ADDVANTAGE TECHNOLOGIES GROUP INC - Annual Report: 2006 (Form 10-K)
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2006
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oTRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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Commission
file number 1-10799
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ADDVANTAGE
TECHNOLOGIES GROUP, INC.
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(Exact
name of registrant as specified in its
charter)
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Oklahoma
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73-1351610
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1221 E. Houston,
Broken Arrow, Oklahoma
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74012
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(Address
of principal executive offices)
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(Zip
code)
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Registrant’s
telephone number: (918) 251-9121
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Securities
registered under Section 12(b) of the
Act
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Title of each class
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Name of exchange on which registered
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Common
Stock, $.01 par value
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American
Stock Exchange
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Securities
registered under Section 12(g) of the Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act
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Yes o
No x
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act
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Yes o
No x
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Indicate
by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Echange
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.
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Yes
x
No o
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and disclosure
will not 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-K
or any
amendment to this form 10-K.
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o
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Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer (as defined
in Rule 12b-2 of the Act)
Large
Accelerated Filer o Accelerated
Filer o
Non-accelerated filer x
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Act).
The
aggregate market value of the outstanding shares of common stock,
par
value $.01 per share, held by non-affiliates computed
by reference to the closing
price
of the registrant’s common stock as of March 31, 2006 was
$34,446,944.
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Yes o
No x
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The
number of shares
of the
registrant’s outstanding
common
stock, $.01 par value per share, was 10,232,756 as of December 12th,
2006.
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Documents
Incorporated by Reference
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The
identified sections of definitive Proxy Statement to be filed as
Schedule
14A pursuant to Regulation 14A in connection with the Registrant’s 2007
annual meeting of shareholders are
incorporated by reference into Part III of this Form 10-K. 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.
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ADDVANTAGE
TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR
ENDED SEPTEMBER 30, 2006
INDEX
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Page
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PART
I
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PART
II
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PART
III
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PART
IV
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2
PART
I
FORWARD-LOOKING
STATEMENTS
Certain
matters discussed in this report constitute forward-looking statements, within
the meaning of the Private Securities Litigation Reform Act of 1995, including
statements which relate to, among other things, expectations of the business
environment in which ADDvantage Technologies Group, Inc. (the "Company")
operates, projections of future performance, perceived opportunities in the
market and statements regarding our goals and objectives and other similar
matters. The words “estimates,” “projects,” “intends,” “expects,” “anticipates,”
“believes,” “plans” and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are found at
various places throughout this report and the documents incorporated into it
by
reference. These and other statements which are not historical facts are hereby
identified as “forward-looking statements” for purposes of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934, as amended,
and
Section 27A of the Securities Act of 1933, as amended. These statements are
subject to a number of risks, uncertainties and developments beyond the control
or foresight of the Company, including changes in the trends of the cable
television industry, technological developments, changes in the economic
environment generally, the growth or formation of competitors, changes in
governmental regulation or taxation, changes in our personnel and other such
factors. Our actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in the forward-looking statements. We do not undertake any obligation
to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events. Readers should carefully review the risk
factors described herein and in other documents we file from time to time with
the Securities and Exchange Commission.
Background
We
(through
our
subsidiaries) distribute and service a comprehensive line of electronics and
hardware for the cable television ("CATV") industry. The products we sell
and service are used to acquire, distribute, receive and protect the
communications signals carried on fiber optic, coaxial cable and wireless
distribution systems. Our customers provide an array of communications
services including television, high-speed data (internet) and telephony, to
single family dwellings, apartments and institutions such as hospitals, prisons,
universities, schools, cruise boats and others.
We
continue to expand market presence by creating a network of regionally based
subsidiaries that focus on servicing customers in their markets. The current
subsidiary network includes Tulsat
Corporation ("Tulsat"), NCS Industries, Inc. ("NCS"), Tulsat-Atlanta LLC,
ADDvantage Technologies Group of Missouri, Inc. (dba "ComTech Services"),
Tulsat-Nebraska, Inc., ADDvantage Technologies Group of Texas, Inc. (dba "Tulsat
Texas"), Jones Broadband International, Inc. ("Jones Broadband") and
Tulsat-Pennsylvania LLC (dba "Broadband Remarketing
International").
Several
of our subsidiaries, through their long relationships with OEM manufactures
and
specialty repair facilities have established themselves as value added resellers
(“VARs”). Tulsat, located in Broken Arrow, Oklahoma, is an exclusive
Scientific-Atlanta Master Stocking Distributor for certain legacy products
and
distributes most of Scientific-Atlanta's other products. Tulsat has also
been designated an authorized third party Scientific-Atlanta repair center
for
select products. NCS, located in Warminster, Pennsylvania, is a leading
distributor of Motorola broadband products. Other subsidiaries distribute
Standard, Corning-Gilbert, Blonder-Tongue, RL Drake, Quintech, Videotek and
WaveTek products.
3
In
addition to offering a broad range of new products, we also purchase
from
cable operators and others, surplus
and used equipment that becomes
available as a result of upgrades in their systems or overstocks in their
warehouses. We maintain one of the industry's
largest inventories of new and refurbished equipment, allowing us to provide
products within a short period of time. We continue to upgrade our new product
offerings to stay in the forefront of the communications broadband technology
revolution.
Our
subsidiaries all
operate technical service centers specializing in Motorola, Magnavox,
Scientific-Atlanta and Alpha Power Technologies repairs.
Overview
of the Industry
We
participate in markets for equipment sold primarily to cable operators and
other
related parties. As internet usage by households continues to increase, more
customers are electing to switch from dial-up access services to high-speed
services, particularly those offered by cable operators in the United States.
Within the last few years, certain cable operators have begun to offer a
"triple-play" bundle of services that includes voice, video and high-speed
data
over a single network with the objective of capturing higher average revenues
per subscriber. We believe cable operators are well positioned to deliver
next-generation voice, video and data services because cable operators have
invested significantly over the past few years to upgrade their cable plants
to
digital networks. These upgrades allow them to leverage their incumbent video
and high speed data positions further. Many cable operators have well-equipped
networks capable of delivering symmetrical high-bandwidth video, two-way high
speed data service and telephony to over 90% of their subscribers through their
existing hybrid fiber co-axial (HFC) infrastructure.
We
believe we have been able to provide the products and services sought by
cable operators as they establish and expand their services and territories.
Our
relationships with our principal vendors, Scientific-Atlanta and Motorola,
provide solutions with products that are required to implement and support
existing cable operators. These relationships and our inventory are key
factors that drive our revenue and profit growth.
We
are focused on the opportunities provided by technological changes in
fiber-to-the premises, the expansion of bandwidth, and our recent appointment
as
a Scientific-Atlanta International Distributor for Latin and South America.
We
will continue to stock legacy CATV equipment as well as digital and optical
broadband telecommunications equipment from major suppliers so we can provide
our customers one-stop shopping, access to "hard-to-find" products and reduce
customer downtime because we have the product in stock. Our experienced sales
support staff has the technical know-how to consult with our customers regarding
solutions for various products and configurations. Through our seven service
centers that provide warranty and out-of-warranty repairs, we continue to reach
new customers.
4
Recent
Business Developments
On
December 12, 2005, we announced Tulsat’s signing of a three-year extension on
its Master
Distributor Contract with Scientific-Atlanta. This extension authorizes
the
subsidiary to carry and resell the entire line of Scientific-Atlanta current
and
legacy equipment. Under the terms of the agreement, Tulsat also continues
to be
the exclusive distributor for select Scientific-Atlanta headend and transmission
products for U.S. customers through January 15, 2009. On June 7, 2006 Tulsat
extended its Third Party Service Agreement with Scientific-Atlanta through
May,
2008. This service agreement allows Tulsat to act as an authorized service
provider for select Scientific-Atlanta equipment within the United
States.
On
June 22, 2006 we purchased the assets of Broadband Remarketing International.
This acquisition expanded our product offerings to include refurbished
digital
converter set-top boxes and equipment destruction services. On September
19,
2006, we completed the purchase of approximately 100,000 surplus digital
set-top
boxes from Adelphia Communication Corporation for approximately $1,800,000.
During the fourth quarter we also purchased an additional 15,000 boxes
from
other sources for various amounts totaling approximately $200,000. These
boxes
will require an additional investment of approximately $2.0 to $3.0
million to refurbish and prepare them for resale. During the first quarter
of 2007, we have started to inventory the refurbished digital set-top boxes
and
have begun marketing and selling this new product line.
We
believe there is a strong demand in the U.S. for this product line as digital
boxes provide consumers the ability to translate high definition signals
(HD-TV)
and receive other services such as video on demand (VOD) and digital video
recording (DVR). The
boxes we purchased and currently market are considered legacy boxes as
the
security features (which allow the MSO or cable operator to control channel
access and services) are not separable from digital boxes. The
FCC has
issued a ban on purchasing these legacy boxes after July 1, 2007 in the
attempt
to force the industry to transition to digital boxes with separable security
features. By separating the security features from the digital boxes, the
FCC
believes the equipment can be more widely distributed through commercial
retailers (such as Wal-Mart, Best Buy and Circuit City). Because of the
uncertainty of equipment availability and higher acquisition costs associated
with the new digital boxes with separable security features, several large
MSOs
have filed petitions with the FCC requesting at least partial if not full
waivers to the regulation. In addition, certain Congress members have formally
requested the FCC extend the July 1, 2007 deadline to give the industry
time to
develop more cost effective solutions. We believe the ban has created an
increased demand for the legacy boxes as MSOs will want to build their
inventory
of these cost effective legacy boxes prior to the ban date. In addition,
we
believe there will continue to be demand for these boxes after the ban
date,
either in the U.S. if waivers are obtained or the FCC deadline is extended,
or
internationally where no ban exists and they are widely used.
We
expect to add the set-top digital boxes with separable security features
to our
refurbished digital box product line as surplus boxes become available.
Products
and Services
We
offer our customers a wide range of new, surplus new and refurbished products
that are used in connection with the cable television signal.
Headend
products are used by a system operator for signal acquisition, processing and
manipulation for further transmission. Among the products we offer in this
category are satellite receivers (digital and analog), integrated
receiver/decoders, demodulators, modulators, antennas and antenna mounts,
amplifiers, equalizers and processors. The headend of a television signal
distribution system is the "brain" of the system; the central location where
the
multi-channel signal is initially received, converted and allocated to specific
channels for distribution. In some cases, where the signal is transmitted
in encrypted form or digitized and compressed, the receiver will also be
required to decode the signal.
Fiber
products are used to transmit the output of cable system headend to multiple
locations using fiber optic cable. Among the products offered are optical
transmitters, fiber optic cable, receivers, couplers, splitters and compatible
accessories. These products convert RF frequencies to light frequencies
and launch them on optical fiber. At each receiver site, an optical
receiver is used to convert the signals back to RF VHF frequencies for
distribution to subscribers.
Distribution
products are used to permit signals to travel from the headend to their ultimate
destination in a home, apartment, hotel room, office or other terminal location
along a distribution network of fiber optic or coaxial cable. Among the
products we offer in this category are transmitters, receivers, line extenders,
broadband amplifiers, directional taps and splitters.
Digital
converters and modems are boxes placed inside the home that receive, record
and
transmit video, data and telephony signals. Among the products we offer in
this
category are remanufactured Scientific Atlanta and Motorola digital converter
boxes and modems.
Other
hardware such as test equipment, connector and cable products are also
inventoried and sold to our customers.
5
Revenues
by Geographic Areas
Our
revenues
by geographic areas were
as
follows:
Year ended September 30,
2006
2005 2004
Geographic Area
United States
$48,713,482 $47,863,096
$46,163,254
Latin America,
and Other 3,827,727
2,410,099
908,075
Total $52,541,209 $50,273,195
$47,071,329
Revenues
attributed to geographic areas are based on the location of the customer. All
of
our long-lived assets are located in the United States.
Sales
and Marketing
In
fiscal 2006, sales of new products represented 73% of our revenue and
re-manufactured product sales represented 17% of our revenues. Repair and
other services contributed the remaining 10% of our revenues.
We
market and sell our products to franchise and private cable operators, system
contractors and others directly. Our sales and marketing are predominantly
performed by the internal sales and customer service staff of our
subsidiaries. We also have outside sales representatives located in
particular geographic areas. The majority of our sales activity is
generated through personal relationships developed by our sales personnel and
executives, referrals from manufacturers we represent, advertising in trade
journals, telemarketing and direct mail to our customer base in the United
States. We have developed contacts with the major CATV operators in the United
States and we are constantly in touch with these operators regarding their
plans
for upgrading or expansion and their needs to either purchase or sell equipment.
We
market ourselves as an "On Hand - On Demand" distributor. We maintain the
largest inventory of new and used cable products in the industry and offer
our
customers same day shipments. We believe our investment in on-hand
inventory, our network of regional repair centers, and our experienced sales
and
customer service team create a competitive advantage for us.
We
continue to add products and services to maintain and expand our current
customer base in North America, Latin and South America, Europe and the Far
East. Sales in Latin America and South America continue to grow as we expand
our
relationship with international cable operators in this region. Recently,
Scientific-Atlanta has appointed one of our subsidiaries, Tulsat Corporation,
to
become one of its
non-exclusive
distributors in Latin and South America.
We
believe there is growth potential for sales of new and legacy
products
in the international market as some operators choose to upgrade to new larger
bandwidth platforms while other customers, specifically in developing markets,
desire less expensive legacy new and refurbished bandwidths. We do extend
limited credit to international customers that purchase products on a regular
basis and make timely payments. However, for most international sales we require
prepayment of purchases or letters of credit confirmed by U.S. banks prior
to
shipment of products.
6
Suppliers
In
fiscal 2006, we purchased approximately $16.5 million of new inventory directly
from Scientific-Atlanta and approximately $5.0 million of new inventory directly
from Motorola. These
purchases represented approximately 60%
of our total inventory purchases for fiscal 2006. The
concentration of our inventory suppliers subjects us to risk which
is further discused in "Item
1A. Risk
Factors."
