U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 2
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10799
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Name of small business issuer in its charter)
Oklahoma 73-1351610
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 East Iola
Broken Arrow, Oklahoma 74012
---------------------- -----
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (918) 251-9121
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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
--------- ---------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year are $25,408,931.
The aggregate market value of the shares of common stock, par value $.01 per
share, held by non-affiliates of the issuer was $1,196,204 as of December 26,
2002.
As of the latest practicable date, the number of the registrant's common stock,
$.01 par value per share, outstanding was 10,010,414 as of December 26, 2002.
The definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with the Registrant's 2003 annual meeting of shareholders is
incorporated by reference in Part III, Items 9, 10, 11 and 12 of this Form 10-
KSB. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant's most recent
fiscal year.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE): Yes [ ] No [x]
This Amendment No. 2 to our Annual Report on Form 10-KSB for the year ended
September 30, 2002 is being filed for the purpose of amending and restating the
disclosures under Items 6 and 7 of Part II of Form 10-KSB.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with our consolidated historical
financial statements and the notes to those statements that appear elsewhere in
this report. Certain statements in the discussion contain forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including those set forth under "Risk Factors" and "Business" and elsewhere in
this report.
General
-------
ADDvantage Technologies Group, Inc and its subsidiaries, TULSAT, Lee CATV
Corporation, NCS Industries, Comtech Services, TULSAT - Texas and TULSAT -
Atlanta comprise an organization involved in the re-manufacture, repair and sale
of previously owned cable television ("CATV") equipment and the distribution of
new and surplus equipment to CATV operators. New sales are defined as products
that are purchased from the manufacturer, and includes new surplus, which is
defined as inventory items purchased from other distributors or MSO's with
excess equipment that have never been used. Re-manufactured sales are defined
as used inventory that is updated to meet customer needs and requirements.
Overview
--------
It is difficult to time the placing of orders in our business due to
cyclical conditions that exist in the broadband and cable industry and present
economic conditions that affect it. Last year continued to be a challenging
business environment in the industry due to a significant reduction in capital
spending that began in the first quarter of fiscal 2001. We believe we are in
a unique position to service those MSO's, which are looking to minimize costs.
We have an abundance of inventory and we offer repair services, which are
available to our customers, who include some of the largest cable operators of
the industry. The industry conditions have affected all equipment suppliers,
and we have worked to minimize the negative impact of these conditions on our
financial results and operations. We have aggressively sought to stimulate
sales by marketing our products and services to the larger MSO's and we have
managed our receivables to minimize any bad debt write-offs. Our efforts have
resulted in increasing sales in a down economy (11.0% over last year),
minimizing the impact of the Adelphia bankruptcy (a $96,000 bad debt write-off,
representing approximately 5% of sales to Adelphia, where the impact for other
companies had been more severe) and minimizing the overall impact of bad debts
written off in total compared to net income ($136,000, representing less than
7% of net income). However, our largest risk is our investment in inventory.
2
After consideration of continued analysis, review, and evaluation of our
inventory, we recorded an inventory write-down of $1.4 million due to a
reduction of market prices on certain items of used and new inventory. We
expect fiscal 2003 to be significantly improved based on preliminary results
from increased sales in the first quarter of 2003 compared to first quarter
2002. However, there is no assurance that revenues in fiscal 2003 will
continue to exceed those for comparable periods in fiscal 2002 due to the
factors discussed elsewhere in this report.
Set forth below is a description of how the business has performed over
the last two years. The acquisitions of NCS (March 2001), Comtech and the
formation of TULSAT-Texas (May 2001) and TULSAT-Atlanta (June 2002), have
changed business operations significantly and we have seen a positive impact
from these additions as they implement our management philosophies and
strategies.
Results of Operations
---------------------
Year Ended September 30, 2002 Compared to Year Ended September 30, 2001
(all references to years are to fiscal years)
Net Sales. Net sales climbed $2.5 million or 11.0%, to $25.4 million for
the year from $22.9 million for 2001. Despite the decrease in overall capital
spending in the industry and the bankruptcies of several cable operators, new
sales increased 31.7% from $9.0 million last year to $11.8 million this year as
a result of our new distributorship with Scientific-Atlanta and the acquisition
of NCS. Our focus on increasing repair revenue has resulted in an 18.5%
increase in those revenues, from $3.3 million last year to $3.9 million this
year primarily due to the acquisitions of Comtech and NCS. Although we are
pleased with the results of repair services, they were severely impacted by the
tightening of credit for the small cable operators and bankruptcy filings of
several of our customers. Our revenue generated by sales of re-manufactured
equipment has also been impacted by the economic slowdown. Revenue from re-
manufactured equipment sales dropped 4.4% from $10.2 million last year to $9.8
million this year. The collective impact NCS, Comtech, and Tulsat-Texas had on
sales in those 2002 months which correspond to the same months in 2001 prior to
the acquisitions of those companies was $1.4 million.
Costs of Sales. Costs of sales includes the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, the
equipment costs used in repairs, and the related transportation costs. Cost of
sales this year was 56.6% of net sales compared to 51.9% last year. Costs of
sales for new and refurbished equipment rose to 63.8% of net sales for 2002 from
59.0% of net sales for 2001. This was primarily due to the write-down of
inventory of $1.4 million discussed above. Cost of sales for repair services
increased to 16.9% of net sales for 2002 from 10.3% of net sales for 2001. This
increase was due primarily to the fact that we performed repairs on more high-
end hybrid and fiber optic equipment that has a higher cost of material relative
to sales.
Operating, Selling, General and Administrative Expenses. Operating,
selling, general and administrative expenses includes 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 $1.34 million, or 23.0% in 2002 over the previous year.
