,485,511) (1,284,347)
------------ ------------(1,612,380) (1,561,698)
----------- -----------
Net property and equipment 2,470,733 2,626,1622,353,748 2,401,599
Other assets:
Deferred income taxes 1,127,000 1,154,0001,013,725 1,042,000
Goodwill 1,150,060 1,150,060
Other assets 25,276 39,628
------------ ------------76,468 31,222
----------- -----------
Total other assets 2,302,336 2,343,688
------------ ------------2,240,253 2,223,282
----------- -----------
Total assets $33,763,892 $31,747,909
============ ============$33,559,891 $32,358,583
=========== ===========
See notes to unaudited consolidated condensed financial statements.
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,December 31, September 30,
2004 20032004
(Unaudited) (Audited)
----------- ------------ -------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,100,4962,939,843 $ 2,631,2211,758,695
Accrued expenses 961,373 829,459696,708 1,011,911
Accrued income taxes 153,324 95,114262,990 120,748
Bank revolving line of credit 3,500,999 5,185,9022,409,214 3,225,183
Notes payable - current portion 36,524 118,3931,237,519 1,237,047
Dividends payable 310,000 310,000
Stockholder notes 575,000 838,473210,000 210,000
----------- -----------
Total current liabilities 8,637,716 10,008,5627,756,274 7,563,584
Notes payable 356,786 384,411
Stockholder notes - 385,1716,837,751 7,147,334
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$1.00 par value, at stated value:
Series A, 5% cumulative convertible;
200,000 shares issued and outstanding with
a stated value of $40 per share 8,000,000 8,000,000
Series B, 7% cumulative; 300,000 shares issued
and outstanding with a stated value of $40
per share 12,000,000 12,000,000
Common stock, $.01 par value; 30,000,000 shares
authorized; 10,079,58910,082,889 and 10,030,41410,081,789 shares
issued and outstanding, respectively 100,796 100,304100,829 100,818
Paid-in capital (7,292,092) (7,389,197)(7,282,300) (7,285,564)
Retained earnings 12,014,850 8,312,82214,191,262 12,886,575
Accumulated other comprehensive income:
Unrealized gain on interest rate swap 10,239 -
------------ -----------
-----------
24,823,554 21,023,92919,020,030 17,701,829
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
----------------------- -----------
Total stockholders' equity 24,769,390 20,969,765
-----------18,965,866 17,647,665
------------ -----------
Total liabilities and stockholders' equity $33,763,892 $31,747,909$33,559,891 $32,358,583
=========== ===========
See notes to unaudited consolidated condensed financial statements.
4
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,Months Ended December 31,
2004 2003
2004 2003
----------------------- ----------------------------- ----
Net sales income $11,531,571 $7,146,943 $32,202,923 $21,117,188$11,117,284 $10,164,379
Net service income 1,150,878 1,102,789 3,426,067 3,400,248
----------------------- -------------------------
12,682,449 8,249,732 35,628,990 24,517,4361,143,841 1,128,121
----------- -----------
Total income 12,261,125 11,292,500
Costs of sales 7,373,377 6,719,414
Cost of sales 7,851,550 4,617,887 21,922,581 13,564,660
----------------------- -------------------------service 831,334 702,358
----------- -----------
Gross profit 4,830,899 3,631,845 13,706,409 10,952,7764,056,414 3,870,728
Operating, selling, general and administrativeadmin expenses 2,153,674 1,894,427 6,243,931 5,765,9391,510,542 1,571,816
Depreciation and amortization 70,589 64,786 201,164 186,469
----------------------- -------------------------57,031 64,989
----------- -----------
Income from operations 2,606,636 1,672,632 7,261,314 5,000,3682,488,841 2,233,923
Interest expense 37,404 49,520 134,286 152,906
------------------------ -------------------------146,154 55,753
----------- -----------
Income before income taxes 2,569,232 1,623,112 7,127,028 4,847,4622,342,687 2,178,170
Provision for income taxes 854,000 314,520 2,495,000 1,475,286
----------------------- -------------------------828,000 785,000
----------- -----------
Net income 1,715,232 1,308,592 4,632,028 3,372,1761,514,687 1,393,170
----------- -----------
Other comprehensive income:
Unrealized gain on interest rate swap
(net of $6,275 in taxes) 10,239 -
----------- -----------
Comprehensive income $ 1,524,926 $ 1,393,170
=========== ===========
Net income $ 1,514,687 $ 1,393,170
Preferred dividends 210,000 310,000
310,000 930,000 930,000
----------------------- ------------------------------------ -----------
Net income attributable to common stockholders $ 1,405,2321,304,687 $ 998,592 $ 3,702,028 $ 2,442,176
======================== =========================1,083,170
=========== ===========
Earnings per share:
Basic $ 0.140.13 $ 0.10 $ 0.37 $ 0.240.11
Diluted $ 0.120.13 $ 0.10 $ 0.33 $ 0.24
Shares used in per share calculation:calculation
Basic 10,057,172 10,010,414 10,034,700 10,008,33610,061,756 10,011,314
Diluted 12,130,854 12,010,414 12,114,433 12,008,33610,117,873 12,080,044
See notes to unaudited consolidated condensed financial statements.