We also purchase a large amount of our inventory from cable operators who have
upgraded or are in the process of upgrading their systems.
Seasonality
Many
of the products that we sell are installed outdoors and can be damaged by storms
and power surges. Consequently,
we experience increased demand on certain product offerings during the months
between late spring and early fall
when severe weather tends to be more prominent than at other times during the
year.
Competition
and Working Capital Practices.
The
CATV industry is highly competitive with numerous companies competing in various
segments of the market. There are a number of competitors throughout the United
States buying and selling new and remanufactured CATV equipment similar to
the
products that we offer. However, most of these competitors do not maintain
the
large inventory we carry due to capital requirements. We
maintain
the practice of carrying large quantities of inventory to meet both the
customers' urgent needs and mitigate the extended lead times of our suppliers.
In terms of sales and inventory on hand, we are the largest reseller in this
industry, providing both sales and service of new and re-manufactured CATV
equipment.
We
also face competition from manufacturers and other vendors supplying new
products. Due to our large inventory, we generally have the ability to ship
and
supply products to our customers without having to wait for the manufacturers
to
supply the items.
Working
capital practices in the industry center on inventory and accounts receivable.
We
choose
to carry a larger inventory and continue to reinvest excess cash flow in
inventory to expand our
product
offerings.
The greatest need for working capital occurs when we
make
bulk purchases of surplus new and used inventory, or when our OEM suppliers
offer additional discounts on bulk purchases. Our
working
capital requirements are generally met by cash flow from operations and a bank
revolving credit facility which currently permits borrowing up to $7,000,000.
We
believe we have sufficient funds available to meet our working
capital needs for the foreseeable future.
7
Significant
Customers
We
are not dependent on one or a few customers to support our business. Our
customer base consists of over 1,400 active accounts. Sales to our largest
customer,
Power
and Telephone Supply,
accounted for approximately 10.5% of our revenues in fiscal 2006. Approximately
32% of our revenues for fiscal year 2006 and approximately 28% for 2005 were
derived from sales of products and services to our five largest customers.
There
are approximately 6,000 cable television systems within the United States alone,
each of which is a potential customer.
On
July 1, 2006, one of our larger customers, Adelphia Communications Corporation
sold its remaining cable systems to Time Warner and Comcast. Sales to these
cable system locations, under their new ownership, were negligible during our
fiscal fourth quarter, 2006 and impacted our quarterly performance. While we
can
not forcast the purchasing activity from these cable systems, we expect sales
to
these systems to resume in fiscal 2007.
Personnel
At
September 30, 2006, we had 167 employees. Management considers its relationships
with its employees to be excellent. Our employees are not unionized and we
are
not subject to any collective bargaining agreements.
Each
of the following risk factors could adversely affect our business, operating
results and financial condition, as well as adversely affect the value of
an
investment in our common stock. Additional risks not presently known, or
which
we currently consider immaterial also may adversely affect us.
We
are highly dependent upon our principal executive officers who also own a
significant amount of our outstanding stock.
At September 30, 2006, David Chymiak, Chairman of the Board, and Kenneth
Chymiak, President and Chief Executive Officer, owned approximately 43% of
our
outstanding common stock and 100% of our outstanding preferred stock. Our
performance is highly dependent upon the skill, experience and availability
of
these two persons. Should either of them become unavailable to us, our
performance and results of operations would probably be adversely affected
to a
material extent. In addition, they continue to own a significant interest
in us,
thus limiting our ability to take any action without their approval or
acquiescence. Likewise, as shareholders, they may elect to take certain actions
which may be contrary to the interests of the other shareholders.
8
Our
business is dependent on our customers' capital
budgets.
Our performance is impacted by our customers' capital spending for constructing,
rebuilding, maintaining or upgrading broadband communications systems. Capital
spending in the telecommunications industry is cyclical. A variety of factors
will affect the amount of capital spending, and therefore, our sales and
profits, including:
·consolidations
and recapitalizations in the cable television industry;
·general
economic conditions;
·availability
and cost of capital;
·other
demands and opportunities for capital;
·regulations;
·demands
for network services;
·competition
and technology; and
·real
or perceived trends or uncertainties in these factors.
Developments
in the industry and in the capital markets in recent years have reduced access
to funding for certain customers, causing delays in the timing and scale
of
deployments of our equipment, as well as the postponement or cancellation
of
certain projects by our customers.
On
the other hand, a significant increase in the capital budgets of our customers
could impact us in a negative fashion. Much of our inventory consists of
refurbished and surplus-new equipment and materials that we have acquired
from
other cable operators. If our customers seek higher end, more expensive
equipment, the demand for our products may suffer.
The
markets in which we operate are very competitive, and competitive pressures
may
adversely affect our results of operations.
The markets for broadband communication equipment are extremely competitive
and
dynamic, requiring the companies that compete in these markets to react quickly
and capitalize on change. This will require us to make quick decisions and
deploy substantial resources in an effort to keep up with the ever-changing
demands of the industry. We compete with national and international
manufacturers, distributors, resellers and wholesalers including many companies
larger than we are.
The
rapid technological changes occurring in the broadband markets may lead to
the
entry of new competitors, including those with substantially greater resources
than we have. Because the markets in which we compete are characterized by
rapid
growth and, in some cases, low barriers to entry, smaller niche market companies
and start-up ventures also may become principal competitors in the future.
Actions by existing competitors and the entry of new competitors may have
an
adverse effect on our sales and profitability.
Consolidations
in the telecommunications industry could result in delays or reductions in
purchases of products, which would have a material adverse effect on our
business.
The telecommunications industry has experienced the consolidation of many
industry participants, and this trend is expected to continue. We and our
competitors may each supply products to businesses that have merged, such
as the
recent purchase of Adelphia Communications Corporation by Time Warner and
Comcast, or will merge in the future. Consolidations could result in delays
in
purchasing decisions by the merged businesses and we could play either a
greater
or lesser role in supplying the communications products to the merged entity.
These purchasing decisions of the merged companies could have a material
adverse
effect on our business. Mergers among the supplier base also have increased,
such as the recent acquisition of Scientific-Atlanta by Cisco, and this trend
may continue. The larger combined companies may be able to provide better
solution alternatives for customers and potential customers. The larger breadth
of product offerings by these consolidated suppliers could result in customers
electing to trim their supplier base for the advantages of one-stop shopping
solutions for all of their product needs.
9
Our
success depends in large part on our ability to attract and retain qualified
personnel in all facets of our operations.
Competition for qualified personnel is intense, and we may not be successful
in
attracting and retaining key executives, marketing, engineering and sales
personnel, which could impact our ability to maintain and grow our operations.
Our future success will depend, to a significant extent, on the ability of
our
management to operate effectively. The loss of services of any key personnel,
the inability to attract and retain qualified personnel in the future or
delays
in hiring required personnel, particularly engineers and other technical
professionals, could negatively affect our business.
We
are substantially dependent on certain manufacturers, and an inability to
obtain
adequate and timely delivery of products could adversely affect our
business.
We are a value added reseller and master stocking distributor for
Scientific-Atlanta and a value added reseller of Motorola broadband and
transmission products. During fiscal 2006, our inventory purchases from these
two companies totaled approximately $21.5 million, or 59% of our total inventory
purchases. Should these relationships terminate or deteriorate, or should
either
manufacturer be unable or unwilling to deliver the products needed by us
for our
customers, our performance could be adversely impacted. An inability to obtain
adequate deliveries or any other circumstance that would require us to seek
alternative sources of supplies could affect our ability to ship products
on a
timely basis. Any inability to reliably ship our products on time could damage
relationships with current and prospective customers and harm our business.
We
have a large investment in our inventory which could become obsolete or
outdated.
Determining the amounts and types of inventory requires us to speculate to
some
degree as to what the future demands of our customers will be. Consolidation
in
the industry or competition from other types of broadcast media could
substantially reduce the demands for our inventory, which could have a material
adverse effect upon our business and financial results. The broadband
communications industry is characterized by rapid technological change. In
the
future, technological advances could lead to the obsolescence of a substantial
portion of our current inventory, which could have a material adverse effect
on
our business. The Company's largest asset is its inventory. Over the past
few
years, our inventory growth has been primarily in new products. However,
the
Company continues to maintain a large investment in used, refurbished,
remanufactured or surplus new equipment.
We
have purchased a large quantity of legacy digital converter boxes which could
become obsolete or outdated.
Recently we purchased approximately 115,000 of used digital converter boxes
for
approximately $2.0 million and plan to invest an additional $2.0 million
to $3.0
million to prepare them for resale. The boxes we purchased and currently
market
are considered legacy boxes as the security features (which allow the MSO
or
cable operators to control access and services) are not separable from
digital boxes. The FCC has issued a ban purchasing these types of legacy
boxes
after July 1, 2007, which is further discussed in “Item 1. Business. Recent
Business Developments”.
If
we fail to sell our inventory of legacy digital boxes and the FCC fails to
issue
waivers or delay the enforcement date, such that no additional sales of legacy
inventory can be made in the U.S. after July 1, 2007, and there is a lack
of
demand for these boxes in the international market, an adjustment may be
needed
to write down the value of any remaining legacy boxes in inventory and this
adjustment may have adverse affect on our financial performance.
10
Our
outstanding common stock is very thinly traded.
While we have approximately 10.2 million shares of common stock outstanding,
43%
of these shares are beneficially owned at December 12, 2006 by David Chymiak
and
Kenneth Chymiak. As a consequence, only about 57% of our shares of common
stock
are held by nonaffiliated, public investors and available for public trading.
The average daily trading volume of our common stock is low. Thus, investors
in
our common stock may encounter difficulty in liquidating their investment
in a
timely and efficient manner.
We
have not paid any dividends on our outstanding common stock and have no plans
to
pay dividends in the future.
We currently plan to retain our earnings and have no plans to pay dividends
on
our common stock in the future. We may also enter into credit agreements
or
other borrowing arrangements which may restrict our ability to declare dividends
on our common stock.
Our
principal executive officers and shareholders have a number of conflicts
of
interest with us.
Certain of our properties are leased from entities owned by our principal
executive officers. Also, these executives have made loans to us in various
amounts in the past and were paid interest on these loans. These transactions
are described in the proxy statement that is incorporated by reference into
this
report. These arrangements create certain conflicts of interest between these
executives and us that may not always be resolved in a manner most beneficial
to
us.
Our
international operations may be adversely affected by a number of
factors.
Although the majority of our business efforts are focused in the United States,
we have international operations in the Philippines, Taiwan, Korea, Japan,
Australia, Brazil, Ecuador, Dominican Republic, Honduras, Panama, Mexico,
Columbia and a few other Latin American countries. We currently have no binding
agreements or commitments to make any material international investment.
Our
foreign operations may be adversely affected by a number of factors,
including:
·local
political and economic developments could restrict or increase the cost of
our
foreign
operations;
·exchange
controls and currency fluctuations;
·tax
increases and retroactive tax claims could increase costs of our foreign
operations;
·expropriation
of our property could result in loss of revenue, property and
equipment;
·import
and export regulations and other foreign laws or policies could result in
loss
of
revenues; and
·laws
and policies of the United States affecting foreign trade, taxation and
investment could restrict our ability to fund foreign operations or make
foreign
operations more costly
11
Not
applicable.
Each
subsidiary owns or leases property for office, warehouse and service center
facilities.
| · |
Broken
Arrow, Oklahoma - On November 20, 2006 Tulsat purchased a facility
consisting of an office, warehouse and service center of
approximately 100,000 square feet on ten acres, with an investment
of
$3,250,000, financed by a loan of $2,760,000, due in monthly payments
through 2021at an interest rate of LIBOR plus 1 1/2%. At December
1, 2006,
Tulsat also continues to lease a total of approximately 80,000 square
feet
of warehouse facilities in three buildings from entities which are
controlled by David E. Chymiak, Chairman of the Board, and Kenneth
A.
Chymiak, President and Chief Executive Officer. Each lease has a
renewable
five-year term, expiring at different times through 2008. At December
1,
2006, monthly rental payments on these leases totaled
$26,820.
|
| · |
Deshler,
Nebraska - Tulsat-Nebraska owns a facility consisting of land and
an
office, warehouse and service center of approximately 8,000 square
feet.
|
| · |
Warminster,
Pennsylvania - NCS owns its facility consisting of an office, warehouse
and service center of approximately 12,000 square feet, with an investment
of $567,000, financed by loans of $419,000, due in monthly payments
through 2013 at an interest rate of 5.5% through 2008, converting
thereafter to prime minus ¼%. NCS also rents property of approximately
2,000 square feet, with monthly rental payments of $1,250 through
December
2006.
|
| · |
Sedalia,
Missouri - ComTech Services owns land and an office, warehouse and
service
center of approximately 25,000 square feet.
|
| · |
New
Boston, Texas - Tulsat-Texas owns land and an office, warehouse and
service center of approximately 13,000 square feet.
|
| · |
Suwanee,
Georgia - Tulsat-Atlanta leases an office and service center of
approximately 5,000 square feet. The lease provides for 36 monthly
lease
payments of $3,500 ending on March 31, 2008.
|
| · |
Oceanside,
California - Jones Broadband leases an office, warehouse and service
center of approximately 15,000 square feet for $12,000 a month. The
lease
runs through November 30, 2007 and has a one year renewal option.
|
12
| · |
Stockton,
California - Jones Broadband leases a warehouse of approximately
45,000
square feet for $6,032 a month. The lease ends February 28, 2007
and has a
one-year renewal option.
|
| · |
Chambersburg,
Pennsylvania - Broadband Remarketing International leases an office,
warehouse, and service center of approximately 10,000
square
feet. The
lease is month to month and the lease payment varies based on the
volume
of warehouse space used. The average rent for the
year
was $4,667 per month.
|
We
believe that our current facilities are adequate to meet our needs.
From
time to time in the ordinary course of business, we have become a defendant
in
various types
of legal proceedings. We do not believe that these proceedings
individually
or in the aggregate,
will have a material adverse effect on our financial position, results of
operations or cash
flows.
