ADDVANTAGE TECHNOLOGIES GROUP INC - Annual Report: 2007 (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 SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended September 30,
2007
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oTRANSITION
REPORT
UNDER SECTION 13 OR 15(d) OF THE 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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NASDAQ
Global Market
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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)
has filed all reports required to be filed by Section 13 or
15(d) of the Securities
Exchange
Act during the preceding 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
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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x
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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, 2007 was $19,537,691.
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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 10,249,656 as of December 10,
2007.
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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 2008 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 end of the fiscal year covered by this Form 10-K.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR
ENDED SEPTEMBER 30,
2007
INDEX
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Page
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PART
I
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Item
1.
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Item
1A.
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Item
1B.
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Item
2.
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Item
3.
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Item
4.
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PART
II
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Item
5.
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Item
6.
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Item
7.
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Item
7A.
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Item
8.
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Item
9.
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Item
9A.
Item
9A(T).
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Item
9B.
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PART
III
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Item
10.
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Item
11
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Item
12.
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Item
13.
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Item
14.
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PART
IV
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Item
15.
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SIGNATURES
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PART I
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Item 1.
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FORWARD-LOOKING
STATEMENTS
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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 the original
equipment manufacturers (“OEMs”) 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.
In
addition to offering a broad range of new products, we also purchase and sell
surplus and refurbished equipment that becomes available in the market as a
result of cable operator system upgrades or overstocks in their warehouses.
We
maintain one of the industry's largest inventories of new and refurbished
equipment, allowing us to deliver products to our customers 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 JDSU-Acterna repairs.
Overview
of the Industry
We
participate in markets for equipment sold primarily to cable operators (called
multiple system operators or “MSOs”) and other communication
companies. 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 MSOs in the United
States. Within the last few years, MSOs 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. To offer these expanded services,
MSOs have invested significantly to convert their systems to digital networks
and continue to upgrade their cable plants to increase the speed of their
communication signals. As a result, many MSOs have well-equipped
networks capable of delivering symmetrical high-bandwidth video, two-way high
speed data service and telephony to most of their subscribers through their
existing hybrid fiber co-axial (HFC) infrastructure.
We
believe that we have been able to provide many of the products and services
sought by MSOs as they establish and expand their services and
territories. Our relationships with our principal vendors,
Scientific-Atlanta and Motorola, provide us with products that are important
to
cable operators as they maintain and expand their systems. These
relationships and our inventory are key factors, we believe, in our prospects
for revenue and profit growth.
We
are
focused on the opportunities provided by technological changes resulting from
the implementation of fiber-to-the home (“FTTH”) by several large telephone
companies, the continued expansion of bandwidth signals by MSOs, and the
increased sales to customers in Latin America. We continue
to stock legacy CATV equipment as well as new 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 eight
service centers that provide warranty and out-of-warranty repairs, we continue
to reach new customers.
3
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 $1.8 million and began to refurbish these
boxes and offer them for sale. During fiscal 2007 we purchased
approximately 40,000 additional surplus digital set top boxes and sold
approximately 57,000 boxes to U.S. and international customers generating
incremental revenues from this product line of approximately $4.3
million. At the end of the 2007 fiscal year, we inventoried
approximately 78,000 surplus digital set top boxes with a combined value of
approximately $2.7 million.
The
boxes
that we purchase and currently market are considered legacy boxes as the
security features (which allow the MSOs to control channel access and services)
are not separable from digital boxes. The Federal Communications
Commission ("FCC") issued a ban on MSOs purchasing these legacy boxes after
July
1, 2007 in the attempt to force the cable 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).
Several
large and small MSOs filed petitions with the FCC requesting at least partial,
if not full, waivers to the regulation. A few of these MSOs received
waivers and, as a result, are able to continue to purchase these legacy boxes
for a specified period of time. We expect there will continue to be
demand for these boxes on a limited basis in the U.S. for those companies that
have obtained waivers, and internationally where no ban exists and they are
widely used. However, our ability to continue to obtain surplus
digital converter boxes as well as generate sales of certain boxes currently
in
inventory are risk factors further disclosed in “Item 1A. Risk
Factors”.
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 video, telephone and internet data
signals.
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. In this category, we currently offer
products including optical transmitters, fiber optic cable, receivers, couplers,
splitters and compatible accessories. These products convert radio
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.
We
also
inventory and sell to our customers other hardware such as test equipment,
connector and cable products.
Revenues
by Geographic Areas
Our
revenues by geographic areas were as
follows:
Years ended September 30,
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2007
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2006
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2005
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Geographic
Area
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United
States
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$ |
59,756,983
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$ |
48,713,482
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$ |
47,863,096
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Latin
America
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and
Other
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5,889,102
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3,827,727
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2,410,099
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Total
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$ |
$65,646,085
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$ |
52,541,209
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$ |
50,273,195
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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.
4
Sales
and Marketing
In
fiscal
2007, sales of new products represented 69% of our total revenues and
re-manufactured product sales represented 23%. Repair and other services
contributed the remaining 8% of revenues.
We
market
and sell our products to franchise and private MSOs, telephone companies, system
contractors and other resellers. 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
various 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 major MSOs in the United
States and we are constantly in touch with these operators regarding their
plans
for upgrading or expansion as well as 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 of any reseller 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 America, Europe and the Far East. Sales
in
Latin America continue to grow as we expand our relationships with international
cable operators in this region. 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 products. We extend credit on a
limited basis to international customers that purchase products on a regular
basis and make timely payments. However, for most international sales we require
prepayment of sales or letters of credit confirmed by U.S. banks prior to
shipment of products.
Suppliers
In
fiscal
2007, we purchased approximately $14.4 million of new inventory directly from
Scientific-Atlanta and approximately $7.2 million of new inventory directly
from
Motorola. These purchases represented approximately 53% of our total
inventory purchases for fiscal 2007. The concentration of our
inventory suppliers subjects us to risk which is further discussed in "Item
1A.
Risk Factors." We also purchase a large amount of our inventory from
MSOs 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 that 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
compete with our OEM suppliers as they sell directly to our
customers. Our OEM suppliers have a competitive advantage over us as
they can sell products at lower prices than we offer. As a result, we
are often considered a secondary supplier by large MSOs and telephone companies
when they are making large equipment purchases or upgrades. However,
for smaller orders or items that are needed to be delivered quickly, we hold
an
advantage over these suppliers as we carry most inventory in stock and can
have
it delivered in a very short timeframe.
Working
capital practices in the industry center on inventory and accounts receivable.
We choose to carry a large inventory and continue to reinvest excess cash flow
in new 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 borrowings up to $7,000,000.We
expect to have sufficient funds available from these sources to meet our working
capital needs for the foreseeable future.
Significant
Customers
We
are
not dependent on one or a few customers to support our business. Our
customer base consists of over 2,000 active accounts. Sales to our
largest customer accounted for approximately 9% of our revenues in fiscal
2007. Approximately 34% of our revenues for fiscal year 2007 and
approximately 32% for 2006 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.
Personnel
At
September 30, 2007, 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.
5
Item
1A. Risk Factors.
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, 2007, David Chymiak, Chairman of the Board, and Kenneth Chymiak,
President and Chief Executive Officer, owned approximately 43% of our
outstanding common 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 could 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.
Our
business is dependent on our customers' capital
budgets. Our performance is impacted by our customers'
capital spending for constructing, rebuilding, maintaining or upgrading their
broadband and telecommunications systems. Capital spending in the CATV and
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 can reduce 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.
On
the
other hand, a significant increase in the capital budgets of our customers
could
also impact us in a negative fashion. Large upgrades or complete
system upgrades are typically sourced with equipment purchased directly from
OEMs. Not only do these upgrades negatively impact new product sales,
they can also negatively impact recurring refurbished and repair business as
the
new equipment installed typically carries an OEM warranty that allows the
customer to exchange bad products for new products directly with the
manufacturer.
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 requires 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 us.
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 CATV and
telecommunications
industry could result in delays or
reductions in purchases of products, which would have a material adverse effect
on our business. The CATV and 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, 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
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, and this trend may continue. The
larger combined companies may be able to provide better solution
alternatives to 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.
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 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 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 2007, our
inventory purchases from these two companies totaled approximately $21.6
million, or 53% 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 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 timely 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.
6
We
have purchased a large quantity of
legacy digital converter boxes which could become
obsolete or outdated. Over the past 14 months we have
purchased approximately 140,000 used digital converter boxes and continue to
maintain approximately 78,000 boxes in inventory. The boxes we
purchased and currently market are considered legacy boxes as the security
features (which allow the MSOs or cable operators to control channel access
and
services) are not separable from the boxes. The FCC issued a ban on
the purchase of 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 current inventory of legacy digital boxes in the U.S. 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 an adverse effect on our financial
performance.
Access
to surplus digital converter boxes may become limited which would limit future
sales of this product line. During fiscal 2007 we sold
approximately 57,000 legacy converter boxes generating incremental revenues
of
approximately $4.3 million. Recently, the availability of surplus
boxes in the market has become limited as MSOs are no longer selling excess
boxes but rather choosing to keep the legacy boxes and reuse them. As
a result, future revenues from this product line could be negatively impacted
by
the limited supply of surplus boxes.