Most of this increase was directly attributable to operating expenses (primarily
salaries and wages) associated with NCS, Comtech, Tulsat - Texas and the
addition of the new facility, Tulsat - Atlanta, in 2002.
3
Income from Operations. Income from operations decreased 27.0 %, to $3.5
million for 2002 from $4.9 million for 2001. This decrease was primarily due
to the inventory write-down and operating costs associated with the recent
acquisitions offset by higher net sales.
Interest Expense. Interest expense for fiscal 2002 was $245,000 compared
to $337,000 in fiscal 2001. The decrease was primarily attributable to a lower
average interest rate on the Company's line of credit.
Income Taxes. The provision for income taxes for fiscal 2002 decreased to
$1.1 million from $1.7 million in fiscal 2001. The decrease was primarily due
to lower pre-tax earnings coupled with a favorable impact from changes in the
deferred tax valuation allowance.
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.
Inbound freight charges are included in Costs of Sales. Purchasing and
receiving costs, inspection costs, warehousing costs, internal transfer costs
and other inventory expenditures are included in operating expenses.
4
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 annual 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
sold. Demand for some of the items in our inventory has been impacted by recent
economic conditions present in the cable industry. Rather than using the
allowance method for excess and slow moving inventory, a direct write-off
method is utilized to present inventory at lower of cost or market. We wrote
certain items in inventory down to their estimated market values at September
30, 2002, increasing the cost of sales by $1,442,938. 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. The reserve for bad debts increased from
$0 at September 30, 2001 to $85,212 at September 30, 2002. The increase
resulted from changes in the industry and the general downturn in the economy
causing us to experience an increase in delays in receiving payments and
defaults. At September 30, 2002, accounts receivable, net of allowance for
doubtful accounts of $85,000, amounted to $3.3 million.
Liquidity and Capital Resources
We finance our operations primarily through internally generated funds and
a bank line of credit.
During 2002, we generated in excess of $2.4 million cash flow from
operations, which we used to meet our preferred dividend obligations of $1.24
million, repay debt, and increase cash by $545,000.
5
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 (3.5% at September 30, 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 September 30, 2002 of $4.5 million, due June
30, 2003.
Our board of directors has authorized the repurchase of up to $l.0 million
of our outstanding common stock from time to time in the open market at
prevailing market prices or in privately negotiated transactions. The
repurchased shares will be held in treasury and used for general corporate
purposes including possible use in the company's employees' stock plans or for
acquisitions. We did not repurchase any shares during the fiscal year.
We believe that cash flow from operations, existing cash balances and our
existing line of credit provide sufficient liquidity and capital resources to
meet our needs.
We lease various properties from a company owned by our principal
shareholders. Future minimum lease payments under these leases are as follows:
2003 $ 437,700
2004 384,840
2005 105,840
2006 17,640
----------
$ 946,020
==========
Cash used in financing activities in 2002 was primarily used to pay
dividends on our Series A and Series B Preferred Stock. Dividends on these
preferred stocks total $1,240,000 annually. The outstanding common and
preferred stock is beneficially owned by our principal shareholders as reflected
in the following table.
Stock Ownership
---------------
Percent of Percent of
Percent of Series A Series B
Common Preferred Preferred
Stock Stock Stock
Name of Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned (A) Owned (A)
---------------- ----- --------- ---------
David E. Chymiak 41.6% 50.0% 50.0%
Kenneth A. Chymiak 40.0% 50.0% 50.0%
(A) The two series of outstanding preferred stock have an aggregate preference
upon liquidation of $20,000,000 plus accrued and unpaid dividends.
6
Impact of Recently Issued Accounting Standards
In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (SAFS 141), Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), and
Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations to be accounted for using the
purchase method of accounting and is effective for all business combinations
initiated after June 30, 2001. The Company is currently not affected by SFAS
141, as there are no transactions covered by this pronouncement.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The Company will
discontinue the amortization of its goodwill balances and intangible assets
with indefinite useful lives effective October 1, 2002. The Company has
goodwill from recent acquisitions and has not recorded any impairment at this
time. The Company is currently evaluating the impact of SFAS 142 on its
consolidated financial statements.
SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Statement No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company does not expect SFAS 143 to have a material impact on its financial
condition and results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes
Statement 121, "Accounting for the Impairment of Long-Lived assets and Long-
Lived Assets to Be Disposed Of" and the accounting and reporting provisions of
Accounting Principals Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. Goodwill is excluded from the scope
of Statement No. 144. Additionally, Statement No. 144 utilizes a probability-
weighted cash flow estimation approach and establishes a "primary-asset"
approach to determine the cash flow estimation period for a group of assets.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001. The Company does not expect SFAS 144 to have a material impact on its
financial condition and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS 145). This Statement
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, and an amendment of that Statement, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for sale-
7
leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company does not
expect SFAS 145 to have a material impact on its financial condition and results
of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is currently not affected by
SFAS 146 as there are no transactions covered by these pronouncements.
In October 2002, the Financial Accounting Standards Board issued FASB
Statement No. 147, Accounting for Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9 (SFAS 147). SFAS 147 amends SFAS 72 and no longer requires
financial institutions to recognize, and subsequently amortize, any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset.
In addition, SFAS 147 amends SFAS 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Management does not anticipate that the adoption of SFAS 147
will have any material impact on the financial statements.