5
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
June 30,Three Months Ended
December 31,
2004 2003
---- ----
Cash Flows from Operating Activities
Net income $ 4,632,0281,514,687 $ 3,372,1761,393,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 201,164 186,469
Loss on disposal of property and equipment 24,412 -57,031 64,989
Deferred income tax benefit (234,000) (215,326)- (50,000)
Change in:
Accounts receivable (2,263,651) (354,393)Receivables (286,618) (1,529,452)
Inventories 830,285 (2,453,716)(826,411) 943,676
Other assets 14,352 (2,818)(28,732) 16,772
Accounts payable 469,275 305,3041,181,148 (597,393)
Accrued liabilities 190,124 288,026
------------ ------------(172,961) 487,383
----------- -----------
Net cash provided by operating activities 3,863,989 1,125,722
------------ ------------1,438,144 729,145
----------- -----------
Cash Flows from Investing Activities
Additions to property and equipment (70,147) (641,586)
------------ ------------(9,180) (13,681)
----------- -----------
Net cash used in investing activities (70,147) (641,586)
------------ ------------(9,180) (13,681)
----------- -----------
Cash Flows from Financing Activities
Net change under bank revolving line of credit (1,684,903) (22,251)(815,969) (110,507)
Payments on stockholder notes (648,644) (188,503)
Proceeds on notes payableloans - 440,000(84,351)
Payments on notes payable (109,494) (136,595)(309,111) (50,280)
Proceeds from stock options exercised 97,597 -3,275 8,585
Payments of preferred dividends (930,000) (930,000)
------------ ------------(210,000) (310,000)
----------- ----------
Net cash used in financing activities (3,275,444) (837,349)
------------ ------------(1,331,805) (546,553)
----------- ----------
Net increase (decrease) in cash 518,398 (353,213)97,159 168,911
Cash, beginning of period 1,316,239 496,283
775,740
------------ ----------------------- -----------
Cash, end of period $1,413,398 $ 1,014,681 $ 422,527
============ ============665,194
=========== ===========
Supplemental Cash Flow Information
Cash paid for interest $ 142,328146,154 $ 152,41355,509
Cash paid for income taxes $ 2,682,170529,947 $ 1,239,61216,000
See notes to unaudited consolidated condensed financial statements.
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, 20032004 have been
audited by independent certified public 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-KSB10-K for the fiscal year ended September 30, 2003.2004.
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"), is in a niche market in the broadband sector as a "Value Added
Reseller" ("VAR") and Master Distributor for Scientific-Atlanta ("SFA") legacy
products and distributor for most of their other products. NCS is a VAR for
Motorola ("MOT") broadband and transmission products. The Company is also a
distributor for such companies as Blonder-Tongue, Videotek, Quintech
Electronics and Corning Gilbert, among others. In addition to sellingsells new, surplus, and refurbished cable
television equipment throughout North America we operatein addition to being a repair
centers specializing in many different Original Equipment
Manufacturer ("OEM") products.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
Three months ended
Nine months ended
June 30, June 30,December 31,
2004 2003
2004 2003
----------------------- ----------------------------- ----
Basic EPS Computation:
Net income attributable to
common stockholders $ 1,405,2321,304,687 $ 998,592 $ 3,702,028 $ 2,442,1761,083,170
Weighted average outstanding
common shares 10,057,172 10,010,414 10,034,700 10,008,33610,061,756 10,011,314
Earnings per Share - Basic $ 0.140.13 $ 0.10 $ 0.37 $ 0.24
=========== ==========0.11
=========== ===========
Diluted EPS Computation:
Net income attributable to
common stockholders $ 1,405,2321,304,687 $ 998,592 $ 3,702,028 $ 2,442,1761,083,170
Add: Dividends on Series A convertible
preferred stock - 100,000 100,000 300,000 300,000
----------- ----------
----------- -----------
Net income attributable to common
stockholders - Diluted 1,505,232 1,098,592 4,002,028 2,742,1761,304,687 1,183,170
Weighted average outstanding
common shares 10,057,172 10,010,414 10,034,700 10,008,33610,061,756 10,011,314
Potentially dilutive securities
- -------------------------------
Assumed conversion of 200,000 Sharesshares of
Series A convertible preferred stock 2,000,000 2,000,000 2,000,000- 2,000,000
Effect of dilutive stock options 73,682 - 79,733 -
----------- --------- ----------- -----------56,117 68,730
---------- ----------
Weighted average shares outstanding -
assuming dilution 12,130,854 12,010,414 12,114,433 12,008,33610,117,873 12,080,044
Earnings per Share - Diluted $ 0.120.13 $ 0.10 $ 0.33 $ 0.24
=========== ==========
=========== ===========
Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At June 30,December 31, 2004, a $3,500,999$2,409,214 balance is outstanding under a $9.0$7.0 million
line of credit due JuneSeptember 30, 2005, with interest payable monthly based on
the prevailing 30-day LIBOR rate plus 2.0% (4.4% at Chase Manhattan
Prime less 11/4% (3.0% at June 30,December 31, 2004).