There
were no matters submitted to a vote of our stockholders in the fourth quarter
of
fiscal 2006.
PART
II
The
table sets forth the high and low sales prices on the American Stock Exchange
for the quarterly periods indicated.
|
Year
Ended September 30, 2006
|
High
|
Low
|
|
First
Quarter
|
$7.10
|
$3.51
|
|
Second
Quarter
|
$9.09
|
$5.75
|
|
Third
Quarter
|
$6.86
|
$4.63
|
|
Fourth
Quarter
|
$4.97
|
$3.55
|
|
Year
Ended September 30, 2005
|
||
|
First
Quarter
|
$6.30
|
$3.85
|
|
Second
Quarter
|
$5.94
|
$3.95
|
|
Third
Quarter
|
$4.25
|
$3.03
|
|
Fourth
Quarter
|
$4.05
|
$3.10
|
Substantially
all of the holders of our common stock maintain ownership of their shares in
“street name” accounts and are not, individually, shareholders of record. As of
September 30, 2006, there were approximately 1,400 beneficial owners of our
common stock.
13
Dividend
Policy.
We
have never declared or paid a cash dividend on our common stock. It has been
the
policy of our Board of Directors to use all available funds to finance the
development and growth of our business. The payment of cash dividends in the
future will be dependent upon our earnings and financial requirements and other
factors deemed relevant by our Board of Directors. Under the terms of our
outstanding preferred stock, no dividends may be paid on our common stock unless
all cumulative cash dividends due on the preferred stock have been paid or
provided for.
SELECTED
CONSOLIDATED FINANCIAL DATA
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year
ended September 30,
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Net
Sales and service income
|
$
|
52,541
|
$
|
50,273
|
$
|
47,071
|
$
|
33,327
|
$
|
25,409
|
||||||
|
Income
from operations
|
$
|
8,117
|
$
|
9,973
|
$
|
9,484
|
$
|
6,197
|
$
|
3,550
|
||||||
|
Net
income
|
$
|
4,843
|
$
|
5,814
|
$
|
5,814
|
$
|
4,493
|
$
|
2,201
|
||||||
|
Earnings
per share
|
||||||||||||||||
|
Basic
|
$
|
.39
|
$
|
.49
|
$
|
.46
|
$
|
.33
|
$
|
.10
|
||||||
|
Diluted
|
$
|
.39
|
$
|
49
|
$
|
.41
|
$
|
.30
|
$
|
.10
|
||||||
|
Total
assets
|
$
|
40,925
|
$
|
39,269
|
$
|
32,359
|
$
|
31,748
|
$
|
26,531
|
||||||
|
Long-term
obligations inclusive
|
||||||||||||||||
|
of
current maturities
|
$
|
9,385
|
$
|
9,382
|
$
|
11,610
|
$
|
6,912
|
$
|
6,276
|
||||||
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 “ Item 1A. Risk Factors.” and elsewhere in this
report.
14
General
We
are a Value Added Reseller ("VAR") for selected Scientific-Atlanta and Motorola
broadband and new products and we are a distributor for several other
manufacturers of cable television ("CATV") equipment. We also specialize in
the
sale of surplus new and refurbished previously-owned CATV equipment to CATV
operators and other broadband communication companies. It is through the
development of our supplier network and specialized knowledge of our sales
team
that we market our products and services to the larger cable multiple system
operators ("MSOs") and Telecommunication Companies ("Telecoms"). These customers
provide an array of different communications services as well as compete in
their ability to offer CATV customers "triple play" transmission services
including video, data and telephony.
Overview
Fiscal
2006 was a year of continued product transition and consolidation in the
industry for the larger MSOs.
These customers continued to upgrade their various cable systems, primarily
by expanding
the bandwidth of their digital communication signal to improve their ‘triple
play’ offering of video, data and telephony. As the industry leaders continue to
offer new services, such as high
definition
television
(HD-TV)
and video on demand (VOD), the need for additional bandwidth will continue
to
drive future upgrades. The larger MSOs also continued their trend toward
consolidation and standardization. Many of the large MSOs made strategic
acquisitions to expand their coverage area, as was the case when Adelphia
Communication Corporation sold it’s remaining cable systems to Time Warner Cable
and ComCast on July 1, 2006, while at the same time others divested themselves
of regional cable systems that could not meet their standard product offerings,
as was the case when Charter sold several of their regional systems to
Suddenlink and New Wave Communications on July 3, 2006. While we cannot foresee
the continued trend of consolidations with our large customers, we do expect
there to be continued spin-offs of regional cable systems that do not meet
the
larger MSOs' standard cable platforms.
To
meet the product demand associated with our large customer upgrades, we have
invested heavily in new
product inventory that
are only available from our OEM suppliers. As these products have been recently
introduced to the industry and have yet to saturate the market, we are not
yet
able to purchase them through our network of ‘surplus new’ product sources.
Consequently,
sales of these new
products
have
put
a strain on our
gross
profit margin percentages. As these new
digital
products become more widely used, ‘surplus new’ and ‘used’ products will become
more available,
which
we expect will
enable us to
return to higher margins on our product sales.
During
2006, we also experienced delays in sales to some of our larger customers due
to
consolidations, as was the case in the fiscal fourth quarter when Adelphia
sold
its remaining cable systems to Time Warner Cable and Comcast. Sales to these
system locations dropped off after the acquisition as the new owners worked
through transition issues. While customer consolidations can have a direct
impact to our quarterly sales results, the cable systems the new owners support
will require continual upgrades and repairs. As such, sales to these
systems are expected to return.
15
Sales
to smaller MSOs and small cable operators were consistent compared to last
year
as these customers remained focused on maintaining and repairing their existing
cable systems. Many of the smaller cable operators continue to delay their
decision to upgrade from analog to digital as the projected subscriber revenue
generated from the expanded ‘triple play’ offering cannot justify the investment
due to the limited subscriber base. The historical average increase in
subscriber revenue of $40 must be compared against the estimated $4,200 per
plant mile of upgrade dollars needed to enable the delivery of these
differentiated services.
We
do, however, expect to see more of the smaller MSOs and cable operators begin
making the transition to digital in 2007 as the cost to upgrade becomes more
affordable. Over the last two years,
the larger MSOs have made several digital upgrades that have generated a supply
of more cost effective ‘used’ digital equipment in the market. The reduced
upgrade costs coupled with the strong customer demand is expected to drive
these
changes. If these customers begin to upgrade their systems as expected, the
sales and margins of our refurbished product line should remain strong in the
upcoming year.
Between
August 2005 and October 2006, we made three strategic acquisitions. On August
17, 2005, we purchased Jones Broadband International,
Inc.
(“Jones Broadband”), a cable equipment distributor with operations in Oceanside,
California and Stockton, California for approximately $3.5 million. The
acquisition of Jones Broadband gave us
a
West Coast sales presence, expanded our customer base in Latin America and
added
an additional regional service center to our nationwide network. During 2006,
Jones Broadband generated approximately $2.5 million of incremental revenue
to
our consolidated results but failed to contribute to our overall profitability.
Throughout the year we addressed several ownership transitional issues including
staffing, accounting system conversion and changes in product line offerings.
In
addition, we also wrote down the inventory value of the fiber optic cable
offered by this subsidiary by approximately $400,000 due to its recent
market
price
deterioration. While we will continue to make changes within the Jones Broadband
operation, we expect the subsidiary to make a positive contribution to
consolidated
fiscal
2007 profitability.
On
June 30, 2006, we acquired the business and certain assets of Broadband
Remarketing International (“BRI”), an equipment remarketing company based in
Chambersburg, Pennsylvania that specializes in the resale of digital converter
boxes and Certified Destruction Services in exchange for 87,209 shares of our
common stock valued at $450,000. During the fourth quarter,
BRI
purchased approximately 100,000 surplus digital converter boxes from Adelphia
Communications Corporation for $1.8 million. We
plan
to invest an additional $2.0 to $3.0 million to refurbish and market these
boxes
during fiscal 2007 and we
have
already begun to make sales of this new product line. Currently,
there is an FCC ban on purchasing these legacy digital boxes after July 1,
2007. Our ability to sell any remaining legacy boxes in inventory in the U.S.
after the July 1, 2007 date, which depends on the issuance of waivers or
extentions by the FCC, is one of our risk factors and further discussed in
"Item
1A. Risk Factors”.
On
October 10, 2006,
we purchased
the business and certain assets of Broadband Digital Repair (“BDR”), a premium
equipment repair facility located in Mishawaka, IN for approximately $150,000.
BDR is an authorized Alpha Repair Facility and retained it’s authorization after
the acquisition. BDR was subsequently renamed, ComTech - Indiana and became
part
of our ComTech subsidiary. The new repair facility expands our service
capabilities in Indiana, Illinois, Ohio and Michigan and adds another repair
facility to our nationwide network.
16
Results
of Operations
Year
Ended September 30, 2006, compared to Year Ended September 30, 2005 (all
references are to fiscal years)
Net
Sales.
Net sales climbed $2.3 million, or 5.0%, to $52.6 million for 2006 from $50.3
million for 2005. Sales of new and refurbished equipment increased $1.6 million
to $47.4 million from
$45.8 million in 2005 and
repair service revenues increased $0.6 million to $5.1 million for 2006 from
$4.5 million in 2005.
The increases
in revenues are
primarily
attributed to the incremental revenues generated from Jones Broadband. Increased
customer sales from our other subsidiaries during 2006 offset the lost revenues
from two of our larger customers, Adelphia Communications and Span Pr Fiber
Optics. Sales to these two customers, prior to their business stoppage, declined
to $1.6 million in 2006 from $3.8 million in 2005.
Cost
of Sales.
Cost of sales include the cost 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 and any related charges for inventory
obsolescence. Cost of sales this year were 68.1% of net sales compared to 66.4%
last year. This increase is due to the product mix change in new equipment
and
an increased charge to inventory obsolescence taken in 2006. Sales of new
equipment to our large MSO customers consisted of a higher percentage of 1.0
Ghz
bandwidth gear. This product was recently introduced to the industry and our
supply of this product has come directly from the OEM manufactures. As this
product becomes widely used, we expect to be able to purchase surplus product
in
the market, at reduced costs, which will increase our overall margins. The
approximate $0.4 million charge to inventory obsolescence was made in connection
with the write-down of certain fiber optic cable currently maintained in
inventory. The write-down of this inventory was made to reduce the cost of
the
fiber to its current market value.
Gross
Profit.
Gross profit declined an approximate $0.1 million to $16.7 million for 2006
from
$16.8 million in 2005. This decline was the attributed to the increase in the
cost of sales partially offset by the additional gross profit produced on the
incremental revenues.
Operating,
Selling, General and Administrative Expenses.
Operating, selling, general and administrative expenses include all personnel
costs, including fringe benefits, insurance and business taxes, occupancy,
transportation, communication, professional services and charges for bad debts,
among other less significant accounts. Operating, selling, general and
administrative expenses increased by $1.8 million to $8.4 million from $6.6
million. This
increase was attributable to a $1.0 million incremental expenses resulting
from
the addition of Jones
Broadband,
acquired in August 2005, $0.5 million charge to bad debt to increase our reserve
to cover the outstanding receivable balance from a customer whose collection
has
become doubtful, $0.1 million in additional compensation expense representing
the fair value of options granted in 2006, resulting from implementing FAS
123R“Share
based Payments" and $0.2 million of increased expenses associated with the
move
of our corporate headquarters, recruiting a new chief financial officer and
changing our independent public accountants.
17
Income
from Operations.
Income from Operations declined $1.9 million to $8.1 million for 2006 from
$10.0
million in 2005. This decrease was due to the additional operating, selling,
general and administrative expenses in addition to the decrease in our gross
profit.
Interest
Expense.
Interest expense for fiscal 2006 was $0.5 million compared to $0.6 million
in
fiscal 2005. Interest expense dropped slightly for the year as we
borrowed
less money on our
line
of credit and continued to pay down our
$8.0 million term loan.. The weighted average interest rate paid on the line
of
credit increased to 6.4% for 2006 from 3.0% for 2005. The weighted average
interest rate for all borrowed funds for 2006 was 6.1% compared to 5.3% in
2005.
Income
Taxes.
The provision for income taxes for fiscal 2006 dropped to $2.7 million, or
an
effective rate of 36.2% from $3.6 million, or an effective rate of 38.2%, in
2005. The reduced taxes resulted from lower pre-tax earnings in
2006 and a reduced tax rate. Our effective tax rate dropped primarily due to
the
increased tax exclusion for compensation expense recorded on stock options
exercised during the year.
Year
Ended September 30, 2005, Compared to Year Ended September 30, 2004
Net
Sales.
Net sales climbed $3.2 million, or 6.8%, to $50.3 million for 2005 from $47.1
million for 2004. Sales of new and refurbished equipment increased 8.3% from
$42.3 million in 2004 to $45.8 million for 2005, due to new marketing
initiatives and a strong fiscal fourth quarter sales volume, resulting from
an
active hurricane season, the incremental increase in revenues from Jones
Broadband, acquired in August 2005, and increased purchases from a large
bandwidth upgrade performed by one of our customers. Repair service revenues
decreased by 6.3% from $4.8 million last year to $4.5 million this year. The
decrease in repair services was due to several recent changes in the market.
MSOs have been consolidating headends, thereby reducing the number required
to
do the job. This in turn has allowed operators to use the extra headends as
replacements instead of repairing the ones not working. Finally, several years
ago the manufacturers started giving five year warranties on their products.
These warranties are set to run out in 2006 and 2007 for products initially
sold
under these warranties and we expect the repair business will return to
us.
Costs
of Sales.
Costs of sales include 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. Costs of sales this year were 66.4% of
net
sales compared to 66.1% last year. This increase is due to lower margins
associated with the increased sales of new equipment.
Gross
Profit.