8
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements Page
Independent Auditors' Report 10
Consolidated Balance Sheet, September 30, 2002 (Restated) 11
Consolidated Statements of Income for Years Ended September
30, 2002 and 2001 (Restated) 13
Consolidated Statement of Changes in Stockholders' Equity 14
Consolidated Statements of Cash Flows, Years Ended September
30, 2002 and 2001 (Restated) 15
Notes to Consolidated Financial Statements 16
9
INDEPENDENT AUDITORS' REPORT
The Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheet of ADDvantage
Technologies Group, Inc. (the "Company") as of September 30, 2002 (as
restated), and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended September 30, 2002
and 2001 (as restated). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 2002 (as restated), and the consolidated results of its
operations and its cash flows for the years ended September 30, 2002 and 2001
(as restated), in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 11 to the financial statements, the Company restated the
financial statements for the years ended September 30, 2002 and 2001 to revise
its accounting for the series of capital transactions associated with the
merger of TULSAT Corporation and ADDvantage Technologies Group, Inc.
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
December 12, 2002
except for Note 11, as to which the date
is February 24, 2004
10
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2002
(Restated)
Assets
Current assets:
Cash $ 775,740
Accounts receivable, net of allowance of $85,212 3,349,108
Refundable income taxes 156,190
Inventories 17,584,237
Deferred income taxes 102,000
------------
Total current assets 21,967,275
Property and equipment, at cost:
Machinery and equipment 1,994,045
Land and buildings 763,007
Leasehold improvements 496,508
------------
3,253,560
Less accumulated depreciation and amortization (1,040,989)
------------
Net property and equipment 2,212,571
Other assets:
Deferred income taxes 1,005,000
Goodwill, net of accumulated amortization of $398,531 1,150,060
Other assets 26,858
------------
Total other assets 2,181,918
------------
Total assets $ 26,361,764
============
See notes to consolidated financial statements.
11
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2002
(Restated)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,471,672
Accrued expenses 586,598
Accrued income taxes -
Bank revolving line of credit 4,473,681
Notes payable - current portion 166,667
Dividends payable 310,000
Stockholder notes 1,135,702
------------
Total current liabilities 8,144,320
Notes payable 76,620
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; 10,011,716 shares issued 100,117
Paid-in capital (7,389,010)
Retained earnings 5,060,234
------------
17,771,341
Less: Treasury stock, 20,000 shares at cost (54,164)
------------
Total stockholders' equity 17,717,177
------------
Total liabilities and stockholders' equity $ 26,361,764
============
See notes to consolidated financial statements.
12
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Restated)
Year ended September 30,
2002 2001
---- ----
Net sales income $ 21,508,380 $ 19,577,461
Net service income 3,900,551 3,307,105
------------ ------------
25,408,931 22,884,566
Costs of sales 14,370,776 11,885,210
------------ ------------
Gross profit 11,038,155 10,999,356
Operating, selling, general and
administrative expenses 7,172,510 5,831,733
Depreciation and amortization 315,691 302,466
------------ ------------
Income from operations 3,549,954 4,865,157
Interest expense 244,746 336,752
------------ ------------
Income before income taxes 3,305,208 4,528,405
Provision for income taxes 1,104,000 1,667,000
------------ ------------
Net income 2,201,208 2,861,405
Preferred dividends 1,240,000 1,240,000
------------ ------------
Net income attributable
to common stockholders $ 961,208 $ 1,621,405
============ ============
Earnings per share:
Basic $ 0.10 $ 0.16
Diluted $ 0.10 $ 0.16
See notes to consolidated financial statements.
13
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 2002 and 2001
Series A Series B Retained
Common Stock Preferred Preferred Paid-in Earnings Treasury
Shares Amount Stock Stock Capital (Deficit) Stock Total
---------------------------------------------------------------------------------------------------
Balance, September 30, 2000 9,992,956 $ 99,930 $8,000,000 $12,000,000 - $(4,735,204) $(54,164)$15,310,562
Adjust capital
transactions (Note 11) - - - - (7,402,340) 7,212,825 - (189,515)
---------------------------------------------------------------------------------------------------
Balance, September 30, 2000
as restated 9,992,956 99,930 8,000,000 12,000,000 (7,402,340) 2,477,621 (54,164) 15,121,047
Net income - - - - - 2,861,405 - 2,861,405
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
Issue common shares (Note 8) 18,760 187 - - 13,330 - - 13,517
---------------------------------------------------------------------------------------------------
Balance, September 30, 2001 10,011,716 100,117 8,000,000 12,000,000 (7,389,010) 4,099,026 (54,164) 16,755,969
Net income - - - - - 2,201,208 - 2,201,208
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
---------------------------------------------------------------------------------------------------
Balance, September 30, 2002 10,030,414 $100,304 $8,000,000 $12,000,000 $(7,389,197) $8,312,822 $(54,164)$20,969,765
===================================================================================================
See notes to consolidated financial statements.
14
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
Year ended September 30,
2002 2001
---- ----
Cash Flows from Operating Activities
Net income $ 2,201,208 $ 2,861,405
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 315,691 302,466
Provision (Benefit) for deferred income taxes (81,000) 117,000
Change in:
Receivables (509,811) 1,118,782
Inventories 144,883 (2,327,183)
Other assets 79,634 (26,431)
Accounts payable and accrued liabilities 221,863 (177,325)
------------ ------------
Net cash provided by operating activities 2,372,468 1,868,714
------------ ------------
Cash Flows from Investing Activities
Additions to property and equipment (610,630) (583,536)
Proceeds from sale of investment in Ventures - 657,569
Purchase of business combinations, net of cash
acquired of $575,958 in 2001 - (1,090,269)
------------ ------------
Net cash used in investing activities (610,630) (1,016,236)
------------ ------------
Cash Flows from Financing Activities
Net borrowings under line of credit 222,548 895,585
Payments on stockholder loans (150,000) (300,000)
Payments on notes payable (49,204) -
Payments of preferred dividends (1,240,000) (1,240,000)
------------ ------------
Net cash used in financing activities (1,216,656) (644,415)
------------ ------------
Net increase in cash 545,182 208,063
Cash, beginning of year 230,558 22,495
------------ ------------
Cash, end of year $ 775,740 $ 230,558
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 244,253 $ 343,460
Cash paid for income taxes $ 1,832,342 $ 1,462,000
See notes to consolidated financial statements.