Borrowings under the line of credit are limited to the lesser of $7.0 million
or the sum of 80% of qualified accounts receivable and 40%50% of qualified
inventory for working capital purposes
and $2.0 million for future acquisitions meeting Bank of Oklahoma credit
guidelines. Thepurposes. Among other financial covenants, the
line of credit agreement provides that the Company's net worth must be greater
than $14.0$15.0 million andplus 50% of annual net income before the payment of
preferred dividends greater than $2.0 million.(with no deduction for net
losses), determined quarterly. The line of credit is collateralized by
inventory, accounts receivable, equipment and fixtures, and general
intangibles.
8
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
of credit. The resulting overdraft balance, consisting of outstanding checks,
was $645,149 at December 31, 2004, and is included in the bank revolving line
of credit.
8
Stockholder loansAn $8 million amortizing term note with Bank of $575,000 bearOklahoma 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 $7.7 million at December 31, 2004. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at rates that correspondthe prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the linenote on September 30, 2004,
which fixed the interest rate at 6.13%. Upon entering into this interest rate
swap, the Company designated this derivative as a cash flow hedge by
documenting our risk management objective and strategy for undertaking the
hedge along with methods for assessing the swap's effectiveness. At December
31, 2004, the fair market value of credit (3.0% at June 30, 2004). The notes are due on demand and are
classified as current. In addition, stockholder notes, which were issued for
purchasesthe interest rate swap approximated its
carrying value of $16,514. Notes payable secured by real estate were repaid in April 2004. Notes payable to
unrelated parties totaled $393,310,of $375,270
are due in monthly payments through 2013 with interest at 5.5% through 2008,
converting thereafter to prime minus 1/4%.25%.
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 twothree
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 are up significantlyincreased for the first ninethree months of 2004.fiscal 2005.
We continue to believe that as cable companies look at expanding their services
in key markets and to recover from or address the effectsremain competitive during this period of a slow economy and
depressed capital markets,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, 2004 and June 30,December 31, 2003
Net Sales. Net sales increased $4.4 million,$969,000, or 53.7%8.6%, to $12.7$12.3 million in the
thirdfirst quarter of fiscal 2004,2005, from $8.2$11.3 million for the same period in fiscal
2003,2004, primarily due to the positive results of our marketing initiatives and
distributor relationships discussed in the previous paragraph. New equipment
sales were up 75.2%17.6% to $9.0$8.9 million for the current period, compared with $5.1$7.6
million for the same period of fiscal 2003.2004. Sales of remanufactured equipment
increaseddecreased by 25.7%14.8% to $2.5$2.2 million for the current period, compared with $2.0$2.6
million in the same period last year. Repair service revenues were up 4.4%1.4% to
$1.2$1.14 million for the current quarter, compared with $1.1$1.13 million for the same
period last year.
CostCosts 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, and (iii) the related transportation costs.costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales
increased to $7.9$7.4 million for the thirdfirst quarter of fiscal 20042005 from $4.6$6.7
million for the same period of fiscal 2003.2004. The increase was primarily due to
the increase in sales for the period. Costs of sales for new and refurbished
equipment increased slightly to 65.5% of the respective net sales for
2004 from 61.1%66.3% of net sales income for 2003. This increase was primarily due to the
increase in the allowance2005 from 66.1%
of net sales income for obsolete inventory during 2004. Costs of sales for repair services increased to
25.6% of the respective net sales for 2004
from 22.7%72.7% of net salesservice income for 2003.2005 from 62.3% of net service income for 2004.
