UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(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
This Amendment No. 1 to our Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2002 is being filed for the purpose of amending and
restating the disclosures under Items 1 and 2 of Part I of Form 10-QSB.
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.
Part I - Financial Information Page
----
Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet
December 31, 2002 (Restated) 3
Consolidated Statements of Income
Three Months Ended December 31, 2002 and 2001 (Restated) 5
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2002 and 2001 (Restated) 6
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of the Financial
Condition and Results of Operations 10
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2002
(Restated)
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 $398,531 1,150,060
Other assets 27,100
------------
Total other assets 2,182,160
------------
Total assets $ 27,834,869
============
See notes to consolidated financial statements.
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2002
(Restated)
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
Paid-in capital (7,389,197)
Retained earnings 5,764,409
------------
18,475,517
Less: Treasury stock, 20,000 shares at cost (54,164)
------------
Total stockholders' equity 18,421,352
------------
Total liabilities and stockholders' equity $ 27,834,869
============
4
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Restated)
Three months ended
December 31,
2002 2001
-----------------------------
Net sales income $ 6,491,416 $ 4,751,823
Net service income 1,205,562 832,906
-----------------------------
7,696,978 5,584,729
Cost of sales 4,072,922 2,919,171
-----------------------------
Gross profit 3,624,056 2,665,558
Operating, selling, general and
administrative expenses 1,917,774 1,504,842
Depreciation and amortization 57,678 82,594
-----------------------------
Income from operations 1,648,604 1,078,122
Interest expense 59,760 66,848
-----------------------------
Income before income taxes 1,588,844 1,011,274
Provision for income taxes 574,669 347,000
-----------------------------
Net income 1,014,175 664,274
Preferred dividends 310,000 310,000
-----------------------------
Net income attributable to common
stockholders $ 704,175 $ 354,274
=============================
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
(Restated)
Three months ended
December 31,
2002 2001
----------------------------
Cash Flows from Operating Activities
Net income $ 1,014,175 $ 664,274
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,678 82,594
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
(Restated)
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
-------------------------
(Restated) (Restated)
Net income attributable to common stockholders $704,175 $354,274
Basic and Diluted EPS Computation:
Weighted average outstanding common shares 10,004,181 9,991,776
Earnings per Share $0.07 $0.04
8
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 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 $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%.
9
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 (MSOs). 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 $2.92 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, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses increased by $413,000 in the first quarter
of fiscal 2003, to $1.92 million from $1.50 million for the same period
in 2002, an increase of 27.4%. 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.
10
Income from Operations. Income from operations rose $570,000, or 52.9% 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 MSOs.
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 MSOs 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.
No inventory write-downs were necessary during the three months ended December
31, 2002 and 2001. 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.
Goodwill
--------
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS 142
requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. SFAS 142 was
adopted by the Company on October 1, 2002, the date of the annual impairment
review. The Company has completed its transitional impairment testing of
goodwill. The results of these tests indicate that goodwill is not impaired as
of October 1, 2002. The adoption of this pronouncement had no impact on the
Company's carrying value of its goodwill. If SFAS 142 had been adopted in
2002, the Company's earnings would have been improved because of reduced
amortization, as described below:
Goodwill - Adoption of Statement 142
------------------------------------
Three Months ended December 31,
-------------------------------
2002 2001
----------- ----------
(Restated) (Restated)
Reported Net Income $ 704,175 $ 354,274
Add back: Goodwill amortization - 28,501
----------- ----------
Adjusted Net Income $ 704,175 $ 382,775
=========== ==========
Basic and Diluted Earnings per Share:
Reported Net Income $0.07 $0.04
Add back: Goodwill amortization - -
----------- ----------
Adjusted Net Income $0.07 $0.04
=========== ==========
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 $300,000 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.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to its report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
By: /s/ Kenneth A. Chymiak
---------------------------------
Date: March 8, 2004 Kenneth A. Chymiak,
Director and President
(Principal Executive Officer and
Principal Financial Officer)
14