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 10, 2007 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 sometimes so low that small trades have an impact on the price of our
stock. 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
certain conflicts of
interest with us. During fiscal 2007 the Company
purchased an office and warehouse facility from an entity owned by our principal
executive officers. In addition, certain office and warehouse
properties continue to be leased from two entities owned by our principal
executive officers. We also redeemed all of the outstanding shares of
preferred stock held by these officers subsequent to our fiscal year
end. 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
sales to international customers may be adversely
affected by a number of factors. Although the majority
of our business efforts are focused in the United States, we sell direct to
customers in Philippines, Taiwan, Korea, Japan, Australia, Brazil, Ecuador,
Dominican Republic, Honduras, Panama, Mexico, Columbia and a few other Latin
American countries. Our foreign sales may be adversely affected by a
number of factors, including:
|
●
|
local
political and economic developments could restrict or
increase the cost of selling to foreign
locations;
|
|
●
|
exchange
controls and currency fluctuations;
|
|
●
|
tax
increases and retroactive tax claims for profits
generated from international sales;
|
|
●
|
expropriation
of our property could result in loss of revenue and
inventory;
|
|
●
|
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 business or
make
foreign business more costly
|
Item
1B. Unresolved Staff Comments.
Not
applicable.
7
|
Item
2.
|
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 $3.3 million, financed by a loan
of $2.8 million, due in monthly payments through 2021 at an interest
rate of LIBOR plus 1.4%. 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 Company, and Kenneth A. Chymiak, President and Chief Executive
Officer of the Company. Each lease has a renewable five-year
term, expiring at different times through 2008. Monthly rental
payments on these leases total $26,820.
|
Subsequent
to fiscal 2007, Tulsat completed the construction of a 62,500 square foot
warehouse facility on the rear of its existing property in Broken Arrow,
OK. The new facility cost approximately $1.65 million to complete and
the construction was financed with cash flow from operations.
|
·
|
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 $0.6 million, financed by loans of $0.4 million, due
in
monthly payments through 2013 at an interest rate of 5.5% through
2008,
converting thereafter to prime minus 0.25%. NCS also rents
property of approximately 4,000 square feet, with monthly rental
payments
of $2,490 through December 2008.
|
|
·
|
Sedalia,
Missouri - ComTech Services owns land and an office, warehouse and
service
center of approximately 42,300 square feet. Subsequent to
fiscal 2007, ComTech Services completed the construction of an 18,000
square foot warehouse facility on the back of its existing property
in
Sedalia, MO. The new facility cost approximately $0.4 million
to complete and the construction was financed with cash flow from
operations.
|
|
·
|
New
Boston, Texas - Tulsat-Texas owns land and an office, warehouse and
service center of approximately 13,000 square
feet.
|
|
·
|
Suwannee,
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 $12,600 a
month. The lease includes a 3% annual increase in lease
payments starting June 2008 and the lease term ends June
2010.
|
|
·
|
Stockton,
California - Jones Broadband leases a warehouse of approximately
30,000
square feet for $4,110 a month. The lease ends February 28,
2008.
|
|
●
|
Chambersburg,
Pennsylvania - Broadband Remarketing International leases an office,
warehouse, and service center of approximately 18,000 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 $9,000
per
month.
|
We
believe that our current facilities are adequate to meet our needs.
8
|
Item
3.
|
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 2007.
|
|
|
|
PART
II
The
table
sets forth the high and low sales prices on the American Stock Exchange for
the
quarterly periods indicated, except for the fourth quarter of fiscal 2007,
which
also reflects the sales prices on the NASDAQ stock market, as we moved our
listing to this exchange on September 13, 2007.
|
Year
Ended September 30, 2007
|
High
|
Low
|
|||||
|
First
Quarter
|
$ |
4.55
|
$ |
2.66
|
|||
|
Second
Quarter
|
$ |
3.74
|
$ |
2.77
|
|||
|
Third
Quarter
|
$ |
5.30
|
$ |
3.85
|
|||
|
Fourth
Quarter
|
$ |
9.28
|
$ |
4.88
|
|||
|
Year
Ended September 30, 2006
|
|||||||
|
First
Quarter
|
$ |
7.10
|
$ |
3.51
|
|||
|
Second
Quarter
|
$ |
9.09
|
$ |
5.75
|
|||
|
Third
Quarter
|
$ |
6.86
|
$ |
4.63
|
|||
|
Fourth
Quarter
|
$ |
4.97
|
$ |
3.55
|
|||
Holders.
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, 2007, there were approximately
2,200 beneficial owners of our common stock.
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.
Securities
authorized for issuance under equity compensation plans.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
110,350
|
$ |
3.15
|
744,966
|
||||||||
|
Equity
compensation plans not approved by security holders
|
0
|
0
|
0
|
|||||||||
|
Total
|
110,350
|
$ |
3.15
|
744,966
|
||||||||
9
Shareholder
Performance Graph.
Set
forth below is a line graph
comparing the yearly percentage change in the cumulative total shareholder
return on our common stock (symbol: AEY) against the cumulative total return
of
the NASDAQ Composite Index (symbol: IXIC), the NASDAQ Telecommunications
Index
(symbol: IXUT) and American Stock Exchange (symbol: XAX) for the period of
five
fiscal years commencing October 1, 2002 and ending September 30,
2007. The NASDAQ Composite Index has been added this year as our
listing moved to this exchange on September 13, 2007. The graph
assumes that the value of the investment in our common stock and each index
was
$100 on September 30, 2002.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
ADDvantage Technologies Group, Inc., NASDAQ Composite Index, NASDAQ
Telecommunications Index and the American Stock Exchange Index
*
$100
invested on September 30, 2002 in our stock or on September 30, 2002 in each
index including reinvestment of dividends.
|
Cumulative
Total Return
|
||||||||||||||||||||||
|
9/30/02
|
9/30/03
|
9/30/04
|
9/30/05
|
9/30/06
|
9/30/07
|
|||||||||||||||||
|
ADDvantage
Technologies Group, Inc.
|
$ |
100.00
|
$ |
542.86
|
$ |
550.00
|
$ |
555.71
|
$ |
555.7
|
$ |
1,160.00
|
||||||||||
|
NASDAQ
Composite Index
|
$ |
100.00
|
$ |
152.26
|
$ |
161.79
|
$ |
182.39
|
$ |
191.23
|
$ |
229.12
|
||||||||||
|
Nasdaq
Telecommunications
|
$ |
100.00
|
$ |
176.58
|
$ |
195.65
|
$ |
217.25
|
$ |
233.91
|
$ |
327.06
|
||||||||||
|
American
Stock Exchange
|
$ |
100.00
|
$ |
119.77
|
$ |
153.74
|
$ |
209.95
|
$ |
230.49
|
$ |
291.34
|
||||||||||
10
Item
6. Selected Financial
Data.
SELECTED
CONSOLIDATED FINANCIAL DATA
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year
ended September
30,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Net
Sales and service income
|
$ 65,646
|
$ 52,541
|
$
50,273
|
$
47,071
|
$
33,327
|
|
Income
from operations
|
$
12,543
|
$ 8,117
|
$ 9,973
|
$ 9,484
|
$ 6,197
|
|
Net
income applicable to Common Shareholders
|
$ 6,590
|
$ 4,003
|
$ 4,974
|
$ 4,574
|
$ 3,253
|
|
Earnings
per share
|
|||||
|
Basic
|
$
.64
|
$ .39
|
$ .49
|
$ .46
|
$ .33
|
|
Diluted
|
$ .64
|
$ .39
|
$ 49
|
$ .41
|
$ .30
|
|
Total
assets
|
$ 49,009
|
$
40,925
|
$
39,269
|
$
32,359
|
$
31,748
|
|
Long-term
obligations inclusive
|
|||||
|
of
current maturities & Dividends
|
$ 9,009
|
$ 9,385
|
$ 9,382
|
$
11,610
|
$ 6,912
|
11
|
|
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.
General
We
are a
Value Added Reseller ("VAR") for select Scientific-Atlanta and Motorola
broadband new products and we are a distributor for several other manufacturers
of CATV equipment. We also specialize in the sale of surplus new and refurbished
previously-owned CATV equipment to MSOs 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 MSOs and telephone companies. 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
In
fiscal
2007 several large franchise MSOs and telephone companies made significant
upgrades to their regional communication plants in efforts to compete for
additional market share. This trend to upgrade regional plants with
new equipment is expected to continue as new products are introduced and the
MSOs, telephone companies, and satellite TV companies continue to converge
into
the same “triple play” market. Sales of new products to two MSO
customers increased approximately $5.5 million during 2007 due to upgrades
being
performed to several of their regional systems. Increased new product
sales to these two customers, combined with the incremental revenues generated
from sales of our refurbished digital converter boxes during 2007, were key
drivers of our revenue growth for the year.
During
the year, we also experienced increased demand for new products due to
inefficiencies in the OEM supply chain. Several manufacturers’
delivery lead times increased during the year due to their production
commitments associated with the large MSO and telephone
companies' upgrade projects. The increased lead times created
opportunities to sell new products to customers that could not wait for the
extended delivery times or for which scheduled delivery dates were missed and
the products needed to be delivered immediately. While the OEM
delivery lead times are not be expected to be as long in 2008 as they were
in
2007, we continue to expect there to be demands for same day shipments from
plant upgrades being performed throughout the U.S.
New
Product Offering
During
the fourth quarter of fiscal 2006, we added digital converter boxes to our
product offerings. The digital converter boxes we purchase and
currently sell are considered legacy boxes as the security features are not
separable from the boxes. We sold approximately 57,000 legacy
converter boxes during fiscal 2007, generating revenues of approximately $4.3
million, and are repairing and processing in excess of 78,000 additional legacy
converter boxes. The inventory value of the boxes at September 30,
2007 totaled approximately $2.7 million and we expect to invest an additional
approximate $0.5 million to repair and process the remaining legacy boxes
currently in inventory.