This increase was due primarily to themore high-end hybrid and fiber optic
equipment being repaired, which involves a higher relative cost of material.
Gross Profit. Gross profit climbed $1.2 million$186,000 or 33.0%4.8% to $4.8$4.1 million for the
thirdfirst quarter of fiscal 20042005 from $3.6$3.9 million for the same period in fiscal
2003.2004. The gross margin percentage was 38.1%33.1% for the current quarter, compared
to 44.0%34.3% for the same quarter last year. The percentage decrease was primarily
due to an increase in sales of new and surplus equipment, which are accompanied
by margins lower than thosethat of re-manufactured equipment, or
repairs.and the increase in
costs of sales for repair services discussed above.
10
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
increaseddecreased by $259,000 for$61,000 in the thirdfirst quarter of fiscal 20042005, to $2.2$1.51 million from
$1.9$1.57 million for the same period in 2003, an increase2004, a decrease of 13.7%3.9%. The increasedecrease in
operating, selling, general and administrative expenses was primarily due to
increasesdecreases in salariesmaintenance and wages and professional services.utilities expenditures during the three months
ended December 31, 2004.
Income from Operations. Income from operations rose $934,000,$255,000, or 55.8%11.4%, to
$2.6$2.49 million for the thirdfirst quarter of fiscal 20042005 from $1.7$2.23 million for the
same period last year. This increase was primarily due to increases in sales
to the larger MSOs, partially offset by the increase in the allowance for
obsolete inventorycosts of sales in 2004.2005.
Interest Expense. Interest expense for the three months ended June 30,December 31,
2004 was $37,000$146,154 compared to $50,000$55,753 for the same period last year. The
decreaseincrease was primarily attributable to a lower average interest rate on our line of
credit and the repayment of stockholderincrease in notes early in the period.payable at
September 30, 2004. The weighted average interest rate paid on the line of credit decreasedour outstanding
borrowings increased to 5.3% for 2005 from 2.75% for 2004 from 3.0% for 2003.2004.
Income Taxes. The provision for income taxes for the three months ended June
30, 2004fiscal 2005 increased to
$854,000$828,000 from $315,000 for the same period$785,000 in fiscal 2003.2004. This increase was primarily due to
higher pre-tax earnings in fiscal 2004 and a reduction in fiscal 2003 of the Company's allowance against deferred
tax assets due to favorable tax development during that period.
Comparison of Results of Operations for the Nine Months Ended June 30, 2004 and
June 30, 2003
Net Sales. Net sales increased $11.1 million, or 45.3%, to $35.6 million for
the nine months ended June 30, 2004, from $24.5 million for the same period in
fiscal 2003, primarily due to the positive results of our marketing initiatives
and distributor relationships discussed above. New equipment sales were up
76.2% to $25.1 million for the current period, compared with $14.2 million for
the same period of fiscal 2003. Sales of remanufactured equipment increased by
3.4% to $7.1 million for the current period, compared with $6.9 million in the
same period last year. Repair service revenues remained relatively constant at
$3.4 million for each of the nine months ended June 30, 2004 and 2003.
Cost 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, and (iii) the related transportation costs.
Costs of sales increased to $21.9 million for the nine months ended June 30,
2004 from $13.6 million for the same period of fiscal 2003. The increase was
primarily due to the increase in sales for the period. Costs of sales for new
and refurbished equipment increased to 65.6% of the respective net sales for
2004 from 61.0% of net sales for 2003. This increase was primarily due to the
increase in the allowance for obsolete inventory during 2004. Costs of sales
for repair services increased to 23.2% of the respective net sales for 2004
from 20.1% of net sales for 2003. This increase was due primarily to the
high-end hybrid and fiber optic equipment being repaired, which involves a
higher relative cost of material.
11
Gross Profit. Gross profit climbed $2.8 million or 25.1% to $13.7 million for
the nine months ended June 30, 2004 from $11.0 million for the same period in
fiscal 2003. The gross margin percentage was 38.5% for the current period,
compared to 44.7% for the same period last year. The percentage decrease was
primarily due to an increase in sales of new and surplus equipment which are
accompanied by margins lower than that of re-manufactured equipment or repairs.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $478,000 for the nine months ended June 30, 2004, to $6.2 million
from $5.8 million for the same period in 2003, an increase of 8.3%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the incurrence of fees for
the Company's commencement of trading on the American Stock Exchange.