Gross profit climbed $0.9 million, or 5.6%, to $16.9 million for fiscal 2005
from $16.0 million for fiscal 2004. The gross margin percentage was 33.6% for
the current year, compared to 33.9% for last year. The small percentage decrease
was primarily due to an increase in sales of new and surplus equipment, which
have margins lower than those of re-manufactured equipment or
repairs.
Operating,
Selling, General and Administrative Expenses.
Operating, selling, general and administrative expenses include all personnel
costs, including fringe benefits, insurance and taxes, occupancy,
transportation, communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $426,000 for fiscal 2005 to $6.6 million from $6.2 million in
2004,
an increase of 6.5%. The increase in operating, selling, general and
administrative expenses was primarily due to increases in salary and wage
related expenses.
18
Income
from Operations.
Income from operations increased $.5 million, or 5.3%, to $10.0 million for
2005
from $9.5 million for 2004. This increase was primarily due to increases in
sales of new equipment to the larger MSOs, partially offset by the lower margins
received and the increase in our operating, selling, general and administrative
expenses.
Interest
Expense.
Interest expense for fiscal 2005 was $558,000 compared to $158,000 in fiscal
2004. The increase was primarily attributable to the $8,000,000 new borrowings
incurred to finance our redemption of the Series A Preferred Stock on September
30, 2004. This redemption resulted in our payment in 2005 of $400,000 less
dividends. Our interest expense is deductible for federal income tax purposes
while the dividends we had been paying were not. The weighted average interest
rate paid on the line of credit increased to 2.96% for 2005 from 2.85% for
2004.
The weighted average interest rate for all borrowed funds for 2005 was 5.31%
compared to 2.85% in 2004.
Income
Taxes.
The provision for income taxes for fiscal 2005 increased to $3.6 million from
$3.5 million in fiscal 2004. The increase was primarily due to higher pre-tax
earnings in fiscal 2005.
Inflation.
Inflation has had no noticeable impact on our revenues over the last three
years. The increase in revenue has been primarily a result of increasing our
market share and the increased demand for our products resulting from our
increased availability of products for sale.
Liquidity
and Capital Resources
We
finance our operations primarily through internally generated funds and a bank
line of credit. During
2006, we generated approximately $0.2 million cash flow from operations
including an increase in inventory of $4.2 million and a trade payables
reduction of $2.3 million. During the fiscal year, we invested approximately
$0.1 million of capital assets and acquired $0.5 million of additional assets
in
an exchange for 87,209 shares of our common stock. We also received
approximately $0.3 million from stock options exercised and kept our bank
borrowings consistent while and meeting our preferred stock dividend obligations
of $0.8 million. These activities resulted in a net decrease in cash of
approximately $0.4 million.
Cash
used in financing activities in 2006 was primarily used to pay dividends on
our
Series B 7% cumulative convertible Preferred Stock (the “Series B Preferred
Stock”) and for the note payments resulting from the buy-out of Series A
Preferred Stock on September 30, 2004. Dividends on the Series B Preferred
Stock
total $840,000 annually and the outstanding shares are beneficially owned,
50%
by David E. Chymiak, our Chairman of the Board and 50% by Kenneth A. Chymiak,
our President and Chief Executive Officer. The outstanding Series B Preferred
Stock has an aggregate preference upon liquidation of $12,000,000.
On
September 30, 2004, we redeemed all of our outstanding shares of Series A 5%
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") at
its
aggregate stated value of $8 million. The outstanding shares of Series A
Preferred Stock were held beneficially by David E. Chymiak and Kenneth A.
Chymiak. We financed the redemption through a credit agreement with our primary
lender which included a Revolving Credit Commitment in the amount of $7 million
and a Term Loan Commitment in the amount of $8 million. This agreement was
amended in November 2006 to include a second Term Loan Commitment of $2.76
million. The proceeds from the $8.0 million term loan were used to redeem the
Series A Preferred Stock. At September 30, 2006 this term loan balance was
$5.6
million. The proceeds from the $2.76 million term loan were used to purchase
certain real estate in November 2006 from an entity owned by David and Kenneth
Chymiak.
19
We
have a line of credit with our primary lender under which we are authorized
to
borrow up to $7.0 million at a borrowing rate based on the prevailing 30-day
LIBOR rate plus 1.75% (7.08% at September 30, 2006 and 6.40% average for fiscal
year 2006). This line of credit provides the lesser of $7.0 million or the
sum
of 80% of qualified accounts receivable and 50% of qualified inventory in a
revolving line of credit for working capital purposes. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures, and
general intangibles and had an outstanding balance at September 30, 2006 of
$3.5
million. The line of credit renews annually and is currently due September
30,
2007. The highest balance against this line in 2006 was approximately $5.0
million.
At
September 30, 2006, notes payable secured by real estate of $0.3 million are
due
in monthly payments through 2013 with interest at 5.5% through 2008, converting
thereafter to prime minus .25%.
On
September 30, 1999, Chymiak Investments, L.L.C., which is owned by David E.
Chymiak and Kenneth A. Chymiak, purchased from Tulsat Corporation, certain
real
estate and improvements comprising office and warehouse space for a price of
$1,286,000. The price represented the appraised value of the property less
the
sales commission and other sales expenses that would have been incurred by
Tulsat Corporation if it had sold the property to a third party in an
arm’s-length transaction. Tulsat Corporation entered into a five-year lease
commencing October 1, 1999 with Chymiak Investments, L.L.C. covering the
property. This lease was renewed on October 1, 2004 and will expire on September
30, 2008.
The
Company leases various properties primarily from two companies owned by David
E.
Chymiak and Kenneth A. Chymiak. Future minimum lease payments under these leases
are as follows:
2007
$
321,840
2008
$
321,840
$ 643,680
Related
party rental expense for the years ended September 30, 2006, 2005 and 2004
was
$465,840, $465,840 and $466,000, respectively.
20
The
following table presents our contractual obligations for aggregate maturities
of
long-term debt and the minimum lease payments under our lease
agreements.
Payments
due by period
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1- 3 years
|
3-5
years
|
More
than 5 years
|
|||||||||||
|
Long
Term Debt
|
$
|
9,384,
808
|
$
|
4,718,070
|
$
|
4,489,840
|
$
|
48,765
|
$
|
128,133
|
||||||
|
Capital
Leases
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Operating
Leases
|
$
|
928,592
|
$
|
541,752
|
$
|
386,840
|
$
|
-
|
$
|
-
|
||||||
|
Purchase
Obligations
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Total
|
$
|
10,313,400
|
$
|
5,259,822
|
$
|
4,876,680
|
$
|
48,765
|
$
|
128,133
|
||||||
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
working capital needs.
Critical
Accounting Policies and Estimates
Note
1 to the Consolidated Financial Statements in this Form 10-K for fiscal year
2006 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 of America 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.
21
Inventory
Valuation
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. 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 cannot ship new equipment on
a
same-day basis. Carrying these large inventories represents our largest risk.
Our
inventory consists of new and used electronic components for the cable
television industry. Inventory cost is stated at the lower of cost or market
and
our cost is determined using the weighted average method. At September 30,
2006
we had total inventory of approximately $30.2 million, consisting of
approximately $21.0 million in new products and approximately $9.2 million
in
used or refurbished products against which we have a reserve of $1.2 million
for
excess and obsolete inventory, leaving us a net inventory of $29.0 million.
We
are required to make judgments as to future demand requirements from our
customers. We regularly review the value of our inventory in detail with
consideration given to rapidly changing technology which can significantly
affect future customer demand. 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 that we do make. In
order
to address the risks associated with our investment in inventory, we 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. During 2006,
we
increased our reserve for excess and obsolete inventory by approximately $0.4
million. In addition during 2006, we wrote down the carrying value of certain
inventory items by approximately $0.8 million to reflect deterioration in the
market price of that inventory. If actual market conditions are less favorable
then those projected by management, and our estimates prove to be inaccurate,
we
could be required to increase our inventory reserve and our gross margins could
be adversely affected.
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 since the amounts involved
are
not considered material.
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 to approximately
$0.6 million at September 30, 2006 from approximately $0.1 million at September
30, 2005. This reserve was increased to cover the potential write off
from a specific customer whose payment capability, management believes, has
become doubtful. At September 30, 2006, accounts receivable, net of allowance
for doubtful accounts, amounted to approximately $5.3 million.
22
Impact
of Recently Issued Accounting Standards
In
November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments"
("FSP 115-1"), which provides guidance on determining when investments in
certain debt and equity securities are considered impaired, whether that
impairment is other-than-temporary, and on measuring such impairment loss.
FSP
115-1 also includes accounting considerations subsequent to the recognition
of
an other-than- temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized
as other-than-temporary impairments. FSP 115-1 is required to be applied to
reporting periods beginning after December 15, 2005. We elected to adopt
FSP115-1 in fiscal 2006 and its application had no material impact on our
financial position.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which revised
ARB No. 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. This Statement requires the allocation of fixed
production overheads to the costs of conversion be based on normal capacity
of
the production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We elected to adopt SFAS
No.151 beginning with fiscal year 2005. The adoption of this standard had no
impact on our financial position and results of operations.
In
December 2004, the FASB issued SFAS 123R, which replaced SFAS 123 and superseded
APB 25. SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their grant date fair market values and requires that such recognition
begin in the first interim or annual period after June 15, 2005, with early
adoption encouraged. Under SFAS 123R, the pro forma disclosures previously
permitted are no longer an alternative to financial statement recognition.
In
April 2005, the Securities and Exchange Commission (the SEC) postponed the
effective date of SFAS 123R until the issuer’s first fiscal year beginning after
June
15, 2005. In addition, in March 2005, the SEC issued Staff Accounting Bulletin
No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R and the
valuation of share-based payments for public companies.
We
adopted SFAS 123R in the first quarter of fiscal 2006 and applied the modified
prospective method, which required that compensation expense be recorded for
all
unvested stock options and restricted stock upon adoption of SFAS 123R. We
applied the Black-Scholes valuation model in determining the fair value of
share-based payments to employees, which must then be amortized on a straight
line basis over the requisite service period. On October 1, 2005, all
outstanding options representing 1,214,967 shares were fully vested. Therefore,
SFAS 123R had no impact on our statement of income on the date of adoption
of
that standard.
23
During
2006, Stock options were granted to certain members of the management and the
Board of Directors. We determined the fair value of the options issued, using
the Black-Scholes Valuation Model and are amortizing the calculated value over
the vesting term. The costs were primarily recognized in 2006, with residual
amounts being charged against income in 2007, 2008 and 2009.
In
July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,) "Accounting
for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes”. FIN 48 clarifies the accounting for income taxes
by prescribing the minimum recognition threshold a tax position is required
to
meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The interpretation
applies to all tax positions related to income taxes subject to FASB Statement
No. 109.
FIN
48 is effective for fiscal years beginning after December 15, 2006. Differences
between amounts recognized in the statements of financial position prior to
the
adoption of FIN 48 and the amounts reported after adoption should be accounted
for as cumulative-effect adjustment recorded to the beginning balance or
retained earnings. We do not believe that the adoption of FIN 48 will have
a
material impact on our financial position.
Off-Balance
Sheet Arrangements
None
Market
risk represents the risk of loss that may impact our financial position, results
of operations, or cash flow due to adverse changes in market prices, foreign
currency exchange rates, and interest rates. Our greatest exposure would be
a
downturn in the demand for our
products. At September 30, 2006, over 87% of our assets were in cash, trade
receivables, and inventory, with inventory representing 81% of these assets.
Our
exposure to market rate risk for changes in interest rates relates primarily
to
our revolving line of credit. The interest rates under the line of credit and
the stockholder notes fluctuate with the LIBOR rate. At September 30, 2006,
the
outstanding balances subject to variable interest rate fluctuations totaled
$2.1
million. The high credit balance for 2006 was approximately $5.0 million,
leaving over $2.0 million available for working capital requirements. Future
changes in drawdown requirements and changes in interest rates could cause
our
borrowing costs to increase.
We
maintain no cash equivalents. However, we entered into an interest rate swap
on
September 30, 2004, in an amount equivalent to the $8 million notes payable
in
order to minimize interest rate risk. Although the note bears interest at the
prevailing 30-day LIBOR rate plus 2.5%, the swap effectively fixed the interest
rate at 6.13%. The fair value of this derivative will increase or decrease
opposite any future changes in interest rates.
All
sales and purchases are denominated in U.S. dollars.
24
|
Index
to Financial Statements
|
Page
|
|
|
|
|
|
|
|
|
|
25
To
the Board of Directors and Stockholders of
ADDvantage
Technologies Group, Inc.
We
have audited the accompanying consolidated balance sheet of ADDvantage
Technologies Group, Inc. and subsidiaries (the “Company”) as of September 30,
2006, and the related consolidated statements of income and comprehensive
income, changes in stockholders’ equity and cash flows for the year then ended.
Our audit also included the financial schedule of ADDvantage Technologies
Group,
Inc., listed in Item 15(a). These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audit.
The
consolidated financial statements of the Company as of September 30, 2005 and
for each of the two years in the period ended September 30, 2005 were audited
by
other auditors whose report dated December 22, 2005 expressed an unqualified
opinion on those statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ADDvantage Technologies Group, Inc. and subsidiaries as of September 30,
2006,
and the consolidated results of their operations and their cash flows for
the
year then ended, in conformity with accounting principles generally accepted
in
the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements, taken as a whole, presents fairly in all material respects
the information set forth therein.
HOGAN
AND SLOVACEK
December
22, 2006
Tulsa,
Oklahoma
26
The
Stockholders of
ADDvantage
Technologies Group, Inc.
We
have audited the accompanying consolidated balance sheet of ADDvantage
Technologies Group, Inc. and subsidiaries (the “Company”) as of September 30,
2005, and the related consolidated statements of income and comprehensive
income, changes in stockholders’ equity and cash flows for each of the two years
ended September 30, 2005 and 2004. Our audits also included the financial
schedule of ADDvantage Technologies Group, Inc., listed in Item 15(a). These
financial statements and financial statement schedule 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 2005,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended September 30, 2005, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements, taken as a whole,
presents fairly in all material respects the information set forth
therein.