Throughout
the fiscal year, we projected strong domestic demand for our legacy digital
converter boxes based on the July 1, 2007 FCC ban deadline for purchasing these
types of boxes. However, rather than making large purchases prior to
the ban date, many domestic MSOs chose to petition the FCC for a waiver to
the
ban requirements and wait to receive a reply before acquiring any additional
boxes. During the quarter ended June 30, 2007, many of the MSOs were
granted waivers. The most common type of waiver issued allows the MSO to
continue to purchase and distribute legacy boxes based on its commitment to
convert to the new box type by February, 2009, when the FCC has mandated that
all cable transmissions be digitally broadcast.
During
the fourth quarter of fiscal 2007, we received several purchase orders for
legacy boxes from domestic MSOs that have obtained waivers and we continue
to
receive orders from international customers, which we expect to become our
predominant customer base for legacy boxes in the future as waivers
expire. During the next few years, as domestic MSO customers convert
to the new box type, we expect the normal attrition of legacy boxes will produce
a surplus supply that will drive down pricing in the international
market. If this happens, our margins on legacy digital converter box
sales will be impacted. However, we expect the sales prices for the
refurbished legacy digital boxes will remain above our investment
costs.
Results
of Operations
Year
Ended September 30, 2007, compared to Year Ended September 30, 2006 (all
references are to fiscal years)
Total
Net Sales. Total Net Sales climbed $13.1 million, or 25%, to
$65.6 million for 2007 from $52.5 million for 2006. Sales of new
equipment increased $6.4 million, or 17%, to $45.0 million in 2007 from $38.6
million in 2006, driven by increases in sales of $5.5 million to two large
franchise MSOs that upgraded several of their regional communication systems
across the U.S. Refurbished sales increased $6.4 million, or
73% to $15.3 million in 2007 from $8.8 million in 2006. This increase
came primarily from sales of refurbished digital converter boxes which
contributed incremental revenues of approximately $4.3 million during 2007
along
with increased sales of refurbished broadband equipment associated with a
specific customer contract totaling approximately $1.3 million. Net
repair service revenues increased $0.3 million to $5.4 million for 2007 from
$5.1 million in 2006. The increases in service revenues are
primarily attributed to the expansion of our repair routes to pick up damaged
and broken equipment in the western region of the U.S.
Costs
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. Costs of sales this year were 68%
of
total net sales compared to 69% last year. This decrease was due
primarily to the product mix change in refurbished equipment. Sales
of refurbished equipment, driven by sales of digital converter boxes, which
maintain higher gross margins than new product sales, grew during 2007 at a
higher rate than new product sales. As a result, the combined cost of
sales percentage dropped for the year.
Gross
Profit. Gross profit in 2007 increased $5.1 million to $21.3
million from $16.2 million in 2006. The increased gross profits were attributed
to the growth in sales of both new and refurbished products.
Operating,
Selling, General and Administrative Expenses. Operating,
selling, general and administrative expenses include all personnel costs,
including fringe benefits, insurance and business taxes, occupancy,
communication, professional services and charges for bad debts, among other
less
significant accounts. Operating, selling, general and administrative
expenses increased by $0.6 million to $8.5 million in 2007 from $7.9 million
in
2006. This increase was primarily attributable to a $1.0 million
increase in payroll associated with the growth of our business offset by a
decrease of $0.3 million in bad debt charges absorbed in 2007. During
2006, we recorded bad debt charges totaling approximately $0.5 million to cover
the outstanding receivable balance from a customer whose collection had become
doubtful.
12
Income
from Operations. Income from operations increased $4.4 million
to $12.5 million for 2007 from $8.1 million in 2006. This increase in
income was primarily attributable to the growth in revenues.
Interest
Expense. Interest expense for 2007 was $0.6 million compared to
$0.5 million in fiscal 2006. Interest expense increased $0.2 million associated
with the new $2.8 million building loan obtained in November, 2006, offset
by
approximately $0.1 million reduction in interest associated with lower
borrowings on the line of credit. The weighted average interest rate
paid on the line of credit increased to 7% for 2007 from 6% for 2006. The
weighted average interest rate for all borrowed funds was 7% for 2007, compared
to 6% in 2006.
Income
Taxes. The provision for income taxes for fiscal 2007 increased
$1.8 million to $4.6 million, or an effective rate of 38%, from $2.7 million,
or
an effective rate of 36%, in 2006. The increased taxes resulted
primarily from higher pre-tax earnings in 2007. Our effective tax
rate increased slightly in 2007 as fewer stock options were exercised during
the
year and, as such, we recognized less tax deductible compensation expense
associated with the exercised shares.
Year
Ended September 30, 2006, compared to Year Ended September 30, 2005 (all
references are to fiscal years)
Net
Sales. Net total sales climbed $2.3 million, or 5%, 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 our Jones
Broadband subsidiary, acquired on August 19, 2005, totaling approximately $3.1
million. This increase along with other increased sales to
customers during 2006 helped offset the lost revenues from two of our larger
customers, Adelphia Communications and Span Pro 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.
Costs
of Sales. Cost of sales includes 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 was 69%
of
net sales compared to 66% 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. The 1.0
Ghz products were recently introduced to the CATV industry and our supply of
this product has come directly from the OEM manufacturers. 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 $0.2 million to
$16.2 million for 2006 from $16.4 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 our increase in 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,
communication, professional services and charges for bad debts, among other
less
significant accounts. Operating, selling, general and administrative
expenses increased by $1.7 million to $7.9 million from $6.2
million. This increase was attributable to $1.0 million of
incremental expenses related to 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.
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% for 2006 from 3% for 2005.
The
weighted average interest rate for all borrowed funds for 2006 was 6% compared
to 5% in 2005.
Income
Taxes. The provision for income taxes for fiscal 2006 dropped to
$2.7 million, or an effective rate of 36% from $3.6 million, or an effective
rate of 38%, 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.
Liquidity
and Capital Resources
We
finance our operations primarily through internally generated funds and a bank
line of credit. During 2007, we generated approximately $6.7 million
of cash flow from operations including $2.6 million absorbed from changes in
receivables, inventories, other assets, accounts payable and accrued
liabilities.
During fiscal
year 2007, we invested approximately $1.9 million of our available cash flow
in
land and building purchases in Broken Arrow, Oklahoma and Sedalia,
Missouri. In November, 2006, we purchased a 100,000 square foot
office and warehouse facility on ten acres of property in Broken Arrow, Oklahoma
for approximately $3.3 million. We financed approximately $2.8
million of the purchase price by executing a new 15 year term loan with our
primary financial lender. In addition, we constructed a 62,500 square
foot warehouse facility at the back section of the recently acquired 10 acre
property. We paid $1.1 million associated with the construction of
this new warehouse during the fiscal year and expect to spend an additional
$0.6
million to complete the facility in 2008. These buildings were
purchased and constructed to gain additional operating efficiencies by
consolidating our operations and multiple outside warehouses located in Broken
Arrow, Oklahoma into one facility. During the year we also spent $0.3
million on the construction of an 18,000 square foot warehouse on the back
of
our property in Sedalia, Missouri. The new building will expand
the revenue generating capacity of this location as it increases the square
footage of their operation by approximately 30%.
During
2007, we also paid the remaining $0.1 million acquisition price associated
with
the August 19, 2005 purchase of Jones Broadband International
(“JBI”). The combined consideration paid for the acquisition totaled
$3.9 million. This consideration consisted of a purchase price of approximately
$3.5 million, net of cash acquired of approximately $0.1 million, as well
as our assumption of the accounts payable and accrued liabilities of JBI
totaling approximately $0.3 million. During fiscal 2007, 2006 and 2005, we
paid
approximately $0.1 million, $0.5 million and $2.9, respectively, of the total
purchase price associated with this acquisition.
During
2007 we used approximately $4.0 million of available cash flow to pay dividends,
retire term debts and reduce our revolving line of
credit. Dividends paid on the Series B 7% Cumulative Preferred
Stock (“Series B Preferred Stock”) totaled $0.8 million for the year and
the outstanding shares were 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 Company redeemed these shares on November 27,
2007, at their stated value of $12.0 million, which is further
discussed in “Note 11 – Subseuqent Events” of “Item 8. Fianancial
Statements and Supplementary Data.”
13
We
paid
$1.2 million in scheduled debt payments on our $8.0 million term note
as well as $0.2 million in scheduled debt payments on our $2.8 million term
note. Both term notes were financed through our primary
financial lender and require monthly payments of principal plus accrued
interest. The proceeds from the $8.0 million term note, created
September 30, 2004, were used to redeem 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. At September 30, 2007, the outstanding balance on this
term note totaled $4.4 million. The $2.8 million term note was created in
November 2006 to finance the purchase of real estate in Broken Arrow, Oklahoma
from an entity owned by David and Kenneth Chymiak. The
remaining unpaid balance of this term note was $2.6 million on September 30,
2007.
We
also
used $1.7 million of available cash flows to reduce the outstanding balance
on
our $7.0 million line of credit with our primary financial lender. We
maintain a line of credit 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%
(6.9% at September 30, 2007 and 7.0% average for fiscal year 2007).
Borrowings under the line of credit are limited to the lesser of $7.0 million
or
the net balance of 80% of qualified accounts receivable plus 50% of qualified
inventory less any outstanding term note balances. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures, and
general intangibles and had an outstanding balance at September 30, 2007 of
$1.7
million. The line of credit was renewed on November 30, 2007 for an additional
three year term expiring November 30, 2010. The highest balance
against this line during 2007 was approximately $3.8 million.
At
September 30, 2007, we held a note payable secured by real estate of $0.3
million with payments due in monthly through 2013. The note bears
interest at 5.5% through 2008, converting thereafter to prime minus
.25%.