Income from Operations. Income from operations rose $2.3 million, or 45.2%,
to $7.3 million for the nine months ended June 30, 2004 from $5.0 million for
the same period last year. This increase was primarily due to increases in
sales to the larger MSOs, partially offset by the increase in the allowance for
obsolete inventory in 2004.
Interest Expense. Interest expense for the nine months ended June 30, 2004 was
$134,000 compared to $153,000 for the same period last year. The decrease was
primarily attributable to a lower average interest rate on our line of credit.
The weighted average interest rate paid on the line of credit decreased to
2.75% for 2004 from 3.1% for 2003.
Income Taxes. The provision for income taxes for fiscal 2004 increased to $2.5
million from $1.5 million in fiscal 2003. This increase was primarily due to
higher pre-tax earnings in fiscal 2004 and a reduction in fiscal 2003 of the
Company's allowance against deferred tax assets due to favorable tax
developments during that period.2005.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-KSB10-K for fiscal
year 20032004 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.
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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
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. 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. Our estimates
of future product demand may prove to be inaccurate,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. We
recorded an allowanceAs of
2%, or $447,000, of the inventory balance at September
30, 2003 as a reserve for obsolete equipment. For the nine months ended June 30, 2004, we increasedhave reduced inventories by recording an allowance for
excess and obsolete inventories totaling $1,093,000. No addition to this allowance by 3%, or $656,000, as a reserve for
obsolete equipment purchased during the period. No
allowance was recorded forduring the ninethree months ended June 30,December 31, 2004. An
allowance of $201,000 was recorded during the three months ended December 31,
2003.
Accounts Receivable Valuation
-----------------------------
Management judgments and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness,creditworthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness,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, 2004,
accounts receivable, net of allowance for doubtful accounts of $79,000,$68,000,
amounted to $6.0$5.1 million.
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Liquidity and Capital Resources
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $9.0$7.0 million at a borrowing rate of 11/4% below
Chase Manhattan Prime (3.0%based on the
prevailing 30-day LIBOR rate plus 2.0% (4.4% at June 30, 2004).December 31, 2004.) This line
of credit will provide the lesser of $7.0 million or the sum of 80% of
qualified accounts receivable and 40%50% of qualified inventory in a revolving
line of credit for working capital purposes and $2.0 million for future acquisitions meeting Bank
of Oklahoma credit guidelines.purposes. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures, and
general intangibles and had an outstanding balance at JuneDecember 31, 2004, of
$2.4 million, due September 30, 2005. We intend to renew the agreement at the
maturity date under similar terms.
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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 $7.7 million at December 31, 2004. The note is due on September 30, 2009,
with monthly principal payments of $100,000 plus accrued interest, and the note
bears interest at the prevailing 30-day LIBOR rate plus 2.50%. An interest
rate swap was entered into simultaneously with the note on September 30, 2004,
which fixed the interest rate at 6.13%. Notes payable secured by real estate
of $3.5 million,$375,270 are due June 30,
2005.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
athe bank line of credit. Monthly payments of principal for notes payable and
loans used to purchase buildings total $37,000$1.2 million in the next 12 months. We
expect to fund these payments through cash flows from operations.
We also have two stockholder loans totaling $575,000, due on demand,
bearing interest at the same rate as our bank line of credit. These notes are
being repaid at the rate of $25,000 per month. It is not expected that these
notes will be called within the next year.
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
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 and stockholder notes.credit. The interest rates under
the line of credit and the stockholder notes fluctuate with the primeLIBOR rate. At June 30,December 31, 2004, the
outstanding balances subject to variable interest rate fluctuations totaled
$4.1$2.4 million. Future changes in interest rates could cause our borrowing costs
to increase or decrease.
The Company maintains no cash equivalents and does not enterequivalents. 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, financial instruments.$16,514 at December 31, 2004, 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.
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During the period covered by this report on Form 10-Q, there have been no
changes in our internal control 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
and Reports on Form 8-K.
(a) Exhibit No. Description
31.1 Certification of Periodic Report by Chief Executive Officer and Chief
Financial Officer under Section 302 of the Sarbanes-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.
(b) Reports on Form 8-K for the quarter ended June 30, 2004:
The Company furnished several reports on Form 8-K covering
matters disclosed under Items 9 and 12 but no reports on Form 8-K
were filed during the period.
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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)
By: /s/ Kenneth A. Chymiak
---------------------------------------------------------------
Date: August 3, 2004February 11, 2005 Kenneth A. Chymiak,
President and Chief
Executive Officer (Principal
Executive Officer and
Principal Financial Officer)
By: /s/ Dee Cooper
---------------------------------------------------------------
Date: August 3, 2004February 11, 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.
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