TULLUIS
TAYLOR SARTAIN & SARTAIN LLP
Tulsa,
Oklahoma
December
22, 2005
27
|
September 30,
|
|||||||
|
Assets
|
2006
|
2005
|
|||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
98,898
|
$
|
449,219
|
|||
|
Accounts receivable, net of allowance of $554,000
|
|||||||
|
and $92,000, respectively
|
5,318,127
|
7,671,549
|
|||||
|
Income tax refund receivable
|
307,299
|
-
|
|||||
|
Inventories,
net of allowance for excess and obsolete inventory
|
|||||||
|
of $1,178,000 and $1,575,395, respectively
|
28,990,696
|
25,321,149
|
|||||
|
Deferred income taxes
|
1,074,000
|
968,000
|
|||||
|
Total
current assets
|
35,789,020
|
34,409,917
|
|||||
|
|
|
||||||
|
Property
and equipment, at cost:
|
|||||||
|
Machinery and equipment
|
2,697,476
|
2,357,182
|
|||||
|
Land and buildings
|
1,668,511
|
1,591,413
|
|||||
|
Leasehold improvements
|
205,797
|
565,945
|
|||||
|
4,571,784
|
4,514,540
|
||||||
|
Less
accumulated depreciation and amortization
|
(2,033,679
|
)
|
(1,811,784
|
)
|
|||
|
Net
property and equipment
|
2,538,105
|
2,702,756
|
|||||
|
Other
assets:
|
|||||||
|
Deferred income taxes
|
702,000
|
786,000
|
|||||
|
Goodwill
|
1,560,183
|
1,150,060
|
|||||
|
Other assets
|
335,566
|
220,275
|
|||||
|
Total other assets
|
2,597,749
|
2,156,335
|
|||||
|
Total
assets
|
$
|
40,924,874
|
$
|
39,269,008
|
|||
See
notes to audited consolidated financial statements.
28
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
September 30,
|
|||||||
|
Liabilities
and Stockholders’ Equity
|
2006
|
2005
|
|||||
|
Current
liabilities:
|
|
|
|||||
|
Accounts payable
|
$
|
2,618,490
|
$
|
4,958,834
|
|||
|
Accrued expenses
|
1,181,139
|
1,876,523
|
|||||
|
Accrued income taxes
|
-
|
110,691
|
|||||
|
Bank revolving line of credit
|
3,476,622
|
2,234,680
|
|||||
|
Notes payable - current portion
|
1,241,348 |
1,239,071
|
|||||
|
Dividends payable
|
210,000 | 210,000 | |||||
|
Total
current liabilities
|
8,727,599 | 10,629,799 | |||||
|
Notes
payable
|
4,666,738
|
5,908,199
|
|||||
|
|
|
||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred stock, 5,000,000 shares authorized,
|
|||||||
|
$1.00
par value, at stated value:
|
|||||||
|
Series
B, 7% cumulative; 300,000 shares issued and
|
|||||||
|
outstanding
with a stated value of $40 per share
|
12,000,000
|
12,000,000
|
|||||
|
Common stock, $.01 par value; 30,000,000 shares
authorized;
|
|||||||
|
10,252,856
and 10,093,147 shares issued and outstanding,
|
|||||||
|
respectively
|
102,528
|
100,931
|
|||||
|
Paid-in capital
|
(6,474,018
|
)
|
(7,265,930
|
)
|
|||
|
Retained earnings
|
21,863,685
|
17,860,967
|
|||||
|
Accumulated other comprehensive income:
|
|||||||
|
Unrealized
gain on interest rate swap, net of tax
|
92,506
|
89,206
|
|||||
|
27,584,701
|
22,785,174
|
||||||
|
Less: Treasury stock, 21,100 shares at cost
|
(54,164
|
)
|
(54,164
|
)
|
|||
|
Total
stockholders’ equity
|
27,530,537
|
22,731,010
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
40,924,874
|
$
|
39,269,008
|
|||
See
notes to audited consolidated financial statements.
29
|
September 30,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
sales income
|
$
|
47,400,816
|
$
|
45,755,198
|
$
|
42,293,046
|
||||
|
Net
service income
|
5,140,393
|
4,517,997
|
4,778,283
|
|||||||
|
Total
net sales
|
52,541,209
|
50,273,195
|
47,071,329
|
|||||||
|
Cost of sales
|
35,799,831
|
33,401,167
|
31,092,890
|
|||||||
|
Gross
profit
|
16,741,378
|
16,872,028
|
15,978,439
|
|||||||
|
Operating, selling, general and
|
||||||||||
|
administrative expenses
|
8,377,152
|
6,642,641
|
6,216,728
|
|||||||
|
Depreciation and amortization
|
247,504
|
256,435
|
277,352
|
|||||||
|
Income
from operations
|
8,116,722
|
9,972,952
|
9,484,359
|
|||||||
|
Interest expense
|
530,004
|
557,560
|
157,606
|
|||||||
|
Income
before income taxes
|
7,586,718
|
9,415,392
|
9,326,753
|
|||||||
|
Provision form income taxes
|
2,744,000
|
3,601,000
|
3,513,000
|
|||||||
|
Net
income
|
4,842,718
|
5,814,392
|
5,813,753
|
|||||||
|
Other
comprehensive income
|
||||||||||
|
Unrealized gain on interest rate swap
|
||||||||||
|
(Net of $2,000 and $54,000 in taxes, respectively).
|
3,300
|
89,206
|
-
|
|||||||
|
Comprehensive Income
|
$
|
4,846,018
|
$
|
5,903,598
|
$
|
5,813,753
|
||||
|
Net
income
|
4,842,718
|
5,814,392
|
5,813,753
|
|||||||
|
Preferred stock dividends
|
840,000
|
840,000
|
1,240,000
|
|||||||
|
Net
income attribute
|
||||||||||
|
to common stockholders
|
$
|
4,002,718
|
$
|
4,974,392
|
$
|
4,573,753
|
||||
|
Earnings
per share:
|
||||||||||
|
Basic
|
$
|
0.39
|
$
|
0.49
|
$
|
0.46
|
||||
|
Diluted
|
$
|
0.39
|
$
|
0.49
|
$
|
0.41
|
||||
|
Shares
used in per share calculation
|
||||||||||
|
Basic
|
10,152,472
|
10,067,277
|
10,041,197
|
|||||||
|
Diluted
|
10,201,474
|
10,109,854
|
12,104,541
|
|||||||
See
notes to audited consolidated financial statements.
30
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
Years
ended September 30, 2006, 2005 and 2004
|
Series
A
|
Series
B
|
Retained
|
Other
|
|||||||||||||||||||||||||
|
Common
Stock
|
Preferred
|
Preferred
|
Paid-in
|
Earnings
|
ComComprehensive
|
T
Treasury
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Stock
|
Capital
|
(Deficit)
|
Income
|
Stock
|
Total
|
||||||||||||||||||||
|
Balance,
September 30, 2003
|
10,030,414
|
$
|
100,304
|
$
|
8,000,000
|
$
|
12,000,000
|
($7,389,197
|
)
|
$
|
8,312,822
|
-
|
($54,164
|
)
|
$
|
20,969,765
|
||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
5,813,753
|
-
|
-
|
5,813,753
|
|||||||||||||||||||
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(1,240,000
|
)
|
-
|
-
|
(1,240,000
|
)
|
|||||||||||||||||
|
Stock
options exercised
|
51,375
|
514
|
-
|
-
|
103,633
|
-
|
-
|
-
|
104,147
|
|||||||||||||||||||
|
Redemption
of Series A
|
||||||||||||||||||||||||||||
|
Preferred
stock
|
-
|
-
|
(8,000,000
|
)
|
-
|
-
|
-
|
-
|
-
|
(8,000,000
|
)
|
|||||||||||||||||
|
Balance,
September 30, 2004
|
10,081,789
|
$
|
100,818
|
-
|
$
|
12,000,000
|
($7,285,564
|
)
|
$
|
12,886,575
|
-
|
($54,164
|
)
|
$
|
17,647,665
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
5,814,392
|
-
|
-
|
5,814,392
|
|||||||||||||||||||
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(840,000
|
)
|
-
|
-
|
(840,000
|
)
|
|||||||||||||||||
|
Stock
options exercised
|
11,358
|
113
|
-
|
-
|
19,634
|
-
|
-
|
-
|
19,747
|
|||||||||||||||||||
|
Unrealized
gain on interest swap
|
-
|
-
|
-
|
-
|
-
|
-
|
89,206
|
-
|
89,206
|
|||||||||||||||||||
|
Balance,
September 30, 2005
|
10,093,147
|
$
|
100,931
|
-
|
$
|
12,000,000
|
($7,265,930
|
)
|
$
|
17,860,967
|
$
|
89,206
|
($54,164
|
)
|
$
|
22,731,010
|
||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
$
|
4,842,718
|
-
|
-
|
4,842,718
|
||||||||||||||||||
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(840,000
|
)
|
-
|
-
|
(840,000
|
)
|
|||||||||||||||||
|
Stock
options exercised
|
72,500
|
725
|
-
|
-
|
244,674
|
-
|
-
|
-
|
245,399
|
|||||||||||||||||||
|
Unrealized
gain on interest swap
|
-
|
-
|
-
|
-
|
-
|
-
|
3,300
|
-
|
3,300
|
|||||||||||||||||||
|
Share
based compensation expense
|
-
|
-
|
-
|
-
|
98,110
|
-
|
-
|
-
|
98,110
|
|||||||||||||||||||
|
Shares
issued in exchange for certain assets
|
87,209
|
872
|
-
|
-
|
449,128
|
-
|
-
|
-
|
450,000
|
|||||||||||||||||||
|
Balance,
September 30, 2006
|
10,252,856
|
$
|
102,528
|
-
|
$
|
12,000,000
|
($6,474,018
|
)
|
$
|
21,863,685
|
$
|
92,506
|
($54,164
|
)
|
$
|
27,530,537
|
||||||||||||
See
notes to audited consolidated financial statements.
31
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
September 30,
|
|||||||||
|
|
||||||||||
|
Cash
Flows from Operating Activities
|
2006 2005 2004
|
|||||||||
|
Net
income
|
$
|
4,842,718
|
$
|
5,814,392
|
$
|
5,813,753
|
||||
|
Adjustments
to reconcile net income
|
||||||||||
|
provided
by operating activities:
|
||||||||||
|
Depreciation and amortization
|
247,504
|
256,435
|
277,352
|
|||||||
|
Provision for losses on accounts receivable
|
445,541
|
40,080
|
-
|
|||||||
|
Provision for excess and obsolete inventories
|
439,625
|
482,395
|
645,900
|
|||||||
|
Loss on disposal of property and equipment
|
76,829
|
-
|
24,412
|
|||||||
|
Deferred income tax benefit
|
(22,000
|
)
|
(3,000
|
)
|
(172,000
|
)
|
||||
|
Change in:
|
||||||||||
|
Receivables
|
1,600,582
|
(2,174,498
|
)
|
(1,004,069
|
)
|
|||||
|
Inventories
|
(4,109,172
|
)
|
(1,927,585
|
)
|
506,482
|
|||||
|
Other assets
|
(132,276
|
)
|
(51,577
|
)
|
8,406
|
|||||
|
Accounts payable
|
(2,340,344
|
)
|
3,027,827
|
(872,526
|
)
|
|||||
|
Accrued liabilities
|
(806,075
|
)
|
687,191
|
208,086
|
||||||
|
Net
cash provided by operating activities
|
242,932
|
6,151,660
|
5,435,796
|
|||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Additions
to property and equipment
|
(99,520
|
)
|
(446,534
|
)
|
(77,201
|
)
|
||||
|
Investment
in Jones Broadband International,
|
||||||||||
|
net of cash acquired of $100,322
|
-
|
(3,510,935
|
)
|
-
|
||||||
|
Net
cash used in investing activities
|
(99,520
|
) |
(3,957,469
|
)
|
(77,201
|
)
|
||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Net
change under bank revolving line of credit
|
1,241,942
|
(990,503
|
)
|
(1,960,719
|
)
|
|||||
|
Proceeds
on notes payable
|
-
|
-
|
8,000,000
|
|||||||
|
Payments
on notes payable
|
(1,239,184
|
)
|
(1,250,455
|
)
|
(1,342,067
|
)
|
||||
|
Proceeds
from stock options exercised
|
343,509
|
19,747
|
104,147
|
|||||||
|
Payments
of preferred dividends
|
(840,000
|
)
|
(840,000
|
)
|
(1,340,000
|
)
|
||||
|
Redemption
of preferred stock
|
-
|
-
|
(8,000,000
|
)
|
||||||
|
Net
cash used in financing activities
|
(493,733
|
)
|
(3,061,211
|
)
|
(4,538,639
|
) | ||||
|
Net
increase (decrease) in cash
|
(350,321
|
)
|
(867,020
|
)
|
819,956
|
|||||
|
Cash,
beginning of year
|
449,219
|
1,316,239
|
496,283
|
|||||||
|
Cash,
end of year
|
$
|
98,898
|
$
|
449,219
|
$
|
1,316,239
|
||||
|
Supplemental
Cash Flow Information
|
||||||||||
|
Cash
paid for interest
|
$
|
531,596
|
$
|
557,560
|
$
|
172,426
|
||||
|
Cash
paid for income taxes
|
$
|
3,019,768
|
$
|
3,582,616
|
$
|
3,669,170
|
||||
|
Value
of shares issued in exchange for business and
|
||||||||||
|
certain assets
|
$
|
450,000
|
-
|
-
|
||||||
See
notes to audited consolidated financial statements.
32
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
ended September 30, 2006, 2005 and 2004
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, Latin
America and South 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: Tulsat Corporation ("Tulsat"),
NCS Industries, Inc. ("NCS"), Tulsat-Atlanta LLC, ADDvantage Technologies Group
of Missouri, Inc. (dba "ComTech Services"), Tulsat-Nebraska, Inc., ADDvantage
Technologies Group of Texas, Inc. (dba "Tulsat Texas"), Jones Broadband
International, Inc. ("Jones Broadband") and Tulsat-Pennsylvania LLC (dba
"Broadband Remarketing International"). All significant inter-company balances
and transactions have been eliminated in consolidation.