The
Company leases various properties, primarily from two companies owned by David
E. Chymiak and Kenneth A. Chymiak. Future minimum lease payments
under all operating leases are as follows:
|
Fiscal
Year
|
|||
|
2008
|
$ |
528,370
|
|
|
2009
|
155,136
|
||
|
2010
|
159,792
|
||
|
2011
|
26,762
|
||
|
Total
|
$ |
870,060
|
|
The
following table presents our contractual obligations for payments of all debt,
estimated interest payments on 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
|
$ |
9,008,747
|
$ |
3,163,098
|
$ |
3,662,936
|
$ |
473,931
|
$ |
1,708,782
|
|||||||||
|
Estimated
Interest on Long Term Debt (a)
|
1,745,253
|
489,109
|
435,128
|
273,275
|
547,741
|
||||||||||||||
|
Capital
Leases
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Operating
Leases
|
870,060
|
528,370
|
341,690
|
-
|
-
|
||||||||||||||
|
Purchase
Obligations
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Total
|
$ |
11,624,060
|
$ |
4,180,577
|
$ |
4,439,754
|
$ |
747,206
|
$ |
2,256,523
|
|||||||||
|
(a)
|
The
estimated interest payments are calculated by multiplying the fixed
and
variable interest rates, associated with the long term debt agreements,
by
the average debt outstanding for the year(s) presented. To
estimate the variable rates, the Company used the average of the
rates
incurred in fiscal 2007. Actual variable rates may vary from
the historical rates used to calculate the estimated interest
expense.
|
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 2007
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.
14
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, 2007 we had total inventory of approximately $32.2 million,
consisting of approximately $17.2 million in new products and approximately
$15.0 million in used or refurbished products against which we have a reserve
of
$0.7 million for excess and obsolete inventory, leaving us a net inventory
of
$31.5 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 2007, we increased our reserve for excess and obsolete
inventory by approximately $0.7 million. In addition during 2007, we wrote
down
the carrying value of certain inventory items by approximately $1.2 million
to
reflect deterioration in the market price of that inventory. If
actual market conditions are less favorable than 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 cost 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, or weakening in economic trends
could have a significant impact on the collectability 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 decreased
to
approximately $0.3 million at September 30, 2007 from approximately $0.6 million
at September 30, 2006. The reserve balance was impacted during the
year by a large write-off of approximately $0.5 million associated with a
specific customer account that had become uncollectible. This
reduction was offset by increases in the reserve of approximately $0.2 million
to cover other expected losses. At September 30, 2007, accounts receivable,
net
of allowance for doubtful accounts, amounted to approximately $6.7
million.
Impact
of
Recently Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
159, The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective
basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning
in the first quarter of fiscal 2009. We are evaluating the impact, if any,
the
adoption of SFAS No.159 will have on our operating income or net
earnings.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements. SAB No. 108
requires analysis of misstatements, using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality,
and provides for a one-time cumulative effect transition adjustment. We adopted
SAB No. 108 in the first quarter of fiscal year 2007 and its adoption had no
impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for us beginning October 1, 2008. We do not expect the
adoption of SFAS No. 157 to have a material effect on our financial
statements.
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 de-recognition, 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. In fiscal 2006, we elected early adoption of FIN 48 and
there
was no impact on our financial statements.
15
In
June
2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on
EITF issue No. 06-2, Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43. EITF Issue No. 06-2
requires companies to accrue the costs of compensated absences under a
sabbatical or similar benefit arrangement over the requisite service period.
EITF issue No. 06-2 is effective for us beginning October 1, 2007. We
do not expect the adoption of EITF Issue No. 06-2 to result in a material
adjustment to our financial statements.
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
December 2004, the FASB issued SFAS No. 123(R), Accounting for
Share-Based Payment, which replaced SFAS
123 and superseded APB 25. SFAS 123(R) 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 123(R), 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 123(R) 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 123(R) and the valuation of
share-based payments for public companies.
We
adopted SFAS 123(R) 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 123(R). 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 144,267 shares were fully vested. Therefore, SFAS 123(R)
had no impact on our statement of income on the date of adoption.
During
2007 and 2006, stock options were granted to certain members of 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 the year granted
with residual amounts to be charged against income in 2008 and
2009.
We currently
present 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(R). 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 the
Black-Scholes option pricing model in estimating the fair value of employee
stock options.
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. We maintain no material
assets that are subject to market risk and attempt to limit our exposure to
market risk on material debts by entering into swap arrangements that
effectively fix the interest rates. In addition, the Company has
limited market risk associated with foreign currency exchange rates as all
sales
and purchases are denominated in U.S. dollars.
We
are
exposed to market risk related to changes in interest rates on our $7.0 million
revolving line of credit and our $2.8 million term note. Borrowings
under these obligations bear interest at rates indexed to the 30 day LIBOR
rate,
which expose us to increased costs if interest rates rise. At
September 30, 2007, the outstanding borrowings subject to variable interest
rate
fluctuations totaled $4.3 million, and was as high as $6.2 million and as low
as
$4.3 million at different times during the fiscal year. A
hypothetical 20% increase in the published LIBOR rate, causing our borrowing
costs to increase, would not have a material impact on our financial
results. We do not expect the LIBOR rate to fluctuate more than 20%
in the next twelve months.
In
addition to these debts, we have a $8.0 million term note which also bears
interest at a rate indexed to the 30 day LIBOR rate. To mitigate the
market risk associated with the floating interest rate, we entered
into an interest rate swap on September 30, 2004, in an amount equivalent to
the
$8.0 million term note. 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.
16
|
Index
to Financial Statements
|
Page
|
|
|
|
|
|
|
|
|
|
17
To
the
Board of Directors and Stockholders of
ADDvantage
Technologies Group, Inc.
We
have audited the accompanying
consolidated balance sheets of ADDvantage Technologies Group, Inc. and
subsidiaries (the “Company”) as of September 30, 2007 and 2006, and the related
consolidated statements of income and comprehensive income, changes in
stockholders’ equity and cash flows for each of the years then
ended. 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. The consolidated
financial statements of the Company as of September 30, 2005 were
audited by other auditors whose report dated December 22, 2005 expressed an
unqualified opinion on those statements.
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. 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, 2007 and 2006, and the consolidated results
of
their operations and their cash flows for each of the years 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.
/s/
HOGAN
AND SLOVACEK
December
21, 2007
Tulsa,
Oklahoma
18
The
Stockholders of
ADDvantage
Technologies Group, Inc.
We
have
audited the accompanying consolidated statements of income and comprehensive
income, changes in stockholders’ equity and cash flows of ADDvantage
Technologies Group, Inc. and subsidiaries (the Company) for the year ended
September 30, 2005. 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.
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. 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 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 results of the operations and
the cash flows of ADDvantage Technologies Group, Inc. and subsidiaries for
the year 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.
/s/
TULLUIS TAYLOR SARTAIN & SARTAIN LLP
Tulsa,
Oklahoma
December
22, 2005, except as reflected
in
Amendment 1 to the 2006 Form 10-K/A
to
which the date is December 5, 2007
19
|
September
30,
|
|||||||
|
Assets
|
2007
|
2006
|
|||||
|
Current
assets:
|
|||||||
|
Cash
|
$ |
60,993
|
$ |
98,898
|
|||
|
Accounts
receivable, net of allowance of
$261,000 and
|
|||||||
|
$554,000,
respectively
|
6,709,879
|
5,318,127
|
|||||
|
Income
tax refund receivable
|
153,252
|
307,299
|
|||||
|
Inventories,
net of allowance for excess and
obsolete inventory
|
|||||||
|
of
$697,000 and $1,178,000,
respectively
|
31,464,527
|
28,990,696
|
|||||
|
Deferred
income taxes
|
678,000
|
1,074,000
|
|||||
|
Total
current assets
|
39,066,651
|
35,789,020
|
|||||
|
Property
and equipment, at cost:
|
|||||||
|
Machinery
and equipment
|
3,144,927
|
2,697,476
|
|||||
|
Land
and buildings
|
6,488,731
|
1,668,511
|
|||||
|
Leasehold
improvements
|
205,797
|
205,797
|
|||||
|
9,839,455
|
4,571,784
|
||||||
|
Less
accumulated depreciation and amortization
|
(2,341,431) | (2,033,679) | |||||
|
Net
property and equipment
|
7,498,024
|
2,538,105
|
|||||
|
Other
assets:
|
|||||||
|
Deferred
income taxes
|
679,000
|
702,000
|
|||||
|
Goodwill
|
1,560,183
|
1,560,183
|
|||||
|
Other
assets
|
204,843
|
335,566
|
|||||
|
Total
other assets
|
2,444,026
|
2,597,749
|
|||||
|
Total
assets
|
$ |
49,008,701
|
40,924,874
|
||||
See
notes
to audited consolidated financial statements.
20
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
September
30,
|
|||||||
|
Liabilities
and Stockholders’ Equity
|
2007
|
2006
|
|||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$ |
4,301,672
|
$ |
2,618,490
|
|||
|
Accrued
expenses
|
1,331,890
|
1,181,139
|
|||||
|
Bank
revolving line of credit
|
1,735,405
|
3,476,622
|
|||||
|
Notes
payable – current portion
|
1,427,693
|
1,241,348
|
|||||
|
Dividends
payable
|
210,000
|
210,000
|
|||||
|
Total
current liabilities
|
9,006,660
|
8,727,599
|
|||||
|
Notes
payable
|
5,845,689
|
4,666,738
|
|||||
|
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;
|
|||||||
|
10,270,756
and 10,252,856 shares
issued, respectively
|
102,708
|
102,528
|
|||||
|
Paid
in capital
|
(6,383,574) | (6,474,018) | |||||
|
Retained
earnings
|
28,454,024
|
21,863,685
|
|||||
|
Accumulated
other comprehensive
income:
|
|||||||
|
Unrealized
gain on interest rate
swap, net of tax
|
37,358
|
92,506
|
|||||
|
34,210,516
|
27,584,701
|
||||||
|
Less:
Treasury stock, 21,100 shares at
cost
|
(54,164) | (54,164) | |||||
|
Total
stockholders’ equity
|
34,156,352
|
27,530,537
|
|||||
|
Total
liabilities and stockholders’ equity
|
$ |
49,008,701
|
40,924,874
|
||||
See
notes
to audited consolidated financial statements.