15
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
Note 1 - Summary of Significant Accounting Policies
Description of business
ADDvantage Technologies Group, Inc. and its subsidiaries (the "Company") sell
new, surplus, and re-manufactured cable television equipment throughout North
America in addition to being a repair center for various cable companies. The
Company operates in one business segment.
Principles of consolidation
The consolidated financial statements include the accounts of ADDvantage
Technologies Group, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
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.
Property and equipment
Property and equipment consists of office equipment, other equipment, and
buildings, with estimated useful lives of 5 years, 10 years, and 40 years,
respectively. Leasehold improvements are depreciated over the remainder of the
lease agreement. Depreciation is provided using straight line and accelerated
methods over the estimated useful lives of the related assets. Repairs and
maintenance are expensed as incurred, whereas major improvements are
capitalized. Depreciation expense was $157,267 and $165,493 for the years
ended September 30, 2002 and 2001, respectively.
Income taxes
The Company provides for income taxes in accordance with the liability method
of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax carryforward amounts. Management provides valuation allowance
against deferred tax assets for amounts which are not considered "more likely
than not" to be realized.
16
Revenue recognition
Our principal sources of revenues are from sales of new, remanufactured or used
equipment, and repair services. The Company recognizes revenue for product
sales when title transfers, the risks and rewards of ownership have been
transferred to the customer, the fee is fixed and determinable, and the
collection of the related receivable is probable which is generally at the time
of shipment. The stated shipping terms are FOB shipping point per the
Company's sales agreements with customers. Accruals are established for
expected returns based on historical activity. Revenue for services is
recognized when the repair is completed and the product is shipped back to the
customer.
Shipping and handling costs
Amounts billed to customers for shipping and handling represent revenues earned
and are included in net sales and service income in the accompanying
consolidated statements of income. Actual costs for shipping and handling of
these sales is included in costs of sales.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $224,468
and $229,947 for the years ended September 30, 2002 and 2001, respectively.
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Any significant, unanticipated changes in product demand, technological
developments or continued economic trends affecting the cable industry could
have a significant impact on the value of our inventory and operating results.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
spreading the trade credit risk. The Company controls credit risk through
credit approvals, credit limits, and monitoring procedures. The Company
performs in-depth credit evaluations for all new customers but does not require
collateral to support customer receivables.
17
Goodwill
Goodwill is amortized on a straight-line basis over periods ranging from 10 to
20 years. Amortization of goodwill for the years ended September 30, 2002 and
2001, was $158,424 and $134,863, respectively.
An outside firm specializing in business valuation and financial advisory
services was retained to analyze the Company's recorded amount of goodwill and
render an opinion on goodwill impairment as of October 1, 2002. The goodwill
impairment testing consisted of two steps. The first step compared the fair
value of the reporting unit with its carrying amount, including goodwill. The
second step of measuring impairment loss would be necessary if the results of
step one indicated the fair value of the reporting unit was lower than its
carrying amount.
CBIZ Valuation Group, Inc. performed a valuation analysis that included, but
was not necessarily limited to, procedures of reviewing financial statements
for multiple years and entities, discussions with Company management,
reviewing information related to the industry, reviewing and analyzing pricing
and other data involving publicly disclosed transactions of companies that
operate in the industry, and review of other financial data involving publicly
traded companies that operate in the same or similar line of business as the
Company.
For the purpose of determining the fair value of the common equity of
ADDvantage, CBIZ utilized the results of the market approach and the income
approach, which incorporated the discounted cash flow method. The discounted
cash flow model is a cash flow to invested capital model, meaning that it
neither forecasts forward debt balances nor any interest expense. The
resulting cash flows are those available to both debt (including preferred
stock) and equity holders. Annual tests will continue to be performed as of
October 1 of each year, with more frequent testing if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
Employee stock-based awards
Employee stock-based awards are accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Earnings per share
Basic earnings per share are based on the sum of the average number of common
shares outstanding and issuable restricted and deferred shares. Diluted
earnings per share include any dilutive effect of stock options, restricted
stock and convertible preferred stock.
18
Fair value of financial instruments
The carrying amounts of accounts receivable and payable approximate fair value
due to their short maturities. The carrying value of the Company's line of
credit approximates fair value since the interest rate fluctuates periodically
based on the prime rate. Terms of the stockholder loans are similar to the
bank loan. Management believes that the carrying value of the Company's
borrowings approximate fair value based on credit terms currently available for
similar debt.
Impact of recently issued accounting standards
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (SAFS 141), Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), and
Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations to be accounted for using the
purchase method of accounting and is effective for all business combinations
initiated after June 30, 2001. The Company is currently not affected by SFAS
141, as there are no transactions covered by this pronouncement.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have finite lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. The Company will discontinue
the amortization of its goodwill balances and intangible assets with indefinite
useful lives effective October 1, 2002, and will evaluate the carrying value of
goodwill during the first quarter of fiscal 2003. The Company is currently
evaluating the impact of SFAS 142 on its consolidated financial statements.