Accounts
receivable
Trade
receivables are carried at original invoice amount less an estimate made for
doubtful accounts based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. Trade
receivables are written-off when deemed uncollectible. Recoveries of trade
receivables previously written-off are recorded when received. The Company
generally does not charge interest on past due 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. The Company records inventory reserve provisions to properly
reflect inventory value based on a review of inventory quantities on hand,
historical sales volumes and technology changes. These reserves are to provide
for items that are potentially slow-moving, excess or obsolete.
33
Property
and equipment
Property
and equipment consists of office equipment, warehouse and service equipment
and
buildings with estimated useful lives of 5 years, 10 years and 40 years,
respectively. Depreciation is provided using straight line and accelerated
methods over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the remainder of the lease agreement. Repairs
and maintenance are expensed as incurred, whereas major improvements are
capitalized. Depreciation and amortization expense was $247,504, $256,435 and
$277,352 for the years ended September
30, 2006, 2005 and 2004, respectively.
Income
taxes
The
Company provides for income taxes in accordance with the liability method of
accounting pursuant to Statement of Financial Accounting Standards ("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 a valuation allowance against deferred tax assets for
amounts which are not considered “more likely than not” to be
realized.
Revenue
recognition
The
Company's 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.
Derivatives
SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, requires that all derivatives, whether designated in hedging
relationships or not, be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value
of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of the changes in the fair value of the derivative are
recorded in Other Comprehensive Income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in other income
(expense).
The
Company's objective of holding derivatives is to minimize the risks of interest
rate fluctuation by using the most effective methods to eliminate or reduce
the
impact of this exposure. The Company has designated its interest rate swap
as a
cash flow hedge on the $8.0 million term note payable. As there are no
differences between the critical terms of the interest rate swap and the hedged
debt obligations the Company assumes no ineffectiveness in the hedging
relationship. Interest expense on this note is adjusted to include the payment
made or received under the interest rate swap agreement.
34
Freight
Amounts
billed to customers for shipping and handling represent revenues earned and
are
included in Net Sales Income and Net 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 $385,485, $335,487
and
$265,112 for the years ended September 30, 2006, 2005 and 2004,
respectively.
Management
estimates
The
preparation of financial statements in conformity with U.S. 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 the Company's inventory and operating
results.
Concentrations
of credit risk
The
Company holds cash with one major financial institution which at times exceed
FDIC insured limits. Historically, the Company has not experienced any loss
due
to such concentration of credit risk.
Other
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. Sales to one customer accounted
for
approximately 11% of net revenues for 2006. Sales to foreign (non-U.S. based
customers) total approximately $3.8 million, $2.4 million and $0.9 million
in
the three fiscal years ended September 30, 2006. In 2006, the Company purchased
approximately 46% of our inventory from Scientific-Atlanta and approximately
14%
of
our inventory from Motorola. The concentration of suppliers of our inventory
subjects us to risk.
35
Goodwill
Annual
impairment testing indicates that goodwill is not impaired as of September
30,
2006 or 2005.
Employee
stock-based awards
In
the first quarter of fiscal year 2006, the company adopted Statement of
Financial Accounting Standards 123(R), "Share Based Payment" ("SFAS 123R").
SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, be recognized in financial statements based on their
grant date fair value. The Company has elected the modified-prospective
transition method of adopting SFAS 123R which requires the fair value of
unvested options be calculated and amortized as compensation expense over the
remaining vesting period. SFAS 123R does not require the Company to restate
prior periods for the value of vested options. Compensation expense for stock
based awards is included in the operating, selling, general and administrative
expense section of the consolidated statements of income and comprehensive
income.
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.
Fair
value of financial instruments
The
carrying amounts of accounts receivable and accounts 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. 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
November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments"
("FSP 115-1"), which provides guidance on determining when investments in
certain debt and equity securities are considered impaired, whether that
impairment is other-than-temporary, and on measuring such impairment loss.
FSP
115-1 also includes accounting considerations subsequent to the recognition
of
an other-than- temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized
as other-than-temporary impairments. FSP 115-1 is required to be applied to
reporting periods beginning after December 15, 2005. The Company elected to
adopt FSP11-5 in fiscal 2006 and its application had no material impact on
its
financial position.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which revised
ARB No. 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. This Statement requires the allocation of fixed
production overheads to the costs of conversion be based on normal capacity
of
the production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company elected to adopt
SFAS No.151 beginning with fiscal year 2005. The adoption of this standard
had
no impact on the Company's financial position and results of
operations.
36
In
December 2004, the FASB issued SFAS 123R, which replaced SFAS 123 and superseded
APB 25. SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their grant date fair market values and requires that such recognition
begin in the first interim or annual period after June 15, 2005, with early
adoption encouraged. Under SFAS 123R, the pro forma disclosures previously
permitted are no longer an alternative to financial statement recognition.
In
April 2005, the Securities and Exchange Commission (the SEC) postponed the
effective date of SFAS 123R until the issuer’s first fiscal year beginning after
June 15, 2005. In addition, in March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R
and
the valuation of share-based payments for public companies.
The
Company adopted SFAS 123R in the first quarter of fiscal 2006 and applied the
modified prospective method, which required that compensation expense be
recorded for all unvested stock options and restricted stock upon adoption
of
SFAS 123R. The Company applied the Black-Scholes valuation model in determining
the fair value of share-based payments to employees, which must then be
amortized on a straight line basis over the requisite service period. On October
1, 2005 all outstanding options representing 1,214,967 shares were fully vested.
Therefore, SFAS 123R had no impact on the Company's statement of income on
the
date of adoption.
During
2006, stock options were granted to certain members of management and the Board
of Directors. The Company determined the fair value of the options issued,
using
the Black-Scholes Valuation Model and is amortizing the calculated value over
the vesting term. The costs were primarily recognized in 2006, with residual
amounts being charged against income in 2007, 2008 and 2009.
The
Company currently presents pro forma disclosure of net income (loss) and
earnings (loss) per share as if compensation costs from all stock awards were
recognized based on the fair value recognition provisions of SFAS 123. The
Statement requires use of valuation techniques, including option pricing models,
to estimate the fair value of employee stock awards. For pro forma disclosures,
we use a Black-Scholes option pricing model in estimating the fair value of
employee stock options.
In
July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,) "Accounting
for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes”. FIN 48 clarifies the accounting for income taxes
by prescribing the minimum recognition threshold a tax position is required
to
meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The interpretation
applies to all tax positions related to income taxes subject to FASB Statement
No. 109.
FIN
48 is effective for fiscal years beginning after December 15, 2006. Differences
between amounts recognized in the statements of financial position prior to
the
adoption of FIN 48 and the amounts reported after adoption should be accounted
for as a cumulative-effect adjustment recorded to the beginning balance or
retained earnings. Management does not believe that the adoption of FIN 48
will
have a material impact on the Company's financial position.
37
Reclassifications
Certain
reclassifications have been made to the 2004 and 2005 financial statements
to
conform to the 2006 presentation.
Note
2 - Inventories
Inventories
are summarized as follows:
|
2006
|
2005
|
||||||
|
New
|
$
|
21,012,912
|
$
|
20,066,957
|
|||
|
Used
|
9,155,784
|
6,829,587
|
|||||
|
Allowance
for excess and obsolete inventory
|
(1,178,000
|
)
|
(1,575,395
|
)
|
|||
|
$
|
28,990,696
|
$
|
25,321,149
|
||||
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.
The
Company regularly reviews 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. The Company recorded a charge to allow for obsolete inventory
during September 30, 2006, increasing the cost of sales by approximately $0.4
million. The Company recorded a charge to allow for obsolete inventory at
September 30, 2004, increasing the cost of sales by approximately $0.6
million.
On
August 19, 2005, the Company purchased 100% of the outstanding stock of Jones
Broadband International, Inc. ("JBI") for consideration consisting of
approximately $2.4 million in debt assumption, including accrued liabilities
and
cash of approximately $1.6 million. The total purchase price represented the
approximate book value of JBI, consisting of $2.6 million of inventory after
an
approximate $0.5 million write down to market and $1.3 million of other assets
including receivables and fixed assets. JBI’s main office is in Oceanside,
California and it has a warehouse in Stockton, California. Results of JBI’s
operations are included in the Company’s consolidated statements of income from
the acquisition date.
Note
3 - Line of Credit, Stockholder Notes, Notes Payable and Interest Rate
Swap
At
September 30, 2006, a $3,476,622 balance is outstanding under a $7.0 million
line of credit due November 30, 2006, with interest payable monthly based on
the
prevailing 30-day LIBOR rate plus 1.75%. (7.07% at September 30, 2006 with
a
6.4% combined weighted average during fiscal year 2006).
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 50% of qualified inventory
for working capital purposes. Among other financial covenants, the line of
credit agreement provides that the Company’s net worth must be greater than
$15.0 million plus 50% of annual net income (with no deduction for net losses),
determined quarterly. The line of credit is collateralized by inventory,
accounts receivable, equipment and fixtures and general
intangibles.
38
Cash
receipts are applied from the Company’s lockbox account directly against the
bank line of credit, and checks clearing the bank are funded from the line
of
credit. The resulting overdraft balance, consisting of outstanding checks,
was
$1,334,946 at September 30, 2006, and
is included in the bank revolving line of credit.
On
September 30, 2004, the Company redeemed all of the outstanding shares of its
Series A 5% Cumulative Convertible Preferred Stock at its aggregate stated
value
of $8 million. All of the outstanding shares of Series A Preferred Stock were
held beneficially by David E. Chymiak, Chairman of the Board of the Company,
and
Kenneth A. Chymiak, President and Chief Executive Officer of the Company. The
Company financed the redemption with a new credit agreement with its bank which
includes a Revolving Credit Commitment in the amount of $7 million and a Term
Loan Commitment in the amount of $8 million. The proceeds from the Term Loan
were used to redeem the Series A Preferred Stock. At September 30, 2006 the
term
loan balance was $5,600,000.
On
September 29, 2004, the Company’s majority shareholders, David Chymiak and Ken
Chymiak, entered into a stock purchase agreement in which they sold 500,000
shares of their common stock to Barron Partners, LP ("Barron"), a private
investment partnership, for $3.25 per share. Under this agreement, Barron also
received options to purchase up to three million additional shares of the common
stock owned by these majority shareholders. During 2006, Barron exercised its
options to purchase these three million shares. The Company filed a registration
statement covering the resale of the shares of common stock sold as well as
the
shares of common stock issuable upon exercise of the options. The Company did
not receive any of the proceeds from the sale of the shares and did not receive
any of the proceeds from the exercise of the options, but paid the cost of
registering the shares for resale by the selling shareholders.
An
$8 million amortizing term note with the Company's primary lender was obtained
to finance the redemption of the outstanding shares of the Series A Preferred
Stock at September 30, 2004. The September 30, 2006 balance of this note is
$5,600,000 and is due on September 30, 2009, with monthly principal payments
of
$100,000 plus accrued interest, and the note bears interest at the prevailing
30-day LIBOR rate plus 2.50% (7.82% at September 30, 2006). An interest rate
swap was entered into simultaneously with the note on September 30, 2004, which
fixed the interest rate at 6.13%. The Company receives monthly the variable
interest rate of LIBOR based on a one month interval, plus 2.5% on the interest
rate swap. This amount is subsequently reclassified into interest expense as
a
yield adjustment in the same period in which the related interest on the
floating-rate debt obligation affects earnings. Upon entering into this interest
rate swap (which expires September 30, 2009), the Company designated this
derivative as a cash flow hedge by documenting our risk management objective
and
strategy for undertaking the hedge along with methods for assessing the swap's
effectiveness. At September 30, 2006, the notional value of the swap was
$8,000,000 and the fair market value of the interest rate swap is an asset
of
approximately $149,000, which is included in other non-current assets on the
Company’s consolidated balance sheet.
Notes
payable secured by real estate of $308,086 are due in monthly payments through
2013 with interest at 5.5% through 2008, converting thereafter to prime minus
.25%.
39
The
aggregate maturities of notes payable and the line of credit for the five years
ending September 30, 2011 are as follows:
|
2007
|
$
|
4,718,070
|
||
|
2008
|
1,243,685
|
|||
|
2009
|
3,246,155
|
|||
|
2010
|
48,765
|
|||
|
2011
|
51,522
|
|||
|
Thereafter
|
76,611
|
|||
|
|
|
|||
|
Total
|
$
|
9,384,808
|
||
|
|
|
Note
4 - Income Taxes
The
provisions for income taxes consist of:
|
2006
|
2005
|
2004
|
||||||||
|
Current
|
$
|
2,766,000
|
$
|
3,604,000
|
$
|
3,685,000
|
||||
|
Deferred
|
(22,000
|
)
|
(3,000
|
)
|
(172,000
|
)
|
||||
|
2,744,000
|
$
|
3,601,000
|
$
|
3,513,000
|
||||||
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:
|
2006
|
2005
|
2004
|
||||||||
|
Statutory
tax rate
|
34.0%
|
|
34.0%
|
|
34.0%
|
|
||||
|
State
income taxes, net of U.S.
|
||||||||||
|
federal
tax benefit
|
4.9%
|
|
4.7%
|
|
4.7%
|
|
||||
|
Tax
credits and exclusions
|
(1.7%)
|
|
(
.5%)
|
|
(0.6%)
|
|
||||
|
Other
|
(1.0%)
|
|
-
|
(0.4%)
|
|
|||||
|
36.2%
|
|
38.2%
|
|
37.7%
|
|
|||||
40
Deferred
tax assets consist of the following at September 30:
|
|
2006
|
2005
|
|||||
|
Net
operating loss carryforwards
|
$
|
1,117,000
|
$
|
1,239,000
|
|||
|
Financial
basis in excess of tax basis
|
|
|
|||||
|
of
certain assets
|
(321,000
|
)
|
(397,000
|
)
|
|||
|
Accounts
Receivable
|
211,000
|
27,000
|
|||||
|
Inventory
|
718,000
|
834,000
|
|||||
|
Other,
net
|
51,000
|
51,000
|
|||||
|
|
|
|
|||||
|
Deferred
tax assets, net
|
$
|
1,776,000
|
$
|
1,754,000
|
|||
|
Deferred
tax assets are classified as:
|
|||||||
|
Current
|
$
|
1,074,000
|
$
|
968,000
|
|||
|
Non-Current
|
702,000
|
786,000
|
|||||
|
$
|
1,776,000
|
$
|
1,754,000
|
||||
Utilization
of ADDvantage’s net operating loss carryforward of approximately $2,938,000 to
reduce future taxable income is limited to an annual amount of approximately
$265,000. The NOL carryforward expires in varying amounts from 2010 to 2014.