21
|
Years
ended September 30,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Net
new sales income
|
$ |
44,991,536
|
$ |
38,585,308
|
$ |
37,431,223
|
|||||
|
Net
refurbished sales income
|
15,264,336
|
8,815,508
|
8,323,975
|
||||||||
|
Net
service income
|
5,390,213
|
5,140,393
|
4,517,997
|
||||||||
|
Total
net sales
|
65,646,085
|
52,541,209
|
50,273,195
|
||||||||
|
Cost
of sales
|
44,336,505
|
36,321,278
|
33,880,881
|
||||||||
|
Gross
profit
|
21,309,580
|
16,219,931
|
16,392,314
|
||||||||
|
Operating,
selling, general and
administrative
|
|||||||||||
|
expenses
|
8,458,384
|
7,855,705
|
6,162,927
|
||||||||
|
Depreciation
and amortization
|
307,752
|
247,504
|
256,435
|
||||||||
|
Income
from operations
|
12,543,444
|
8,116,722
|
9,972,952
|
||||||||
|
Interest
expense
|
555,105
|
530,004
|
557,560
|
||||||||
|
Income
before income taxes
|
11,988,339
|
7,586,718
|
9,415,392
|
||||||||
|
Provision
for income taxes
|
4,558,000
|
2,744,000
|
3,601,000
|
||||||||
|
Net
income
|
7,430,339
|
4,842,718
|
5,814,392
|
||||||||
|
Other
comprehensive income:
|
|||||||||||
|
Unrealized
gain (loss) on interest rate swap,
net of ($34,000), $2,000 and $56,000 in (tax benefit) taxes,
respectively
|
(55,148) |
3,300
|
89,206
|
||||||||
|
|
|||||||||||
|
Comprehensive
income
|
$ |
7,375,191
|
$ |
4,846,018
|
$ |
5,903,598
|
|||||
|
Net
income
|
7,430,339
|
4,842,718
|
5,814,392
|
||||||||
|
Preferred
stock dividends
|
840,000
|
840,000
|
840,000
|
||||||||
|
Net
income attributable to common stockholders
|
$ |
6,590,339
|
$ |
4,002,718
|
$ |
4,974,392
|
|||||
|
Earnings
per share:
|
|||||||||||
|
Basic
|
$ |
0.64
|
$ |
0.39
|
$ |
0.49
|
|||||
|
Diluted
|
$ |
0.64
|
$ |
0.39
|
$ |
0.49
|
|||||
|
Shares
used in per share calculation:
|
|||||||||||
|
Basic
|
10,237,331
|
10,152,472
|
10,067,277
|
||||||||
|
Diluted
|
10,250,835
|
10,201,474
|
10,109,854
|
||||||||
See
notes
to audited consolidated financial statements.
22
Years
ended September 30, 2007, 2006 and 2005
|
Series
B
|
Retained
|
Other
|
|||||||||||||||||||||||||||||
|
Common
Stock
|
Preferred
|
Paid-in
|
Earnings
|
Comprehensive
|
Treasury
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Capital
|
(Deficit)
|
Income
|
Stock
|
Total
|
||||||||||||||||||||||||
|
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
|
||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
7,430,339
|
-
|
-
|
7,430,339
|
|||||||||||||||||||||||
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
(840,000) |
-
|
-
|
(840,000) | |||||||||||||||||||||||
|
Stock
options exercised
|
17,900
|
180
|
-
|
33,193
|
-
|
-
|
-
|
33,373
|
|||||||||||||||||||||||
|
Unrealized
loss on interest swap
|
-
|
-
|
-
|
-
|
-
|
(55,148) |
-
|
(55,148) | |||||||||||||||||||||||
|
Share
based compensation expense
|
-
|
-
|
-
|
57,251
|
-
|
-
|
-
|
57,251
|
|||||||||||||||||||||||
|
Balance,
September 30, 2007
|
10,270,756
|
$ |
102,708
|
$ |
12,000,000
|
$ | (6,383,574) | $ |
28,454,024
|
$ |
37,358
|
$ | (54,164) | $ |
34,156,352
|
||||||||||||||||
See
notes
to audited consolidated financial statements.
23
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
|
Years
ended September 30,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows from Operating Activities
|
|||||||||||
|
Net
income
|
$ |
7,430,339
|
$ |
4,842,718
|
$ |
5,814,392
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|||||||||||
|
Depreciation
and amortization
|
307,752
|
247,504
|
256,435
|
||||||||
|
Provision
for losses on accounts receivable
|
185,000
|
445,541
|
40,080
|
||||||||
|
Provision
for exess and obsolete inventories
|
746,000
|
439,625
|
482,395
|
||||||||
|
Loss
on disposal of property and equipment
|
100,971
|
76,829
|
-
|
||||||||
|
Deferred
income tax benefit
|
419,000
|
(22,000) | (3,000) | ||||||||
|
Share
based compensation expense
|
60,314
|
98,111
|
-
|
||||||||
|
Change
in:
|
|||||||||||
|
Receivables
|
(1,422,705)
|
1,600,582
|
(2,174,498) | ||||||||
|
Inventories
|
(3,219,831) | (4,109,172) | (1,927,585) | ||||||||
|
Other assets
|
75,575
|
(132,276) | (51,577) | ||||||||
|
Accounts
payable
|
1,683,182
|
(1,985,706) |
2,855,516
|
||||||||
|
Accrued
liabilities
|
296,585
|
(660,242) |
233,181
|
||||||||
|
Net
cash provided by operating activities
|
6,662,182
|
841,514
|
5,525,339
|
||||||||
|
Cash
Flows from Investing Activities
|
|||||||||||
|
Additions
to machinery and equipment
|
(381,471) | (99,520) | (446,534) | ||||||||
|
Additions
of land and buildings
|
(4,820,220) |
-
|
-
|
||||||||
|
Investment
in Jones Broadband International
|
(145,834) | (500,471) | (2,884,614) | ||||||||
|
Acquisition
of business and certain assets
|
(166,951) | ||||||||||
|
Net
cash used in investing activities
|
(5,514,476) | (599,991) | (3,331,148) | ||||||||
|
Cash
Flows from Financing Activities
|
|||||||||||
|
Net
change under bank revolving line of credit
|
(1,741,217) |
1,241,942
|
(990,503) | ||||||||
|
Proceeds
on notes payable
|
2,760,291
|
-
|
-
|
||||||||
|
Payments
on notes payable
|
(1,394,995) | (1,239,184) | (1,250,455) | ||||||||
|
Proceeds
from stock options exercised
|
30,310
|
245,398
|
19,747
|
||||||||
|
Payments
of preferred dividends
|
(840,000) | (840,000) | (840,000) | ||||||||
|
Net
cash used in financing activities
|
(1,185,611) | (591,844) | (3,061,211) | ||||||||
|
Net
(decrease) in cash
|
(37,905) | (350,321) | (867,020) | ||||||||
|
Cash,
beginning of year
|
98,898
|
449,219
|
1,316,239
|
||||||||
|
Cash,
end of year
|
$ |
60,993
|
$ |
98,898
|
$ |
449,219
|
|||||
|
Supplemental
Cash Flow Information
|
|||||||||||
|
Cash
paid for interest
|
$ |
558,605
|
$ |
531,596
|
$ |
557,560
|
|||||
|
Cash
paid for income taxes
|
$ |
4,089,459
|
$ |
3,019,768
|
$ |
3,582,616
|
|||||
|
Value
of shares issued in exchange for business and
certain assets.
|
$ | $ |
450,000
|
$ | |||||||
See
notes
to audited consolidated financial statements.
24
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
Years
ended September 30, 2007, 2006 and 2005
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.
Principles
of consolidation and segment reporting
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. In addition, each subsidiary represents a separate
operating segment of the Company and are aggregated for segment reporting
purposes.
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 against the
allowance 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 reflect
inventory at estimated realizable 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.
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 the straight
line method 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 $0.3 million, $0.2 million and $0.3
million for the years ended September 30, 2007, 2006 and 2005,
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 and product line reporting
The
Company's principal sources of revenues are from sales of new,
refurbished or used equipment, and repair services. As a
stocking distributor for several cable television equipment manufacturers,
the
Company offers a broad selection of inventoried and non-inventoried
products. The Company’s sales of different products fluctuate from
year to year as customers' needs change. Because the Company’s
product line sales change from year to year, the Company does not report sales
by product line for management reporting purposes and does not disclose sales
by
product line in these financial statements.
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 were no differences between the critical terms of the interest rate swap
and the hedged debt obligations the Company applied the “Short Cut Method”, as
defined in SFAS 133, and assumed no ineffectiveness in the hedging
relationship. Interest expense on this note was adjusted to include the payment
made or received under the interest rate swap agreement.
25
Freight
Amounts
billed to customers for shipping and handling represent revenues earned and
are
included in Net New Sales Income, Net Refurbished Sales Income and Net
Service Income in the accompanying Consolidated Statements of Income. Actual
costs for shipping and handling of these sales are included in Costs of
Sales.