SFAS 143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset. Statement No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
does not expect SFAS 143 to have a material impact on its financial condition
and results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes
Statement 121, "Accounting for the Impairment of Long-Lived assets and Long-
Lived Assets to Be Disposed Of" and the accounting and reporting provisions of
Accounting Principals Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. Goodwill is excluded from the scope
of Statement No. 144. Additionally, Statement No. 144 utilizes a probability-
weighted cash flow estimation approach and establishes a "primary-asset"
approach to determine the cash flow estimation period for a group of assets.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001. The Company does not expect SFAS 144 to have a material impact on its
financial condition and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS 145). This Statement
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, and an amendment of that Statement, FASB Statement No. 64,
19
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for sale-
leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company does not
expect SFAS 145 to have a material impact on its financial condition and
results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is currently not affected by
SFAS 146 as there are no transactions covered by these pronouncements.
In October 2002, the Financial Accounting Standards Board issued FASB Statement
No. 147, Accounting for Acquisitions of Certain Financial Institutions - an
amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 (SFAS
147). SFAS 147 amends SFAS 72 and no longer requires financial institutions to
recognize, and subsequently amortize, any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset. In addition, SFAS 147
amends SFAS 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor and borrower
relationship intangible assets and credit cardholder intangible assets.
Management does not anticipate that the adoption of SFAS 147 will have any
material impact on the financial statements.
Note 2 - Inventories
Inventories are summarized as follows:
2002 2001
-----------------------------
New $ 11,731,604 $ 10,642,719
Used 5,852,633 7,086,402
-----------------------------
$ 17,584,237 $ 17,729,121
=============================
New inventory includes products purchased from the manufacturers plus "surplus-
new" which is unused products purchased from other distributors or multiple
system operators. Used inventory includes factory remanufactured, Company
remanufactured and used products.
We regularly review inventory quantities on hand and a departure from cost is
required when the loss of usefulness of an item or other factors, such as
obsolete and excess inventories, indicate that cost will not be recovered when
an item is sold. 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, increasing the cost of sales by $1,442,938.
20
Note 3 - Line of Credit, Stockholder Notes, and Notes Payable
At September 30, 2002, a $4,473,681 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% (3.5% at September 30, 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 before
the payment of preferred dividends 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 $151,349 at September 30, 2002 and is included in the bank revolving line of
credit.
Stockholder notes of $1,100,000 are subordinate to and bear interest at rates
equal to the line of credit (3.5% at September 30, 2002). The notes are due on
demand and are classified as current. Stockholder notes of $459,349, 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 $243,291
are due in quarterly payments through 2004 with interest at 7%.
The aggregate maturities of stockholder and other notes payable for the five
years ending September 30, 2007 are as follows: 2003 - $1,302,369; 2004 -
$115,097; 2005 - $41,460; 2006 - $44,679; 2007 - $48,147; thereafter -
$250,884.
Note 4 - Income Taxes
The provisions for income taxes consist of:
2002 2001
-----------------------------
Current $ 1,185,000 $ 1,550,000
Deferred (81,000) 117,000
-----------------------------
$ 1,104,000 $ 1,667,000
=============================
21
The following table summarizes the differences between the U.S. federal
statutory rate and the Company's effective tax rate for financial statement
purposes for the year ended September 30,:
2002 2001
-----------------------------
Statutory tax rate 34.0% 34.0%
State income taxes, net of U.S.
federal tax benefit 2.4 3.4
Non-deductible goodwill
amortization and other
non-deductible expenses 1.5 .9
Adjustment of deferred tax
asset valuation allowance (3.8) (1.2)
Other (0.6) (0.2)
-----------------------------
33.5% 36.9%
=============================
Deferred tax assets consist of the following at September 30,
2002 2001
-----------------------------
Net operating losses carryforwards $ 1,358,000 $ 1,449,000
Tax basis in excess of financial basis
of certain assets 90,000 108,000
Financial liability accruals 102,000 36,000
-----------------------------
Total deferred tax assets 1,550,000 1,593,000
Valuation allowance (443,000) (567,000)
-----------------------------
Net deferred tax asset $ 1,107,000 $ 1,026,000
=============================
Deferred tax assets are classified as:
Current $ 102,000 $ 36,000
Noncurrent 1,005,000 990,000
-----------------------------
$ 1,107,000 $ 1,026,000
=============================
Utilization of ADDvantage's net operating loss carryforward of approximately
$3,996,000 to reduce future taxable income is limited to an annual amount of
$265,000. The NOL carryforward expires in varying amounts from 2014 to 2019.
The valuation allowance was provided due to uncertainty surrounding the
probability of utilizing all of the net operating loss carryovers. The
allowance is adjusted annually based on management's current evaluation.
22
Note 5 - Stockholders' Equity
The 1998 Incentive Stock Plan provides for the award to officers, directors,
key employees and consultants of stock options and restricted stock. The Plan
provides that upon any issuance of additional shares of common stock by the
Company, other than pursuant to the Plan, the number of shares covered by the
Plan will increase to an amount equal to 10% of the then outstanding shares of
common stock. Under the Plan, option prices will be set by the Board of
Directors and may be greater than, equal to, or less than fair market value on
the grant date.
At September 30, 2002, 1,004,874 shares of common stock were reserved for the
exercise of stock awards under the 1998 Incentive Stock Plan. Of the shares
reserved for exercise of stock awards, 886,476 shares were available for future
grants at September 30, 2002.
A summary of the status of the Company's stock options at September 30, 2002
and 2001, and changes during the years then ended is presented below.
2002 2001
---------------------- ----------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
---------------------- ----------------------
Outstanding, beginning of year 114,500 $2.07 40,000 $3.13
Granted - - 74,500 1.50
Exercised - - - -
Canceled - - - -
--------- ---------
Outstanding, end of year 114,500 $2.07 114,500 $2.07
========= =========
Exercisable, end of year 46,125 $2.31 20,500 $2.65
========= =========
Weighted average fair value of
Options granted N/A $1.82
========= =========
The following table summarizes information about fixed stock options
outstanding at September 30, 2002:
Options Outstanding Options Exercisable
--------------------------------- -----------------------
Weighted
Average
Number Remaining Number
Range of Outstanding Contractual Wtd. Avg. Exercisable Wtd. Avg.
