UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period ________________ to ______________
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of small business issuer 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 telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 _____
Shares outstanding of the issuer's $.01 par value common stock as of December
31, 2002 were 10,010,414.
Transitional Small Business Issuer Disclosure Format (Check one):
Yes ___ No X
Part I - Financial Information Page
----
Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet
December 31, 2002 3
Consolidated Statements of Income
Three Months Ended December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of the Financial
Condition and Results of Operation 10
Item 3.
Controls and Procedures 13
Part II - Other Information
Item 6. Exhibits and Reports on 8-K 14
Signatures 15
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2002
Assets
Current assets:
Cash $ 763,153
Accounts receivable, net of allowance of $34,920 3,221,016
Refundable income taxes 156,190
Inventories 19,221,574
Deferred income taxes 102,000
------------
Total current assets 23,463,933
Property and equipment, at cost
Machinery and equipment 2,010,496
Land and buildings 763,007
Leasehold improvements 511,784
------------
3,285,286
Less accumulated depreciation and amortization (1,096,511)
------------
Net property and equipment 2,188,776
Other assets:
Deferred income taxes 1,005,000
Goodwill, net of accumulated amortization of $428,455 1,319,626
Other assets 27,100
-------------
Total other assets 2,351,726
-------------
Total assets $ 28,004,435
=============
See notes to consolidated financial statements
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2002
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,772,329
Accrued expenses 429,838
Accrued income taxes 556,827
Bank revolving line of credit 4,668,981
Notes payable - current portion 166,667
Dividends payable 310,000
Stockholder notes 1,060,702
-------------
Total current liabilities 8,965,344
Notes payable 24,527
Stockholder notes 423,647
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
Series B, 7% cumulative; 300,000 shares issued and outstanding with
a stated value of $40 per share 12,000,000
Common stock, $.01 par value; 30,000,000
shares authorized; 10,030,414 shares issued 100,304
Common stockholders' deficit (1,455,223)
-------------
18,645,082
Less: Treasury stock, 20,000 shares at cost (54,164)
-------------
Total stockholders' equity 18,590,917
-------------
Total liabilities and stockholders' equity $ 28,004,435
=============
4
See notes to consolidated financial statements
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
December 31,
2002 2001
-----------------------------
Net sales and service income $ 7,696,978 $ 5,584,729
Cost of sales 4,072,922 2,919,171
-----------------------------
Gross profit 3,624,056 2,665,558
Operating expenses 1,975,452 1,589,930
-----------------------------
Income from operations 1,648,604 1,075,628
Interest expense 59,760 66,848
-----------------------------
Income before income taxes 1,588,844 1,008,780
Provision for income taxes 574,669 347,000
-----------------------------
Net income 1,014,175 661,780
Preferred dividends 310,000 310,000
-----------------------------
Net income attributable to common
stockholders $ 704,175 $ 351,780
=============================
Earnings per share:
Basic $ 0.07 $ 0.04
Diluted $ 0.07 $ 0.04
5
See notes to consolidated financial statements
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
December 31,
2002 2001
----------------------------
Cash Flows from Operating Activities
Net income $ 1,014,175 $ 661,780
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 57,678 85,088
Provision for deferred income taxes - 44,906
Change in:
Receivables 128,091 708,295
Inventories (1,637,336) (13,622)
Other assets (242) 145,295
Accounts payable and accrued liabilities 700,722 (825,375)
----------------------------
Net cash provided by operating activities 263,088 806,367
----------------------------
Cash Flows from Investing Activities
Additions to property and equipment (33,882) (164,083)
----------------------------
Net cash used in investing activities (33,882) (164,083)
----------------------------
Cash Flows from Financing Activities
Net borrowings (repayments) under line of credit 195,301 (358,511)
Payments on stockholder loans (75,000) -
(Payments) proceeds on notes payable (52,094) 31,164
Payments of preferred dividends (310,000) (310,000)
----------------------------
Net cash used in financing activities (241,793) (637,347)
----------------------------
Net (decrease) increase in cash (12,587) 4,937
Cash, beginning of period 775,740 230,558
----------------------------
Cash, end of period $ 763,153 $ 235,495
============================
6
See notes to consolidated financial statements
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
December 31,
2002 2001
----------------------------
Supplemental Cash Flow Information
Cash paid for interest $ 59,267 $ 66,848
Cash paid for income taxes $ - $ 671,471
7
See notes to consolidated financial statements
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited 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 adjustments which are, in the opinion of management, necessary
in order to make the financial statements not misleading.