Advertising
costs
Advertising
costs are expensed as incurred. Advertising expense was $0.4 million,
$0.4 million and $0.3 million for the years ended September 30, 2007,
2006 and 2005, 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 exceeds
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. The Company had no customer in fiscal 2007 that
contributed in excess of 10% of the total net sales. Sales to foreign
(non-U.S. based customers) total approximately $5.9 million, $3.8 million and
$2.4 million for the fiscal years ended September 30, 2007, 2006 and 2005,
respectively. In 2007, the Company purchased approximately 35% of our
inventory from Scientific-Atlanta and approximately 18% of our inventory from
Motorola. The concentration of suppliers of our inventory subjects us
to risk.
Goodwill
The
Company performed annual goodwill impairment tests on each operating segment
of
the Company. The annual impairment tests performed indicated
that goodwill was not impaired as of September 30, 2007 or 2006.
Employee
stock-based awards
In
the
first quarter of fiscal year 2006, the company adopted SFAS 123(R) Share
Based Payment. 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 a floating interest 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
February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
159, The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective
basis unless they choose early adoption. The Company plans to adopt SFAS No.
159
beginning in the first quarter of fiscal 2009. The Company does not
expect the adoption of SFAS No. 159 will have a material impact on its financial
statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements. SAB No. 108
requires analysis of misstatements being both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. The Company
adopted SAB No. 108 in the first quarter of fiscal year 2007 and its adoption
had no impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for the Company beginning October 1, 2008. The Company
does not expect the adoption of SFAS No. 157 will have a material effect on
its
financial statements.
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 de-recognition, 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.
26
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. In fiscal 2006, the Company elected early adoption of FIN
48
and there was no impact on its financial statements.
In
June
2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on
EITF issue No. 06-2, Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43. EITF Issue No. 06-2
requires companies to accrue the costs of compensated absences under a
sabbatical or similar benefit arrangement over the requisite service period.
EITF issue No. 06-2 is effective for us beginning October 1,
2007. The Company does not expect the adoption of EITF Issue No. 06-2
to result in a material adjustment to its financial statements.
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
December 2004, the FASB issued SFAS No. 123(R), Accounting for
Share-Based Payment, which replaced SFAS
123 and superseded APB 25. SFAS 123(R) 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 123(R), 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 123(R) 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 123(R) and the valuation of
share-based payments for public companies.
The
Company adopted SFAS 123(R) 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 123(R). 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 144,267 shares were fully
vested. Therefore, SFAS 123(R) had no impact on the Company's statement of
income on the date of adoption.
During
2007 and 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 the year
granted 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(R). 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.
Reclassifications
Certain
reclassifications have been made to the 2005 and 2006 financial statements
to
conform to the 2007 presentation. These reclassifications had no
effect on previously reported results of operations or retained
earnings.
Note
2 – Inventories
Inventories
are summarized as follows:
|
2007
|
2006
|
||||||
|
New
|
$ |
17,155,976
|
$ |
21,012,912
|
|||
|
Refurbished
|
15,005,551
|
9,155,784
|
|||||
|
Allowance
for excess and obsolete
inventory
|
(697,000) | (1,178,000) | |||||
| $ |
31,464,527
|
$ |
28,990,696
|
||||
New
inventory includes products purchased from the manufacturers plus “surplus-new”
which is unused products purchased from other distributors or multiple system
operators. Refurbished 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 charges to allow for obsolete
inventory during fiscal years ending September 30, 2007 and 2006, increasing
the
cost of sales by approximately $0.7 million and $0.4 million,
respectively.
27
Note
3 – Business Combination
On
August
19, 2005, the Company acquired 100% of the outstanding stock of Jones Broadband
International, Inc. ("JBI") for a combined consideration of approximately $3.9
million. This consideration consisted of a purchase price of approximately
$3.5
million, net of cash acquired from JBI of approximately $0.1 million, as well
as
the assumption of JBI’s accounts payable and accrued liabilities totaling
approximately $0.3 million. In accordance with the terms of the “JBI
Sale and Purchase Agreement,” the Company paid approximately $0.1 million,
$0.5 million and $2.9 of the total purchase price associated with this
acquisition during fiscal years ended September 30, 2007, 2006 and 2005,
respectively.
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
4 – Line of Credit, Notes Payable and Interest Rate
Swap
At
September 30, 2007, approximately $1.7 million balance was outstanding under
the
$7.0 million Revolving Credit Commitment (“line of credit”) with its
primary financial lender. The line of credit requires monthly
interest payments based on the prevailing 30-day LIBOR rate plus 1.75% (6.88%
at
September 30, 2007 with a 7.02% combined weighted average during fiscal year
2007). Borrowings under the line of credit are limited to the lesser of
$7.0 million or the net balance of 80% of qualified accounts receivable plus
50%
of qualified inventory less any outstanding term note balances. Among
other financial covenants, the 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 and was to mature on November 30,
2007. Subsequent to year end, the Company renewed the $7.0 million
Revolving Credit Commitment for an additional three year term exiring November
30, 2010, which is further discussed in “Note 11 – Subsequent
Events”.
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 approximately $1.7 million at September 30, 2007, and is included
in
the bank line of credit.
On
November 20, 2006, the Company purchased real estate, consisting of an office
and warehouse facility located on ten acres in Broken Arrow, Oklahoma for $3.3
million from Chymiak Investments, LLC. Chymiak Investments, LLC is owned by
David E. Chymiak, Chairman of the Company and Kenneth A. Chymiak President
and
Chief Executive Officer of the Company. The purchased facility
contains approximately 100,000 square feet of gross building area and is
currently being utilized as the Company’s corporate headquarters and the office
and warehouse of the Tulsat subsidiary. The Company financed the
purchase with cash flows from operations and the execution of a $2.8 million
Term Note on November 20, 2006, under the Third Amendment to the Revolving
Credit and Term Loan Agreement with its primary financial lender. The
balance of this Term Note was approximately $2.6 million on September 30, 2007
and is due on November 20, 2021 with monthly principal payments of $15,334
plus
accrued interest. Interest accrues on the note at the prevailing
30-day LIBOR rate plus 1.75% (6.87% at September 30, 2007). The
Revolving Credit and Term Loan Agreement also includes a $7.0 million Revolving
Credit Commitment and an $8.0 million Term Note, discussed separately
herein.
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 $8.0 million. All of the outstanding shares of Series A Preferred
Stock were held beneficially by David E. Chymiak, Chairman of the Company,
and
Kenneth A. Chymiak, President and Chief Executive Officer of the
Company. The Company financed the redemption with the proceeds from
an $8.0 million Term Note agreement with its primary financial lender executed
on September 30, 2004. The September 30, 2007 balance of this note
was $4.4 million and is due on September 30, 2009, with monthly principal
payments of $0.1 million plus accrued interest. Interest accrues on
the note at the prevailing 30-day LIBOR rate plus 2.50% (7.63% at September
30,
2007).
An
interest rate swap was entered into simultaneously with the $8.0 million Term
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 its risk management objective and strategy for undertaking
the hedge along with methods for assessing the swap's
effectiveness. At September 30, 2007, the notional value of the swap
was $4.4 million and the fair market value of the interest rate swap was valued
at approximately $0.1 million, which is included in other non-current assets
on
the Company’s consolidated balance sheet.
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 the 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 costs of registering the shares for resale by the selling
shareholders.
Other
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%.
The
aggregate maturities of notes payable and the line of credit for the five years
ending September 30, 2012 are as follows:
|
2008
|
$ |
3,163,098
|
|
|
2009
|
3,430,163
|
||
|
2010
|
232,773
|
||
|
2011
|
235,529
|
||
|
2012
|
238,442
|
||
|
Thereafter
|
1,708,782
|
||
|
Total
|
$ |
9,008,787
|
28
Note
5 – Income Taxes
The
provisions for income taxes consist of:
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
$ |
4,139,000
|
$ |
2,766,000
|
$ |
3,604,000
|
|||||
|
Deferred
|
419,000
|
(22,000) | (3,000) | ||||||||
| $ |
4,558,000
|
$ |
2,744,000
|
$ |
3,601,000
|
||||||
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:
|
2007
|
2006
|
2005
|
|||||||||
|
Statutory
tax rate
|
34.0% |
34.0%
|
34.0% | ||||||||
|
State
income taxes, net of U.S.
|
|||||||||||
|
federal
tax benefit
|
4.8% | 4.9% | 4.7% | ||||||||
|
Tax
credits and exclusions
|
(0.8%) | (1.7%) | (0.5%) | ||||||||
|
Other
|
-
|
(1.0%) |
-
|
||||||||
| Company's effective tax rate | 38.0% | 36.2% | 38.2% | ||||||||
Deferred
tax assets consist of the following at September 30:
|
2007
|
2006
|
|||||||
|
Net
operating loss carryforwards
|
$ |
1,016,000
|
$ |
1,117,000
|
||||
|
Financial
basis in excess of tax basis
|
||||||||
|
of
certain assets
|
(403,000) | (321,000) | ||||||
|
Accounts
Receivable
|
99,000
|
211,000
|
||||||
|
Inventory
|
492,000
|
718,000
|
||||||
|
Other,
net
|
153,000
|
51,000
|
||||||
|
Deferred
tax assets, net
|
$ |
1,357,000
|
$ |
1,776,000
|
||||
|
Deferred
tax assets are classified as:
|
|||||||
|
Current
|
$ |
678,000
|
$ |
1,074,000
|
|||
|
Non-Current
|
679,000
|
702,000
|
|||||
| $ |
1,357,000
|
$ |
1,776,000
|
||||
Utilization
of the Company’s net operating loss carryforward, totaling approximately $2.7
million at September 30, 2007, to reduce future taxable income is limited to
an
annual deductable amount of approximately $0.3 million. The
NOL carryforward expires in varying amounts from 2010 to 2020.
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.
29
Note
6 – 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, 2007, 1,024,656 million 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, 744,966 shares were available
for future grants.