Exercise Prices at 9/30/02 Life Ex. Price at 9/30/02 Ex. Price
----------------------------------------------------- -----------------------
$1.500 74,500 8.5 years $1.50 23,125 $1.50
$3.125 40,000 7.5 years $3.13 23,000 $3.13
----------- -----------
114,500 46,125
=========== ===========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001: risk-free interest rates of 5.5%; expected
dividend yield of 0.0; expected lives of 10 years; and estimated volatility of
122%.
23
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides
an alternative method of determining compensation cost for employee stock
options, which alternative method may be adopted at the option of the Company.
Had compensation cost been determined consistent with SFAS 123, the Company's
net income would not have changed significantly.
The Series A and Series B Preferred Stock are prior to the Company's common
stock with respect to the payment of dividends and the distribution of assets.
Cash dividends shall be payable quarterly when and as declared by the Board of
Directors. Interest accrues on unpaid dividends at the rate of 5% per annum
with respect to the Series A Preferred Stock and 7% per annum with respect to
the Series B Preferred Stock. No dividends may be paid on any class of stock
ranking junior to the Preferred Stock unless Preferred Stock dividends have
been paid. Liquidation preference is equal to the stated value per share. The
Series A and B Preferred Stock is redeemable at any time at the option of the
Board of Directors at a redemption price equal to the stated value per share.
Holders of the Preferred Stock do not have any voting rights unless the Company
fails to pay dividends for four consecutive dividend payment dates. Shares of
Series A Preferred Stock are convertible into common stock at any time at the
option of the holder. Each share of Series A Preferred Stock is convertible
into 10 shares of common stock.
Note 6 - Retirement Plan
The Company sponsors a 401(k) plan that covers all employees who are at least
21 years of age and have completed one year of service as of the plan effective
date. The Company's contributions to the plan consist of a matching
contribution as determined by the plan document. Pension expense under the
401(k) plan was $111,144 during the year ended September 30, 2002 and $84,134
during the year ended September 30, 2001.
Note 7 - Business Combinations
On March 2, 2001, the Company entered into a Purchase and Sale Agreement with
Richard S. Grasso (the "Shareholder") and NCS, a Pennsylvania corporation, to
purchase from the Shareholder all of the issued and outstanding common stock of
NCS. The consideration for the acquisition of $1,988,000 included: (i)
$800,000 in cash, (ii) a promissory note payable to the Shareholder in the
amount of $200,000, (iii) the assumption of Shareholder's obligation of
$639,000 under a promissory note issued to a prior owner of NCS (iv) $49,000
remaining in a payable to the shareholder; and a three-year consulting
agreement with NCS for $300,000. The Shareholder also entered into a non-
competition agreement with the Company and NCS. The Company financed the
purchase price through borrowings under its line of credit agreement with Bank
of Oklahoma. Immediately after closing, $639,000 was paid for the assumption of
the Shareholder's obligation. As a result of this transaction, NCS became a
wholly owned subsidiary of the Company.
In accounting for the NCS purchase, the Consulting Agreement was considered an
additional component of the purchase price. The required payments were not
related to the expected services that would be provided by Grasso, and the
payments are not contingent on NCS's earnings or any other performance factors.
Therefore, the $300,000 obligation was included in the determination of the
amount of the purchase price.
24
NCS was established in 1973 as a full service repair and sales center, selling
new and re-manufactured cable equipment and has been a leading distributor of
telecommunication equipment and a solutions provider to cable operators and
other related businesses since the market's infancy. The principal place of
business of NCS is located in Willow Grove, Pennsylvania.
On May 31, 2001, the Company entered into a Purchase and Sale Agreement with
Nick Ferolito and Russell Brown (the "Shareholders") and Fero-Midwest dba
Comtech Services, a Missouri corporation ("Comtech"), to purchase from the
Shareholders all of the issued and outstanding common stock of Comtech. The
consideration for the acquisition was $250,000 in cash and assumption of
certain liabilities as stated in the agreement. Also, 18,698 shares of common
stock were issued in connection with this acquisition. As a result of this
transaction, Comtech became a wholly owned subsidiary of the Company.
Following are the unaudited pro-forma result of operations for the year ending
2001, assuming the NCS and Comtech acquisitions occurred at the beginning of
2001.
2001
-------------
(Unaudited)
Net sales and service income $ 25,291,350
Income before income tax 4,355,760
Income tax 1,494,026
The unaudited pro-forma result have been prepared for comparison purposes only
and do not purport to be indicative of the results of operations which would
have actually resulted had the combination been in effect on the dates
indicated, or of future results of operations.
The following table details the amounts assigned to each major asset and
liability caption of these two acquisitions.
Purchase price allocation
-------------------------
NCS Comtech Total
------------------------------------------
Cash $ 575,958 $ 22,773 $ 598,731
Accounts receivable 407,192 235,538 642,730
Prepaid expenses 9,850 1,235 11,085
Inventory 550,000 271,448 821,448
Property and equipment 500,000 94,485 594,485
Accounts payable (209,000) (360,507) (569,507)
Accrued liabilities (79,200) (16,725) (95,925)
Goodwill 233,200 39,152 272,352
------------------------------------------
$ 1,988,000 $ 287,399 $ 2,275,399
==========================================
25
Note 8 - Investment in Ventures Education System Corporation
On November 1, 2000, Ventures Education System Corporation exercised its option
to repurchase the Company's 27% interest in Ventures. The exercise price
consisted of $660,000 and common stock warrants to purchase 50,000 shares at
$.90 per share. The warrants expire on January 31, 2004 or one year after a
public offering, whichever first occurs. The warrants were valued at $12,000.