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
Three Months ended
December 31
2002 2001
------------------------
Net income attributable to common stockholders $704,175 $351,780
Basic and Diluted EPS Computation:
Weighted average outstanding common shares 10,004,181 9,991,776
Earnings per Share $0.07 $0.04
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Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At December 31, 2002, a $4,668,981 balance is outstanding under a $9.0 million
line of credit due June 30, 2003, with interest payable monthly at Chase
Manhattan Prime less 1 1/4% (3.0% at December 31, 2002). 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% of qualified inventory for working capital
purposes and $2.0 million for future acquisitions meeting Bank of Oklahoma
credit guidelines. The line of credit agreement provides that the Company's net
worth must be greater than $14.0 million and net income greater than $2.0
million. 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
of credit. The resulting overdraft balance, consisting of outstanding checks,
is $435,945 at December 31, 2002 and is included in the bank revolving line of
credit.
Stockholder loans of $1,033,680 bear interest at rates that correspond with the
line of credit (3.0% at December 31, 2002) and are subordinate to the bank notes
payable.
The notes are due on demand and are classified as current. Stockholder notes of
$450,669, which were issued for purchases of real estate, bear interest at 7.5%
and are due in monthly payments through 2011. Notes payable to unrelated
parties of $191,194 are due in quarterly payments through 2004 with interest at
7%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We specialize in the refurbishment of previously owned cable television ("CATV")
equipment and the distribution of new and surplus equipment to CATV operators
and other broadband communication companies. Within the last two years, we have
become distributors for a number of different manufacturers of equipment and
other 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 (MSO's). As a result, our overall sales and
profits are dramatically up for the first quarter of 2003, while adding
approximately $1.6 million of inventory to further enhance our product
offerings. We continue to believe that as cable companies look at expanding
their services in key markets and to recover from or address the effects of a
slow economy and depressed capital markets, there will be an emphasis on
minimizing their costs, thus creating a higher demand for the Company's repair
services and surplus-new equipment.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 2002
and December 31, 2001
Net Sales. Net sales increased $2.1 million, or 37.8%, to $7.7 million in the
first quarter of fiscal 2003, from $5.6 million for the same period in fiscal
2002, primarily due to the positive results of our marketing initiatives and
distributor relationships discussed in the previous paragraph. New equipment
sales were up 78.6% to $4.08 million for the current period, compared with $2.28
million for the same period of fiscal 2002. Sales from remanufactured equipment
were relatively flat at $2.46 million for the current period, compared with
$2.39 million in the same period last year. Repair service revenues were up
45.1% to $1.21 million for the current quarter, compared with $833,000 for the
same period last year. The increase in repair services was due to the continued
focus of being a leading repair service provider and the expansion of our
repairs sales to our new Atlanta operations which began in June of 2002.
Cost of Sales. Cost of sales increased to $4.07 million for the first quarter
of fiscal 2003 from $2.91 million for the same period of fiscal 2002. The
increase was primarily due to the increase in sales for the period.
Gross Profit. Gross profit climbed $958,000 or 36.0% to $3.62 million for the
first quarter of fiscal 2003 from $2.67 million for the same period in fiscal
2002. The gross margin percentage was 47.1% for the current quarter, compared
to 47.7% for the same quarter last year.
Operating Expenses. Operating expenses increased by $386,000 in the first
quarter of fiscal 2003, to $1.98 million from $1.59 million for the same period
in 2002, an increase of 24.2%. The increase in operating expenses was primarily
due to the commencement of the operations of TULSAT-Atlanta in June 2002,
coupled with an expanding sales force and other added expenses incurred to meet
the marketing initiatives described previously.
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Income from Operations. Income from operations rose $573,000, or 53.2% to
$1.65 million for the first quarter of fiscal 2003 from $1.08 million for the
same period last year. This increase was primarily due to increases in sales to
the larger MSO's.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-KSB for fiscal
year 2002 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.
We market our products primarily to MSO's and other users of cable
television equipment who are seeking products for 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 the
Company's 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.