A
summary
of the status of the Company's stock options at September 30, 2007, 2006 and
2005 and changes during the years then ended is presented
below.
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Wtd.
Avg.
|
Wtd.
Avg
|
Wtd.
Avg.
|
|||||||||||||||||||
|
Shares
|
Ex.
Price
|
Shares
|
Ex.
Price
|
Shares
|
Ex. Price
|
||||||||||||||||
|
Outstanding,
beginning of year
|
104,750
|
$ |
4.01
|
144,767
|
$ |
3.23
|
131,125
|
$ |
2.83
|
||||||||||||
|
Granted
|
30,000
|
$ |
3.45
|
35,000
|
$ |
5.78
|
25,000
|
$ |
4.62
|
||||||||||||
|
Exercised
|
(16,900) | $ |
1.69
|
(72,500) | $ |
3.38
|
(11,358) | $ |
1.74
|
||||||||||||
|
Canceled
|
(-) | (-) | (2,517) | $ |
1.50
|
(-) | (-) | ||||||||||||||
|
Outstanding,
end of year
|
117,850
|
$ |
4.20
|
104,750
|
$ |
4.01
|
144,767
|
$ |
3.23
|
||||||||||||
|
Exercisable,
end of year
|
110,350
|
$ |
3.15
|
94,750
|
$ |
3.83
|
144,767
|
$ |
3.23
|
||||||||||||
The
following table summarizes information about fixed stock options outstanding
at
September 30, 2007:
|
Options
Exercisable
|
|||||||
|
Number
|
Remaining
|
||||||
|
Outstanding
|
Contractual
|
||||||
|
Exercise
Price
|
At
9/30/07
|
Life
|
|||||
| $ |
3.450
|
30,000
|
9.5
years
|
||||
| $ |
5.780
|
27,500
|
8.5
years
|
||||
| $ |
4.620
|
25,000
|
7.5
years
|
||||
| $ |
4.400
|
4,000
|
6.5
years
|
||||
| $ |
1.650
|
2,000
|
5.5
years
|
||||
| $ |
0.810
|
2,000
|
4.5
years
|
||||
| $ |
1.500
|
6,850
|
3.5
years
|
||||
| $ |
3.125
|
13,000
|
2.5
years
|
||||
|
110,350
|
|||||||
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.
In
the
first quarter of fiscal year 2006, the Company adopted SFAS 123(R), Share
Based Payment. SFAS 123(R) 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 elected the
modified-prospective transition method of adopting SFAS 123(R) which requires
the fair value of unvested options be calculated and amortized as compensation
expense over the remaining vesting period. SFAS 123(R) did 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 123(R) had no impact on the Company's statement of income on the date
of
its adoption.
On
March
6, 2007 and 2006, the Company issued nonqualified stock options to outside
directors and executives covering a total of 30,000 and 35,000 shares,
respectively. The Company estimated 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 estimated
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 its common stock,
consistent with SFAS 123(R) and Securities and Exchange Commission Staff
Accounting Bulletin No. 107 (SAB No. 107). The Company based the risk-free
rate
that was 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 used 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 used historical data to estimate the pre-vesting options
forfeitures and records share-based expense only for those awards that are
expected to vest.
30
Twelve Months Ended September
30,
|
2007
|
2006
|
|||||||
|
Average
expected life
|
5.5
|
5.5
|
||||||
|
Average
expected volatility factor
|
25% | 63% | ||||||
|
Average
risk-free interest rate
|
4.5% | 4.7% | ||||||
|
Average
expected dividends yield
|
-----
|
-----
|
||||||
The
estimated fair value of the options granted on March 6, 2007 and 2006 totaled
$48,060 and $120,510, respectively. All of the options granted in fiscal 2007
were fully vested and, as such, their calculated fair value was expensed on
the
grant date. During fiscal 2006, the Company recorded compensation
expense of $98,111 for the options that vested during the year and the remaining
$22,399 was to be recorded over the vesting term of certain
options. During fiscal 2007, the Company recorded compensation
expense of $12,254 related to these options. The remaining fair value
of the 2006 non-vested options as of September 30, 2007, to be
expensed in over their remaining 3 year vesting, term totaled
$10,145.
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. The compensation expense from the options issued in 2007 and
2006 is 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:
|
|
2007
|
2006
|
2005
|
|
Expected
life in years
|
5.5
|
5.5
|
6.0
|
|
Expected
volatility
|
25%
|
63.0%
|
55.0%
|
|
Risk-free
interest rate
|
4.5%
|
4.7%
|
4.3%
|
|
Expected
dividend yield
|
-----
|
-
|
-
|
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,
|
2007
|
2006
|
2005
|
|||||||||
|
(In
thousands)
|
|||||||||||
|
Net
income as reported
|
$ |
6,590
|
$ |
4,003
|
$ |
4,974
|
|||||
|
Pro
forma compensation expense from stock options
|
0
|
0
|
(65) | ||||||||
|
Pro
forma net income
|
$ |
6,590
|
$ |
4,003
|
$ |
4,909
|
|||||
|
Earnings
per common share as reported:
|
|||||||||||
|
Basic
|
$ |
.64
|
$ |
.39
|
$ |
.49
|
|||||
|
Diluted
|
$ |
.64
|
$ |
.39
|
$ |
.49
|
|||||
|
Proforma
earrings per common share
|
|||||||||||
|
Basic
|
$ |
.64
|
$ |
.39
|
$ |
.49
|
|||||
|
Diluted
|
$ |
.64
|
$ |
.39
|
$ |
.49
|
|||||
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.
31
Note
7 – Related Parties
Cash
used
in financing activities in 2007 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 Company and Kenneth A. Chymiak, President and
Chief Executive Officer of the Company, and for note payments on a term loan
that was used to finance the buy-out of Series A Preferred Stock on
September 30, 2004, which were also beneficially owned by David E. Chymiak
and
Kenneth A. Chymiak. The dividends on the remaining Series B Preferred
Stock total $840,000 annually.
During
2006, the Company leased a recently renovated facility owned by Chymiak
Investments, LLC, for the purpose of consolidating its headquarters and the
office and warehouse operations of Tulsat. The leased facility
contains approximately 100,000 square feet of gross building area on ten acres
in Broken Arrow, OK. Chymiak Investments, LLC is owned by David E.
Chymiak, Chairman of the Company and Kenneth A. Chymiak President and Chief
Executive Officer of the Company. During 2006, the
Company began consolidating its warehouses into the newly leased facility and
was able to vacate several properties that were also being leased from Chymiak
Investments, LLC. During fiscal 2006, the Company made no lease
payments to Chymiak Investments, LLC on the new facility. The Company
continued to make lease payments on the vacated facilities until September
30,
2006, when the leases associated with the vacated properties were cancelled
without penalty.
On
November 20, 2006, the Company purchased the newly leased facility for
approximately $3.3 million from Chymiak Investments, LLC. The amount
paid for the facility represented the combined acquisition cost and modification
costs paid for the facility by Chymiak Investments LLC. The Company
financed the purchase with cash flows from operations as well as executing
a
$2.8 million Term Note, on November 20, 2006, under the Third Amendment to
the
Revolving Credit and Term Loan Agreement with its primary financial
lender.
The
Company leases several warehouse properties in Broken Arrow, OK from two
companies owned by David E. Chymiak and Kenneth A. Chymiak. The total
payments made on the leases to these two companies for the years ended September
30, 2007, 2006 and 2005 totaled $0.3 million, $0.5 million and $0.5
million, respectively.
The
future minimum lease payments under these related party leases are as
follows:
2007 $ 321,840
2008 321,840
$ 643,680
The
outstanding common and preferred stock beneficially owned as of September 30,
2007, by the Company's principal shareholders are reflected in the following
table.
|
Stock
Ownership
|
||
|
Name of Beneficial Owner
|
Percent of Common Stock
Beneficially
Owned
|
Percent
of Series B Preferred Stock Beneficially
Owned
|
|
David
E. Chymiak
|
23%
|
50.0%
|
|
Kenneth
A. Chymiak
|
20%
|
50.0%
|
Note
8 – 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 for the years ended September 30, 2007, 2006
and
2005 was $0.3 million, $0.2 million and $0.2 million, respectively.
32
Note
9 – Earnings per Share
Years ended September 30,
|
2007
|
2006
|
2005
|
||||||||
|
Net
income
|
$ |
7,430,339
|
$ |
4,842,718
|
$ |
5,814,392
|
||||
|
Dividends
on preferred stock
|
840,000
|
840,000
|
840,000
|
|||||||
|
Net
income attributable to common
shareholders
|
6,590,339
|
4,002,718
|
4,974,392
|
|||||||
|
|
|
|
|
|||||||
|
Weighted
average shares outstanding
|
10,237,331
|
10,152,472
|
10,067,277
|
|||||||
|
Potentially
dilutive securities
|
||||||||||
|
Effect
of dilutive stock options
|
13,504
|
49,002
|
42,577
|
|||||||
|
Weighted
average shares outstanding – assuming
dilution
|
10,250,835
|
10,201,474
|
10,109,854
|
|||||||
|
Earnings
per common share:
|
||||||||||
|
Basic
|
$ |
0.64
|
$ |
0.39
|
$ |
0.49
|
||||
|
Diluted
|
$ |
0.64
|
$ |
0.39
|
$ |
0.49
|
||||
Note
10 – Commitments and Contingencies
The
Company has entered into construction agreements to build two buildings on
existing real estate. One agreement specifies the construction of a 62,500
square foot warehouse building on the Company’s ten acre facility in Broken
Arrow, Oklahoma. The contractor has estimated the cost for
constructing the new facility to be approximately $1.7 million. The
agreement calls for the Company to be responsible for all construction costs
incurred plus a specified contractor mark-up percentage. As of
September 30, 2007, the Company had incurred approximately $1.1 million of
the
estimated facility costs. The Company expects the
construction to be complete in December 2007 and does not expect the final
costs
to be materially different than the contractor’s initial estimate.