The transaction resulted in no gain or loss.
Note 9 - Earnings per Share
Year ended Year ended
September 30, September 30,
2002 2001
----------------------------------
(Restated) (Restated)
Net income $ 2,201,208 $ 2,861,405
Dividends on preferred stock 1,240,000 1,240,000
----------------------------------
Net income attributable to
common shareholders - basic 961,208 1,621,405
Dividends on Series A convertible
preferred stock 400,000 400,000
----------------------------------
Net income attributable to common
shareholders - diluted $ 1,361,208 $ 2,021,405
==================================
Weighted average shares outstanding 9,991,716 9,991,716
Potentially dilutive securities
-------------------------------
Assumed conversion of 200,000 shares of
Series A convertible preferred stock 2,000,000 2,000,000
----------------------------------
Weighted average shares outstanding -
assuming dilution 11,991,716 11,991,716
==================================
Earnings per common share:
Basic $ 0.10 $ 0.16
Diluted 0.10 0.16
==================================
Earnings per common share-diluted are the same as basic earnings per share as
conversion of potentially dilutive securities are anti-dilutive.
Note 10 - Related Parties
The Company leases various properties from a company owned by the Company's
principal shareholders. Future minimum lease payments under these leases are as
follows:
26
2003 $ 437,700
2004 384,840
2005 105,840
2006 17,640
-----------
$ 946,020
===========
Related party rental expense for the years ended September 30, 2002 and 2001 is
$438,000 and $438,000, respectively.
Cash used in financing activities in 2002 was primarily used to pay dividends
on the Company's Series A and Series B Preferred Stock. Dividends on these
preferred stocks total $1,240,000 annually. The outstanding common and
preferred stock is beneficially owned by our principal shareholders as
reflected in the following table.
Stock Ownership
---------------
Percent of Percent of
Percent of Series A Series B
Common Preferred Preferred
Stock Stock Stock
Name of Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned (A) Owned (A)
---------------- ----- --------- ---------
David E. Chymiak 41.6% 50.0% 50.0%
Kenneth A. Chymiak 40.0% 50.0% 50.0%
(A) The two series of outstanding preferred stock have an aggregate preference
upon liquidation of $20,000,000 plus accrued and unpaid dividends.
Note 11 - Capital Restatement
On September 30, 1999, the former shareholders of TULSAT Corporation (formerly
named DRK Enterprises, Inc.) assumed control of ADDvantage Technologies Group,
Inc. (formerly named ADDvantage Media Group, Inc.) The resulting merger was
accounted for as a business combination, with the preferred stock issued in the
merger recorded as first a reduction of paid-in capital in an amount to exhaust
the account, and the remainder to retained earnings (deficit). Pursuant to
Staff Accounting Bulletin Topic 4, the Company has revised its accounting for
this series of capital transactions.
The net difference from the previous reporting is that goodwill of $199,490 has
been eliminated and the carrying value of common stock has been accordingly
reduced. In addition, the amount of retained earnings at merger date has been
adjusted to $0, while additional paid-in capital has been adjusted to report a
deficiency of paid-in capital of $8,411,731. Common stock activity subsequent
to this date has been credited to the deficiency of paid-in capital.
27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are included as exhibits to this Form 10-
KSB/A. Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, such exhibit is filed herewith.
Exhibit
-------
2.1 The Securities Exchange Agreement, dated as of September 16, 1999,
by and among ADDvantage Media Group, Inc. and David E. Chymiak,
Kenneth A. Chymiak, as Trustee of the Ken Chymiak Revocable Trust
Dated March 4, 1992, and Susan C. Chymiak, as Trustee of the Susan
Chymiak Revocable Trust Dated March 4, 1992 is incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K filed
with the Securities Exchange Commission by the Company on
September 24, 1999.
2.2 The Amendment and Clarification of the Securities Exchange
Agreement, dated as of September 16, 1999 incorporated by
reference to Exhibit 2.2 to the Current Report on Form 8-K filed
with the Securities Exchange Commission by the Company on October
14, 1999.
2.3 The Agreement and Plan of Merger, dated as of November 22, 1999,
by and among ADDvantage Media Group, Inc., TULSAT Corporation, Lee
CATV Corporation, Diamond W Investments, Inc., Randy L. Weideman
and Deborah R. Weideman incorporated by reference to Exhibit 2.1
to the Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on December 7, 1999.
2.4 The Sale and Purchase Agreement, dated as of March 2, 2001 by and
among ADDvantage Technologies Group, Inc., NCS Industries, Inc.
and Richard S. Grasso incorporated by reference to the Current
Report on Form 8-K filed with the Securities Exchange Commission
by the Company on March 16, 2001.
2.5 The Purchase and Sale Agreement with Nick Ferolito, Russell Brown
and Fero-Midwest d/b/a Comtech Services. The Registrant
undertakes to furnish supplementally to the Commission upon
request a copy of any omitted schedule or exhibit listed in the
Exhibit Index set forth elsewhere herein.
3.1 Certificate of Incorporation of the Company and amendments (filed
with original Form 10-KSB).
3.2 Bylaws of the Company, as amended (filed with original Form
10-KSB).
28
4.1 Certificate of Designation, Preferences, Rights and Limitations of
ADDvantage Media Group, Inc. Series 5% Cumulative Convertible
Preferred Stock and Series B 7% Cumulative Preferred Stock as
filed with the Oklahoma Secretary of State on September 30, 1999
incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed with the Securities Exchange Commission by the
Company on October 14, 1999.