In order to address the risks associated with our investment in inventory,
we regularly review inventory quantities on hand and reduce the carrying value
when the loss of usefulness of an item or other factors, such as obsolete and
excess inventories, indicate that cost will not be recovered when an item is
11
sold. Demand for some of the items in our inventory has been impacted by recent
economic conditions present in the cable industry. We wrote certain items in
inventory down to their estimated market values at September 30, 2002, which
resulted in a charge to cost of sales of $1.4 million for fiscal 2002. Any
significant, unanticipated changes in product demand, technological developments
or continued economic trends affecting the cable industry could have a
significant impact on the value of our inventory and operating results.
Accounts Receivable Valuation
-----------------------------
Management judgments and estimates are made in connection with establishing
the allowance for doubtful accounts. Specifically, we analyze the aging of
accounts receivable balances, historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms. Significant changes in customer concentration or payment terms,
deterioration of customer credit-worthiness, as in the case of the bankruptcy of
Adelphia and its affiliates, or weakening in economic trends could have a
significant impact on the 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 December 31, 2002, accounts receivable, net of
allowance for doubtful accounts of $35,000, amounted to $3.2 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 $9.0 million at a borrowing rate of 1.25% below Chase
Manhattan Prime (3.0% at December 31, 2002). This line of credit will provide
the lesser of $7.0 million or the sum of 80% of qualified accounts receivable
and 40% 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. The line of credit is collateralized by inventory, accounts
receivable, equipment and fixtures, and general intangibles and had an
outstanding balance at December 31, 2002 of $4.7 million, due June 30, 2003.
We intend to renew the agreement at the maturity date under similar terms and
expect discussions to commence with our lender in the next couple of months.
12
We finance our operations primarily through internally generated funds and
a bank line of credit. We owe from the NCS purchase, a $300,0000 obligation due
$25,000 per quarter (of which $125,000 remains payable) and a $200,000 note, due
quarterly at 7% (of which a balance of $75,000 remains). Both notes are
payable quarterly, with 5 quarters remaining. Notes payable to Chymiak
Investments, LLC for loans used to purchase buildings at Comtech and ADDvantage
Technologies Group of Texas, include two notes issued in June 2001 for $328,000
and $150,000, respectively (of which balances of $317,000 and $134,000,
respectively, remain) bearing interest at 7.5% per year due monthly with a 10
year term.
Stockholder loans include a $1.0 million note, due on demand, bearing interest
at the same rate as the Company's bank line of credit, and is subordinate to the
bank notes payable. It is not expected that these loans will be called within
the 2003 fiscal year.
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 the
business of the Company, the Company's 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 the
business or operations of the Company, general economic conditions, the
availability of new and used equipment and other inventory and the Company's
ability to fund the costs thereof, and other factors which may affect the
Company's ability to comply with future obligations. Accordingly, actual results
may differ materially from those expressed in the forward-looking statements.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to this report, with the participation of
management, our principal executive officer and principal financial
officer evaluated our disclosure controls and procedures . Based on
this evaluation, the principal executive officer and principal
financial officer concluded that the disclosure controls and
procedures are effective in timely alerting him to material
information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission.. It should be noted that
the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
(b) Changes in internal controls.
13
Subsequent to January 31, 2003 through the date of this filing of Form
10-QSB for the quarter ended December 31, 2002, there have been no
significant changes in our internal controls or in other factors that
could significantly affect those controls, including any significant
deficiencies or material weaknesses of internal controls that would
require corrective action.
PART II-OTHER INFORMATION
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)Exhibit No. Description
99.1 Certification of the Chief Executive Officer and Chief Financial
Officer
Pursuant to 8 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 December 31, 2002:
The Company filed a current report on Form 8-K on December 30, 2002 reporting
under Item 9 the issuance of a press release announcing its financial results
for the fiscal year ended September 30, 2002. A copy of the press release was
an exhibit to the report.
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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)
/S/ Kenneth A. Chymiak
---------------------------------
Date: February 7, 2003 Kenneth A. Chymiak,
Director and President
(Principal Executive Officer and
Principal Financial Officer)
/S/ Adam R. Havig
---------------------------------
Date: February 7, 2003 Adam R. Havig,
Controller
(Principal Accounting Officer)
CERTIFICATION
I, Kenneth A. Chymiak, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ADDvantage
Technologies Group, Inc, (the "Company");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
15
b. Evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
Company's auditors and the audit committee of Company's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weakness in
internal controls; and
b. Any fraud, whether or not material that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
my most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: February 7, 2003
/S/ Kenneth A. Chymiak
----------------------------------------
Kenneth A. Chymiak,
Principal Executive Office and Principal
Financial Officer
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