The
second agreement specifies the construction of an 18,000 square foot warehouse
building in Sedalia, Missouri for a flat fee of $0.4 million. As of
September 30, 2007, the Company had incurred approximately $0.3 million of
the
agreed upon construction costs. The building was completed subsequent
to year end and the total payments for the construction of the facility were
consistent with the initial agreement.
The
Company is financing the construction of both facilities with cash flows from
operations.
The
Company leases and rents various office and warehouse properties in Oklahoma,
California, Georgia, Indiana and Pennsylvania. The properties
leased in Oklahoma consist of three separate warehouses, totaling approximately
80,000 square feet, from two companies owned by David E. Chymiak and Kenneth
A.
Chymiak. The terms of each lease require monthly rental payments,
utilities as well as require the Company to pay for maintenance and property
taxes. All of the three operating leases have similar terms and
expire September 30, 2008.
The
Company leases seven other warehouse and office facilities in California,
Georgia, Indiana and Pennsylvania. The terms on these operating
leases vary but all mature in 4 years or less and contain renewal
options.
Rental
payments associated with leased properties in fiscal 2007, 2006 and 2005 totaled
approximately $0.7 million, $0.7 million and $0.6 million,
respectively. The Company’s minimum future obligations as of
September 30, 2007 under all existing operating leases are as
follows:
|
Fiscal
Year
|
Rental
Payments
|
|||
|
2008
|
$ |
528,370
|
||
|
2009
|
155,136
|
|||
|
2010
|
159,792
|
|||
|
2011
|
26,762
|
|||
|
Total
|
$ |
870,060
|
||
33
Note
11 - Subsequent Events
On
November 27, 2007 the Company executed the Fourth Amendment to Revolving Credit
and Term Loan Agreement with its primary financial lender, Bank of
Oklahoma. The Fourth Amendment renews the $7.0 Million Revolving Line
of Credit (“Line of Credit”) and extends the maturity date to November 30,
2010. The Fourth Amendment also extends the maturity of and
increases the $8.0 Million Term Loan Commitment to $16.3 million.
The
$7.0
Million Line of Credit will continue to be used to finance the Company’s working
capital requirements. The lesser of $7.0 million or the total of 80%
of the Company’s qualified accounts receivable, plus 50% of the Company’s
qualified inventory, less the outstanding balances under of the term loans
identified in the agreement, is available to the Company under the revolving
credit facility. The entire outstanding balance on the revolving
credit facility is due on maturity.
The
outstanding balance of the $8.0 million Term Loan prior to being amended was
$4.3 million. The $12.0 million of additional funds available under
the amended $16.3 million Term Loan were fully advanced at closing and the
proceeds were used to redeem all of the issued and outstanding shares of the
Company’s Series B 7% Cumulative Preferred Stock. These shares
of preferred stock were beneficially held by David A. Chymiak, Chairman of
the
Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the
Company, and his spouse. The $16.3 million Term Loan is payable over
a 5 year period with quarterly payments beginning the last business day of
January 2008 of approximately $0.4 million plus accrued interest.
The
Revolving Line of Credit and Term Loan Agreement also includes a Term Loan
Commitment of $2.8 million. This loan was secured to finance the
purchase of the Company’s headquarters facility located in Broken Arrow, OK on
November 20, 2006. The $2.8 million Term Loan matures over 15 years and payments
are due monthly at $15,334 plus accrued interest.
Interest
rates on the $7.0 million Revolving Line of Credit, the $16.3 million Term
Loan
and the $2.8 million Term Loan were also amended to accrue at a calculated
rate
of 1.4% plus LIBOR.
Note
12 – Quarterly Results of Operations (Unaudited)
The
following is a summary of the quarterly results of operations for the years
ended September 30, 2007 and 2006.
Three
months ended
|
December
31
|
March
31
|
June
30
|
September
30
|
|||||||||||
|
Fiscal
year ended 2007
|
||||||||||||||
|
Net
sales and service income
|
$ |
14,748,517
|
$ |
16,040,551
|
$ |
17,563,101
|
$ |
17,293,916
|
||||||
|
Gross
profit
|
4,679,157
|
5,222,011
|
6,077,642
|
5,330,770
|
||||||||||
|
Net
income
|
1,638,279
|
1,771,254
|
2,210,411
|
1,810,395
|
||||||||||
|
Basic
earnings per common share
|
.14
|
.15
|
.20
|
.16
|
||||||||||
|
Diluted
earnings per common share
|
.14
|
.15
|
.19
|
.16
|
||||||||||
|
Fiscal
year ended 2006
|
||||||||||||||
|
Net
sales and service income
|
$ |
14,753,611
|
$ |
12,419,157
|
$ |
13,199,459
|
$ |
12,168,982
|
||||||
|
Gross
profit
|
4,922,541
|
3,947,800
|
4,047,558
|
3,302,032
|
||||||||||
|
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
|
||||||||||
34
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.
In
connection with the audit of our financial statements for the fiscal year 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 period.
In
addition, during the Company's fiscal year 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
fiscal 2006 and continued their engagement through fiscal 2007.
|
Item
9A.
|
Evaluation
of Disclosure Controls and
Procedures.
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit to the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified by the Commission’s rules and forms, and that information is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our Chief Executive Officer
and Chief Financial Officer evaluated our disclosure controls and procedures
as
of September 30, 2007. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
Changes
in Internal Controls
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.
Item
9A(T). Controls and
Procedures.
Not applicable for this filing.
|
|
|
|
Item
9B.
|
None.
35
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 “Identification of Officers,” “Election of
Directors,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Code of Ethics” and "Audit Committee,"
respectively, of our Proxy Statement for the 2008 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,
2007.
|
Item
11.
|
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.
|
Item
12.
|
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 "Principal Accounting Fees and Services" of our Proxy
Statement.
36
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.
|
|
|
Report
of Independent Registered Public Accounting Firm for 2006 and
2007.
|
|
|
Consolidated
Balance Sheets as of September 30, 2007 and 2006.
|
|
|
Consolidated
Statements of Income for the years ended September 30, 2007, 2006
and
2005.
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended September
30, 2007, 2006 and 2005.
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007,
2006
and 2005.
|
|
|
|
|
|
Notes
to Consolidated Financial Statements.
|
|
|
2.
|
The
following financial statement Schedule II – Valuation and Qualifying
Accounts for the years ended September 30, 2007, 2006 and 2005
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, 2007
|
|||||||||||||||||||
|
Allowance
for Doubtful Accounts
|
$ |
554,000
|
$ |
185,337
|
(478,337) |
-
|
$ |
261,000
|
|||||||||||
|
Allowance
for Excess and Obsolete Inventory
|
1,178,000
|
745,836
|
(1,226,836) |
-
|
697,000
|
||||||||||||||
|
Valuation
Allowance of Deferred Tax Asset
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
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
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
37
3. 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 and 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 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 and
Exchange
Commission by the Company on October 14, 1999.
|
|
10.1
|
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.
|
|
10.2
|
Third
Amendment to Revolving Credit and Term Loan Agreement dated November
20,
2006, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K
filed December 27, 2006.
|
|
10.3
|
Fourth
Amendment to Revolving Credit and Term Loan Agreement dated November
27,
2007.
|
|
10.4
|
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.
|
|
10.5
|
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.
|
|
10.6
|
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.
|
|
10.7
|
Senior
Management Incentive Compensation Plan, incorporated by reference
to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on March 9, 2007.
|
|
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 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.
|
38
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
ADDvantage
Technologies Group, Inc.
Date: December
28,
2007
By: /s/ Kenneth A.
Chymiak
Kenneth
A. Chymiak, President
Pursuant
to the requirements of the Securities Exchange Act of 1934, 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
28, 2007
|
/s/ David E. Chymiak |
|
David
E. Chymiak, Chairman of the Board of
Directors
|
|
|
Date: December
28, 2007
|
/s/ Kenneth A. Chymiak |
|
Kenneth
A. Chymiak, President (Principal Exectuive Officer)
and Director
|
|
|
Date: December
28, 2007
|
/s/ Daniel E. O'Keefe |
|
Daniel
E. O’Keefe, Chief Financial Officer (Principal Financial
Officer) and Director
|
|
|
Date: December
28, 2007
|
/s/ Henry F. McCabe |
|
Henry
F. McCabe, Director
|
|
|
Date: December
28, 2007
|
/s/ James C. McGill |
|
James
C. McGill, Director
|
|
|
Date: December
28, 2007
|
/s/ Paul F. Largess |
|
Paul
F. Largess, Director
|
|
|
Date: December
28, 2007
|
/s/ Stephen J Tyde |
|
Stephen
J. Tyde, Director
|
|
|
Date: December
28, 2007
|
/s/ Thomas J. Franz |
|
Thomas
J. Franz, Director
|
39
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 and 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 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 and
Exchange
Commission by the Company on October 14, 1999.
|
|
10.1
|
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.
|
|
10.2
|
Third
Amendment to Revolving Credit and Term Loan Agreement dated November
20,
2006, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K
filed December 27, 2006.
|
|
10.3
|
Fourth
Amendment to Revolving Credit and Term Loan Agreement dated November
27,
2007.
|
|
10.4
|
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.
|
|
10.5
|
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.
|
|
10.6
|
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.
|
|
10.7
|
Senior
Management Incentive Compensation Plan, incorporated by reference
to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on March 9, 2007.
|
|
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 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.
|