10.1 Lease Agreement dated September 15, 1999 by and between Chymiak
Investments, L.L.C. and TULSAT Corporation (formerly named DRK
Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to
the Current Report on Form 10-KSB filed with the Securities
Exchange Commission by the Company on December 30, 1999.
10.2 Schedule of documents substantially similar to Exhibit 10.1
incorporated by reference to Exhibit 10.3 to the Current Report on
Form 10-KSB filed with the Securities Exchange Commission by the
Company on December 30, 1999.
10.3 Employment Agreement, dated as of November 22, 1999, by and
between Lee CATV Corporation, Randy L. Weideman and TULSAT
Corporation incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the Securities Exchange
Commission by the Company on December 7, 1999.
10.4 Form of promissory notes issued by TULSAT to David Chymiak and to
Ken Chymiak Revocable Trust and Susan C. Chymiak Revocable Trust
dated as of February 7, 2000 (filed with original Form 10-KSB).
10.5 Amended and restated loan agreement dated June 30, 1997, by and
between Bank of Oklahoma, N.A. ("Lender") and Registrant's wholly
owned subsidiary, Tulsat Corporation, formerly DRK Enterprises,
Inc., an Oklahoma corporation doing business as Tulsat
("Borrower"), as amended through the eighth amendment dated as of
November 3, 2000 (filed with original Form 10-KSB).
21.1 Subsidiaries (filed with original Form 10-KSB).
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
31.1 Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer under Section 302 of the Sarbanes Oxley
Act of 2002.
32.1 Certification of Periodic Report by the Chief Executive Officer
and Chief Financial Officer under Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
None.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ADDvantage Technologies Group, Inc.
Date: February 25, 2004 By: /s/ Kenneth A. Chymiak
--------------------------------
Kenneth A. Chymiak, President
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-KSB/A. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit Description
------- -----------
2.1 The Securities Exchange Agreement, dated as of September 16, 1999,
by and among ADDvantage Media Group, Inc. and David E. Chymiak,
Kenneth A. Chymiak, as Trustee of the Ken Chymiak Revocable Trust
Dated March 4, 1992, and Susan C. Chymiak, as Trustee of the Susan
Chymiak Revocable Trust Dated March 4, 1992 is incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K filed
with the Securities Exchange Commission by the Company on
September 24, 1999.
2.2 The Amendment and Clarification of the Securities Exchange
Agreement, dated as of September 16, 1999 incorporated by
reference to Exhibit 2.2 to the Current Report on Form 8-K filed
with the Securities Exchange Commission by the Company on October
14, 1999.
2.3 The Agreement and Plan of Merger, dated as of November 22, 1999,
by and among ADDvantage Media Group, Inc., TULSAT Corporation, Lee
CATV Corporation, Diamond W Investments, Inc., Randy L. Weideman
and Deborah R. Weideman incorporated by reference to Exhibit 2.1
to the Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on December 7, 1999.
2.4 The Sale and Purchase Agreement, dated as of March 2, 2001 by and
among ADDvantage Technologies Group, Inc., NCS Industries, Inc.
and Richard S. Grasso incorporated by reference to the Current
Report on Form 8-K filed with the Securities Exchange Commission
by the Company on March 16, 2001.
30
2.5 The Purchase and Sale Agreement with Nick Ferolito, Russell Brown
and Fero-Midwest d/b/a Comtech Services. The Registrant
undertakes to furnish supplementally to the Commission upon
request a copy of any omitted schedule or exhibit listed in the
Exhibit Index set forth elsewhere herein.
3.1 Certificate of Incorporation of the Company and amendments (filed
with original Form 10-KSB).
3.2 Bylaws of the Company, as amended (filed with original Form
10-KSB).
4.1 Certificate of Designation, Preferences, Rights and Limitations of
ADDvantage Media Group, Inc. Series 5% Cumulative Convertible
Preferred Stock and Series B 7% Cumulative Preferred Stock as
filed with the Oklahoma Secretary of State on September 30, 1999
incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed with the Securities Exchange Commission by the
Company on October 14, 1999.
10.1 Lease Agreement dated September 15, 1999 by and between Chymiak
Investments, L.L.C. and TULSAT Corporation (formerly named DRK
Enterprises, Inc.) incorporated by reference to Exhibit 10.3 to
the Current Report on Form 10-KSB filed with the Securities
Exchange Commission by the Company on December 30, 1999.
10.2 Schedule of documents substantially similar to Exhibit 10.1
incorporated by reference to Exhibit 10.3 to the Current Report on
Form 10-KSB filed with the Securities Exchange Commission by the
Company on December 30, 1999.
10.3 Employment Agreement, dated as of November 22, 1999, by and
between Lee CATV Corporation, Randy L. Weideman and TULSAT
Corporation incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the Securities Exchange
Commission by the Company on December 7, 1999.
10.4 Form of promissory notes issued by TULSAT to David Chymiak and to
Ken Chymiak Revocable Trust and Susan C. Chymiak Revocable Trust
dated as of February 7, 2000 (filed with original Form 10-KSB).
10.5 Amended and restated loan agreement dated June 30, 1997, by and
between Bank of Oklahoma, N.A. ("Lender") and Registrant's wholly
owned subsidiary, Tulsat Corporation, formerly DRK Enterprises,
Inc., an Oklahoma corporation doing business as Tulsat
("Borrower"), as amended through the eighth amendment dated as of
November 3, 2000 (filed with original Form 10-KSB).
31
21.1 Subsidiaries (filed with original Form 10-KSB).
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
31.1 Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer under Section 302 of the Sarbanes Oxley
Act of 2002.
32.1 Certification of Periodic Report by the Chief Executive Officer
and Chief Financial Officer under Section 906 of the Sarbanes-
Oxley Act of 2002.
32