In
accordance with SFAS 109, the Company records net deferred tax assets to the
extent the Company believes these assets will more likely than not be realized.
In making such determination, the Company considers all available positive
and
negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and recent financial
performance. The Company has concluded, based on its historical earnings and
projected future earnings that it will be able to realize the full effect of
the
deferred tax assets and no valuation allowance is needed.
Note
5 - Stockholders’ Equity
The
1998 Incentive Stock Plan (the "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, 2006, 1,009,652 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, 759,652 shares were available for future
grants at September 30, 2006.
41
A
summary of the status of the Company's stock options at September 30, 2006,
2005
and 2004 and changes during the years then ended is presented
below.
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Wtd.
Avg.
|
Wtd.
Avg
|
Wtd.
Avg.
|
|||||||||||||||||
|
Shares
|
Ex.
Price
|
Shares
|
Ex.
Price
|
Shares
|
Ex.
Price
|
||||||||||||||
|
Outstanding,
beginning of year
|
144,767
|
$
|
3.23
|
131,125
|
$
|
2.83
|
179,000
|
$
|
1.97
|
||||||||||
|
Granted
|
35,000
|
$
|
5.78
|
25,000
|
$
|
4.62
|
4,000
|
$
|
4.40
|
||||||||||
|
Exercised
|
(72,500
|
) |
$
|
3.38
|
(11,358
|
)
|
$
|
1.74
|
(51,375
|
)
|
$
|
2.03
|
|||||||
|
Canceled
|
(2,517
|
) |
$
|
1.50
|
-
|
-
|
(500
|
)
|
$
|
1.50
|
|||||||||
|
Outstanding,
end of year
|
104,750
|
$
|
4.01
|
144,767
|
$
|
3.23
|
131,125
|
$
|
2.83
|
||||||||||
|
Exercisable,
end of year
|
94,750
|
$
|
3.83
|
144,767
|
$
|
3.23
|
108,500
|
$
|
3.08
|
||||||||||
The
following table summarizes information about fixed stock options outstanding
at
September
30, 2006:
|
Options Exercisable
|
|||
|
Number
|
Remaining
|
||
|
Outstanding
|
Contractual
|
||
|
Exercise
Price
|
At
9/30/06
|
Life
|
|
|
$5.780
|
25,000
|
9.5
years
|
|
|
$4.620
|
25,000
|
8.5
years
|
|
|
$4.400
|
4,000
|
7.5
years
|
|
|
$1.900
|
10,000
|
6.5
years
|
|
|
$1.650
|
2,000
|
6.5
years
|
|
|
$0.810
|
2,000
|
5.5
years
|
|
|
$1.500
|
13,750
|
4.5
years
|
|
|
$3.125
|
13,000
|
3.5
years
|
|
|
94,750
|
|||
Prior
to fiscal year 2006, the Company accounted for stock awards under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees' ("APB 25") and related
interpretations. Accordingly, the company historically recognized no
compensation expense for grants of stock options to employees because all stock
options had an exercise price equal to the market price of the underlying common
stock on the date of the grant.
42
In
the first quarter of fiscal year 2006, the Company adopted Statement of
Financial Accounting Standards 123 (R), "Share Based Payment" ("SFAS 123R").
SFAS 123R requires all share-based payments to employees, including grants
of
employee stock options, be recognized in the financial statements based on
their
grant date fair value. The Company has elected the modified-prospective
transition method of adopting SFAS 123R which requires the fair value of
unvested options be calculated and amortized as compensation expense over the
remaining vesting period. SFAS 123R does not require the company to restate
prior periods for the value of vested options. Compensation expense for stock
based awards is included in the operating, selling, general and administrative
expense section of the consolidated statements of income and comprehensive
income. On October 1, 2005, all outstanding options, representing 144,767
shares, were fully vested. Therefore, SFAS 123R had no impact on the Company's
statement of income on the date of its adoption.
On
March 6, 2006, the Company issued nonqualified stock options covering a total
of
35,000 shares to directors and executives. A portion of these options vested
at
the grant date and the remaining vest over 4 years. The Company estimates the
fair value of the options granted using the Black-Scholes option valuation
model
and the assumptions shown in the table below. The Company estimated the expected
term of options granted based on the historical grants and exercises of the
Company's options. The Company estimates the volatility of its common stock
at
the date of the grant based on both the historical volatility as well as the
implied volatility on it's common stock, consistent with SFAS 123R and
Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB No.
107). The Company bases the risk-free rate that is used in the Black-Scholes
option valuation model on the implied yield in effect at the time of the option
grant on U.S. Treasury zero-coupon issues with equivalent expected term. The
Company has never paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. Consequently,
the Company uses an expected dividend yield of zero in the Black-Scholes option
valuation model. The Company amortizes the resulting fair value of the options
ratably over the vesting period of the awards. The Company uses historical
data
to estimate the pre-vesting options forfeitures and records share-based expense
only for those awards that are expected to vest.
Twelve
Months
Ended
September
30, 2006
Average expected life 5.5
Average expected volatility
factor 63%
Average risk-free interest
rate 4.7%
Average expected dividends
yield -----
The
estimated fair value of the options granted on March 6, 2006 totaled $120,510.
The Company recorded compensation expense of $98,110 during fiscal year 2006.
The remaining $23,401 represents the value of the unvested portion of the
options issued and will be amortized as compensation expense over the remaining
4 year vesting term.
Under
the requirements of FAS 123(R), the Company presents pro forma disclosure of
net
income and earnings per share as if compensation costs from all stock awards
issued during periods presented were recognized based on the fair value
recognition provisions of SFAS 123. Pro forma information regarding net income
and earnings per share has been determined as if the Company has accounted
for
its employee stock options under the fair value method of that statement for
2005 and 2004. The compensation expense from the options issued in 2006 are
included in the net income as reported. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:
43
|
2006
|
2005
|
2004
|
|
|
Expected
life in years
|
5.5
|
6.0
|
6.0
|
|
Expected
volatility
|
63.0%
|
55.0%
|
142.0%
|
|
Risk-free
interest rate
|
4.7%
|
4.3%
|
2.0%
|
|
Expected
dividend yeild
|
-
|
-
|
-
|
The
following table illustrates the pro forma effect on net income and earnings
per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123:
Fiscal Year Ended September 30,
|
2006
|
2005
|
2004
|
||||||||
|
(In
thousands)
|
||||||||||
|
Net
income as reported
|
$
|
4,003
|
$
|
4,974
|
$
|
4,574
|
||||
|
Pro
forma compensation expense from stock options
|
0
|
(65
|
)
|
(10
|
)
|
|||||
|
Pro
forma net income
|
$
|
4,003
|
$
|
4,909
|
$
|
4,564
|
||||
|
Earnings
per common share as reported:
|
||||||||||
|
Basic
|
$
|
.39
|
$
|
.49
|
$
|
.46
|
||||
|
Diluted
|
$
|
.39
|
$
|
.49
|
$
|
.41
|
||||
|
Proforma
earings per common share
|
||||||||||
|
Basic
|
$
|
.39
|
$
|
.49
|
$
|
.46
|
||||
|
Diluted
|
$
|
.39
|
$
|
.49
|
$
|
.41
|
||||
The
Series B Preferred Stock has priority over the Company’s common stock with
respect to the payment of dividends and the distribution of assets. Cash
dividends on the Series B Preferred Stock shall be payable quarterly when and
as
declared by the Board of Directors. Interest accrues on unpaid dividends at
the
rate of 7% per annum. No dividends may be paid on any class of stock ranking
junior to the Series B Preferred Stock unless Series B Preferred Stock dividends
have been paid. Liquidation preference is equal to the stated value per share.
The 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 Series B Preferred Stock do not have any voting rights unless the Company
fails to pay dividends for four consecutive dividend payment dates
Note
6 - Related Parties
Cash
used in financing activities in 2006 was primarily used to pay dividends on
the
Company’s Series B Preferred Stock, which is beneficially owned by David E.
Chymiak, Chairman of the Board and Kenneth A. Chymiak, President and Chief
Executive Officer, and for the note payments for the buy-out of Series A
Preferred Stock on September 30, 2004. On September 30, 2004, the Company
redeemed, at the $8 million stated value, all of the Series A Preferred Stock,
which was also beneficially owned by David E. Chymiak and Kenneth A. Chymiak.
With the redemption of the Series A Preferred Stock on September 30, 2004,
dividends on the remaining Series B Preferred Stock total $840,000 annually.
The
outstanding common and preferred stock is beneficially owned by the Company's
principal shareholders are reflected in the following table.
44
Stock
Ownership:
|
Name
of
Beneficial
Owner
|
Percent
of
Common
Stock
Beneficially
Owned
|
Percent
of
Series
B
Preferred
Stock
Beneficially
Owned
(A)
|
||
|
David
E. Chymiak
|
23%
|
50.0%
|
||
|
Kenneth
A. Chymiak
|
20%
|
50.0%
|
In
Fiscal 1999, Chymiak Investments, L.L.C., which is owned by David E. Chymiak
and
Kenneth A. Chymiak, purchased from Tulsat Corporation on September 30, 1999
certain real estate and improvements consisting of office and warehouse space
of
for a price of $1,286,000. The price represented the appraised value of the
property less the sales commission and other sales expenses that would have
been
incurred by Tulsat Corporation if it had sold the property to a third party
in
an arm’s-length transaction. Tulsat Corporation entered into a five-year lease
commencing October 1, 1999 with Chymiak Investments, L.L.C. covering the
property. This lease was renewed on October 1, 2004 and will expire on September
30, 2008.
In
fiscal 2001, ADDvantage Technologies Group of Texas, Inc. borrowed $150,000
on
June 26, 2001 from Chymiak Investments, L.L.C for the purchase of a building
consisting of office and warehouse space at the location in Texas. The note
accrued interest at the rate of 7.5% per annum and was payable over 10 years.
Total interest paid in 2004 and 2003 was $4,898 and $9,869, respectively. The
note was repaid in April 2004.
During
2006, the Company moved its headquarters into a recently renovated office and
warehouse property owned by Chymiak Investments, LLC. The Company vacated
several leased properties as a result of the move that were being leased from
Chymiak Investments, LLC. The Company utilized the new office and warehouse
facility rent free in 2006 but continued to make lease payments on the vacated
properties. The lease agreements associated with the vacated properties were
cancelled on September 30, 2006 without penalty.
The
Company continues to lease various properties primarily from two companies
owned
by David E. Chymiak and Kenneth A. Chymiak. Future minimum lease payments under
these leases are as follows:
2007
321,840
2008
321,840
$
643,680
Related
party rental expense for the years ended September 30, 2006, 2005 and 2004
was
$465,840, $465,840 and $466,000, respectively.
45
Note
7 - Retirement Plan.
The
Company sponsors a 401(k) plan that allows participation by all employees who
are at least 21 years of age and have completed one year of service. 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
$186,079 during the year ended September 30, 2006, $186,304 during the year
ended September 30, 2005, and $161,644 during the year ended September 30,
2004.
Note
8 - Earnings per Share
|
Year
ended
|
Year
ended
|
Year
Ended
|
||||||||
|
September
30,
|
September
30,
|
September
30,
|
||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Net
income
|
$
|
4,842,718
|
$
|
5,814,392
|
$
|
5,813,753
|
||||
|
Dividends
on preferred stock
|
840,000
|
840,000
|
1,240,000
|
|||||||
|
Net
income attributable to
|
||||||||||
|
common
shareholders - basic
|
4,002,718
|
4,974,392
|
4,573,753
|
|||||||
|
Dividends
on Series A
|
||||||||||
|
Preferred
Stock
|
-
|
-
|
400,000
|
|||||||
|
Net
income attributable to common
|
||||||||||
|
shareholders
- diluted
|
$
|
4,002,718
|
$
|
4,974,392
|
$
|
4,973,753
|
||||
|
Weighted
average shares outstanding
|
10,152,472
|
10,067,277
|
10,041,197
|
|||||||
|
Potentially
dilutive securities
|
||||||||||
|
Assumed
conversion of 200,000 shares of
|
||||||||||
|
Series
A Preferred Stock
|
-
|
-
|
2,000,000
|
|||||||
|
Effect
of dilutive stock options
|
49,002
|
42,577
|
63,344
|
|||||||
|
Weighted
average shares outstanding -
|
||||||||||
|
assuming
dilution
|
10,201,474
|
10,109,854
|
12,104,541
|
|||||||
|
Earnings
per common share:
|
||||||||||
|
Basic
|
$
|
0.39
|
$
|
0.49
|
$
|
0.46
|
||||
|
Diluted
|
$
|
0.39
|
$
|
0.49
|
$
|
0.41
|
||||
Note
9 - Subsequent Events
On
November 20th, the Company purchased real estate, consisting of an office and
warehouse facility located on ten acres in Broken Arrow, OK, from Chymiak
Investments, LLC for $3,250,000. The office and warehouse facility is currently
being utilized as the Company's headquarters and the office and warehouse of
our
Tulsat Corporation. The office and warehouse facility contains approximately
100,000 square feet of gross building area and was recently renovated and
modified to for specific use of the Company. The price paid for the property
represents less than the appraised value of the property.
46
On
November 20th, ADDvantage Technologies Group, Inc. executed the Third Amendment
to Revolving Credit and Term Loan Agreement with its primary financial lender.
The Third Amendment renewed the $7,000,000 Revolving Line of Credit and extends
the maturity date on the credit facility to September 30, 2007. The Third
Amendment also established a new $2,760,000 Term Note to the Agreement. The
$2,760,000 Term Note was executed to finance the purchase of the Company's
new
headquarters building located in Broken Arrow, OK, discussed above. The new
loan
matures over fifteen years and payments are due monthly, beginning December
31,
2006, at $15,334 plus accrued interest. Interest accrues at a calculated rate
of
1.5% plus the prevailing 30-day LIBOR rate.
The
Revolving line of Credit and term Loan Agreement also includes a Term Loan
Commitment of $8,000,000 established September 2004. This loan was used to
finance the redemption of the outstanding shares of the Company's Series A
Preferred Stock and matures over five years ending September 30, 2009.
Note
10 - Quarterly Results of Operations (Unaudited)
The
following is a summary of the quarterly results of operations for the years
ended September 30, 2006 and 2005.
Three
months ended
|
December
31
|
March
31
|
June
30
|
September
30
|
||||||||||
|
Fiscal
year ended 2006
|
|||||||||||||
|
Net
sales and service income
|
14,753,611
|
12,419,157
|
13,199,459
|
12,168,982
|
|||||||||
|
Gross
profit
|
5,070,522
|
4,095,811
|
4,195,569
|
3,379,446
|
|||||||||
|
Net
income
|
1,741,594
|
1,076,798
|
1,342,699
|
681,627
|
|||||||||
|
Basic
earnings per common share
|
.15
|
.09
|
.11
|
.05
|
|||||||||
|
Diluted
earnings per common share
|
.15
|
.09
|
.11
|
.05
|
|||||||||
|
Fiscal
year ended 2005
|
|||||||||||||
|
Net
sales and service income
|
$
|
12,261,125
|
$
|
9,894,886
|
$
|
12,093,891
|
$
|
16,023,293
|
|||||
|
Gross
profit
|
4,056,414
|
3,519,716
|
4,258,587
|
5,037,311
|
|||||||||
|
Net
income
|
1,514,687
|
1,088,238
|
1,446,426
|
1,765,041
|
|||||||||
|
Basic
earnings per common share
|
0.13
|
0.09
|
0.12
|
0.15
|
|||||||||
|
Diluted
earnings per common share
|
0.13
|
0.09
|
0.12
|
0.15
|
|||||||||
On
January 17, 2006 we received notification from Tullius Taylor Sartain &
Sartain ("Tullius"), our independent registered public accounting firm, that
they would resign upon completion of Tullius' review of our Quarterly Report
on
Form 10-Q for the first quarterly period ended December 31, 2005. Tullius’
resignation became effective when we filed our Form 10-Q on February 13,
2006.
47
In
connection with the audits of our financial statements for each of the two
fiscal years ended September 30, 2005, and in the subsequent interim period
preceding the effective resignation date, there were no disagreements with
Tullius on any matters of accounting principles or practices, financial
statement disclosures or auditing scope and procedures which disagreements,
if
not resolved to the satisfaction of Tullius, would have caused Tullius to make
reference to the matter in their reports on the Company’s consolidated financial
statements for such periods.
In
addition, during the Company's two fiscal years ended September 30, 2005, and
for the period from October 1, 2005, through February 13, 2006, there were
no
reportable events as defined by paragraph (a) (1) (v) of Item 304 of Regulation
S-K promulgated by the Securities and Exchange Commission.
On
January 26, 2006, the Audit Committee of the Board of Directors engaged Hogan
& Slovacek to serve as our independent registered public accounting firm for
the current fiscal year.
Our
management carried out an evaluation pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended, under the supervision and with the
participation of our chief executive officer and chief financial officer, of
the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act)
as of the end of the period covered by this Report. Based upon that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or furnish under the
Exchange Act are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.
During
the period covered by this report on Form 10-K, there has been no change in
our
internal controls over financial reporting that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
None.
48
PART
III
The
information required by this item concerning our officers, directors, compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, and
our
Code of Business Conduct and Ethics is incorporated by reference to the
information in the sections entitled “Identity of Officers,” “Election of
Directors,” “Compliance with Section 16(a) of the Exchange Act,” and “Code of
Ethics,” respectively, of our Proxy Statement for the 2007 Annual Meeting of
Shareholders (the “Proxy Statement”) to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year ended
September 30, 2006.
The
information required by this item concerning executive compensation is
incorporated by reference to the information set forth in the section entitled
“Compensation of Directors and Executive Officers” of our Proxy
Statement.
The
information required by this item regarding certain relationships and related
transactions is incorporated by reference to the information set forth in the
section entitled “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters” of our Proxy Statement.
The
information required by this item regarding certain relationships and related
transactions is incorporated by reference to the information set forth in the
section entitled “Certain Relationships and Related Transactions” of our Proxy
Statement.
The
information required by this item regarding principal accounting fees and
services is incorporated by reference to the information set forth in the
section entitled "Appointment Of Independent Auditors" of our Proxy
Statement.
49
PART
IV
(a) 1. The
following financial statements are filed as part of this report in Part II,
Item
8.
Report
of Independent Registered Public Accounting Firm for 2005 and 2004.
Report
of Independent Registered Public Accounting Firm for 2006.
Consolidated
Balance Sheets as of September 30, 2006 and 2005.
Consolidated
Statements of Income for the years ended September 30, 2006, 2005 and
2004.
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended September 30,
2006, 2005 and 2004.
Consolidated
Statements of Cash Flows for the years ended September 30, 2006, 2005
and 2004.
Notes
to Consolidated Financial Statements.
50
2. The
following financial statement Schedule II - Valuation and Qualifying
Accounts for
the years ended September 30, 2006, 2005 and 2004 is filed as part of this
report. All
other financial statement schedules have been omitted because they are
not applicable
or are not required or the information required to be set forth therein
is included
in the financial statements or notes thereto contained in Part II, Item 8
of this
current report.
Schedule
II - Valuation and Qualifying Accounts
|
|
Balance
at
|
Charged
to
|
Balance
at
|
|||||||||||||
|
|
Beginning
|
Costs
and
|
|
End
|
||||||||||||
|
|
of
Period
|
Expenses
|
Write-offs
|
Recoveries
|
of
Period
|
|||||||||||
|
Period
Ended September 30, 2006
|
||||||||||||||||
|
Allowance
for Doubtful Accounts
|
$
|
92,000
|
$
|
445,541
|
-
|
$
|
16,459
|
$
|
554,000
|
|||||||
|
Allowance
for Excess and Obsolete Inventory
|
1,575,395
|
439,625
|
(837,020
|
)
|
-
|
1,178,000
|
||||||||||
|
Valuation
Allowance of Deferred Tax Asset
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
|
||||||||||||||||
|
Period
Ended September 30, 2005
|
||||||||||||||||
|
Allowance
for Doubtful Accounts
|
$
|
68,063
|
$
|
40,080
|
(16,143
|
)
|
-
|
$
|
92,000
|
|||||||
|
Allowance
for Excess and Obsolete Inventory
|
1,093,000
|
482,395
|
-
|
-
|
1,575,395
|
|||||||||||
|
Valuation
Allowance of Deferred Tax Asset
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
|
||||||||||||||||
|
Period
Ended September 30, 2004
|
||||||||||||||||
|
Allowance
for Doubtful Accounts
|
$
|
78,359
|
$
|
-
|
(19,968
|
)
|
$
|
9,672
|
$
|
68,063
|
||||||
|
Allowance
for Excess and Obsolete Inventory
|
447,100
|
645,900
|
-
|
-
|
1,093,000
|
|||||||||||
|
Valuation
Allowance of Deferred Tax Asset
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
|
||||||||||||||||
3. The
following documents are included as exhibits to this Form 10-K.
Exhibit
|
3.1
|
Certificate
of Incorporation of the Company and amendments thereto incorporated
by
reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed
with
the Securities Exchange Commission by the Company on January 10,
2003.
|
|
3.2
|
Bylaws
of the Company, as amended, incorporated by reference to Exhibit
3.2 to
the Annual Report on Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
|
|
4.1
|
Certificate
of Designation, Preferences, Rights and Limitations of ADDvantage
Media
Group, Inc. Series A 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.
|
51
|
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 Annual 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 Annual Report on Form 10-KSB filed
with
the Securities Exchange Commission by the Company on December 30,
1999.
|
10.3
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 incorporated by reference to Exhibit 10.7
to
the Annuak Report to Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
|
10.4
|
Revolving
Credit and Term Loan Agreement dated September 30, 2004 ("Revolving
Credit
and Term Loan Agreement"), incorporated by reference to Exhibit 10.5
to
the Company's Form 10-K filed December 22,
2004.
|
|
10.5
|
Third
Amendment to Revolving Credit and Term Loan Agreement dated November
20,
2006.
|
|
10.6
|
The
ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated
by
reference to Appendix A to the Company's Proxy Statement relating
to the
Company's 1998 Annual Meeting, filed April 28, 1998.
|
|
10.7
|
First
Amendment to ADDvantage Media Group, Inc. 1998 Incentive Stock Plan,
incorporated by reference to Exhibit 4.4 to
the
|
Company's Registration Statement on Form S-8 filed November 20, 2003.
10.8
Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage
Technologies, Group, Inc. dated November 20,
2006,
incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission
by
the Company on November 20, 2006.
10.9
Senior Management Incentive Compensation Plan and employment agreement
between the Company and Dan O'Keefe, incorporated by
reference
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on March 6, 2006.
14.1
Amended Code of Business Conduct and Ethics for directors, officers and
employees of the Company, incorporated by reference to the
Current Report on Form 8-K filed with the Securities and Exchange Commission
by
the Company on March 6, 2006.
52
16.1 Letter
regarding change in certifying accountant, incorporated by reference to the
Current Report on Form 8-K filed with the by reference
to
the Current Report on Form 8-K filed with the Securities and Exchange Commission
by the Company on February 13, 2006.
21.1
Listing of the Company's subsidiaries.
23.1
Consent of Hogan & Slovacek.
23.2
Consent of Tullius Taylor Sartain & Sartain LLP
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes
Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
53
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADDvantage
Technologies Group, Inc.
Date:
December 27,
2006
By:
/s/
Kenneth A. Chymiak
Kenneth
A. Chymiak, President
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Date:
December 27,
2006
/s/
David E. Chymiak
David
E. Chymiak, Chairman of the Board of Directors
Date:
December 27,
2006
/s/
Kenneth A. Chymiak
Kenneth
A. Chymiak, President, Director (Principal Executive Officer)
Date:
December 27,
2006 /s/
Daniel E. O'Keefe
Daniel
E. O'Keefe, Chief Financial Officer (Principal Financial Officer)
Date:
December 27,
2006 /s/
Stephen J. Tyde
Stephen
J. Tyde, Director
Date:
December 27,
2006
/s/
Freddie H. Gibson
Freddie
H. Gibson, Director
Date:
December 27,
2006
/s/
Henry F. McCabe
Henry
F. McCabe, Director
54
INDEX
TO EXHIBITS
The
following documents are included as exhibits to this Form 10-K.
Exhibit Description
|
3.1
|
Certificate
of Incorporation of the Company and amendments thereto incorporated
by
reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed
with
the Securities Exchange Commission by the Company on January 10,
2003.
|
|
3.2
|
Bylaws
of the Company, as amended, incorporated by reference to Exhibit
3.2 to
the Annual Report on Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
|
|
4.1
|
Certificate
of Designation, Preferences, Rights and Limitations of ADDvantage
Media
Group, Inc. Series A 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 Annual 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 Annual Report on Form 10-KSB filed
with
the Securities Exchange Commission by the Company on December 30,
1999.
|
10.3 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 incorporated by reference to Exhibit 10.7 to
the Annuak Report to Form 10-KSB filed with the
Securities
Exchange Commission on January 9, 2001.
|
10.4
|
Revolving
Credit and Term Loan Agreement dated September 30, 2004 ("Revolving
Credit
and Term Loan Agreement"), incorporated by reference to Exhibit 10.5
to
the Company's Form 10-K filed December 22,
2004.
|
|
10.5
|
Third
Amendment to Revolving Credit and Term Loan Agreement dated November
20,
2006.
|
|
10.6
|
The
ADDvantage Media Group, Inc. 1998 Incentive Stock Plan, incorporated
by
reference to Appendix A to the Company's Proxy Statement relating
to the
Company's 1998 Annual Meeting, filed April 28, 1998.
|
|
10.7
|
First
Amendment to ADDvantage Media Group, Inc. 1998 Incentive Stock Plan,
incorporated by reference to Exhibit 4.4 to
the
|
Company's Registration Statement on Form S-8 filed November 20, 2003.
10.8
Contract of sale of real estate between Chymiak Investments, LLC and ADDvantage
Technologies, Group, Inc. dated November 20,
2006,
incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission
by
the Company on November 20, 2006.
10.9
Senior Management Incentive Compensation Plan and employment agreement
between the Company and Dan O'Keefe, incorporated by
reference
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on March 6, 2006.
14.1
Amended Code of Business Conduct and Ethics for directors, officers and
employees of the Company, incorporated by reference to the
Current Report on Form 8-K filed with the Securities and Exchange Commission
by
the Company on March 6, 2006.
16.1
Letter regarding change in certifying accountant, incorporated by reference
to
the Current Report on Form 8-K filed with the Securities
Securities
and Exchange Commission by the Company on February 13,
2006.
21.1
Listing
of the Company’s subsidiaries.
23.1 Consent
of Hogan & Slovacek.
23.2
Consent of Tullius Taylor Sartain & Sartain LLP
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes
Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes
Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
56