ADDVANTAGE TECHNOLOGIES GROUP INC - Annual Report: 2008 (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, 2008
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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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Securities
registered under Section 12(g) of the Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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Yes
o No x
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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Yes
o No x
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Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of
the
Securities Exchange Act of 1934during 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 o
Smaller reporting company 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).
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Yes
o No x
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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, 2008
was
$20,111,392.
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The
number of shares of the registrant’s outstanding common stock, $.01 par
value per share, was 10,294,115 as of
November
30, 2008.
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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 2009
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, 2008
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(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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2
PART I
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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 our control or foresight, 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 different geographic
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 Cisco (formerly
Scientific-Atlanta) Master Stocking Distributor for certain current and legacy
products offered within their Service Provider Video Technology Group (“SPVTG”)
and distributes most of Cisco’s other SPVTG products. Tulsat has also been
designated an authorized third party Cisco-SPVTG 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, which allows 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, Cisco-SPVTG and test equipment repairs.
3
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 coaxial (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, Cisco 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 by several large telephone companies,
the continued expansion of bandwidth signals by MSOs, and the increased sales to
customers in Central and South 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 and can deliver to the
customer location the next day. 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.
Recent
Business Developments
Market
conditions in 2008 have had an adverse impact on the economy, and the cable
industry has not been immune. There has been a continued slow down of
installations and upgrades by both large and small MSO and telephone customers
due to the down turn in the housing market and the reduced availability of
credit. While MSOs and telephone companies are not necessarily seeing
a cut back in services from their current customers, they have been adding fewer
new customers. The lack of new customers, coupled with the hesitation
of operators to spend cash during these difficult economic times, have led to
cutbacks in capital expenditures, depleting a lot of the historical
demand. The lack of demand for equipment has also helped the larger
original equipment manufacturers to better manage their delivery schedules,
which has reduced their need to utilize the on-hand inventory maintained by
their distributor networks. All of these factors resulted in
decreased revenues in 2008 from our new product sales of approximately $10.3
million.
Despite a
slowdown in new equipment sales over the past year, we continued to achieve
profitability, which shows the strength of our business model and solid customer
relationships. If the slow-down in capital expenditures by our top
customers continues, our operating results could be adversely
affected. However, we continue to carry the largest inventory of
cable equipment of any reseller in the industry, and we are able to deploy this
equipment as needed. As cable operators begin to increase their
capital expenditures to meet the growing bandwidth needs of their customers, we
will be ready to supply their equipment needs, which will provide us with
long-term growth opportunities.
In 2000,
our Board of Directors authorized the repurchase of up to $l.0 million of our
outstanding common stock from time to time in the open market at prevailing
market prices or in privately negotiated transactions. The
repurchased shares will be held in treasury and used for general corporate
purposes including possible use in our employees' stock plans or for
acquisitions. During the period of October 1, 2008 – December 11,
2008, we acquired in the open market approximately 111,000 shares of our
Company’s stock at an average price of $1.64. Repurchases are made in
compliance with the limitations of securities laws, which limit the timing,
volume, price and manner of stock repurchases. When combined with the
treasury shares purchased in prior years, the Company can purchase up to an
additional $0.8 million of shares under this program. We believe that
the recent trading price of our shares is not fully reflective of the value of
the Company’s business and future prospects. Therefore, we believe
the purchase of shares in the open market is in the best interests of the
Company and its shareholders.
4
Under the
terms of our current agreement with Cisco, formerly Scientific-Atlanta, Tulsat
is authorized to cary and resell the entire line of Cisco-SPVTG current and
legacy equipment and also continues to be the exclusive distributor for select
Cisco-SPVTG headend and transmission products for United States customers
through January 15, 2009. We have every expectation that we will
continue to be a top distibutor for Cisco. In June 2008, Tulsat
extended its Repair Center Agreement with Cisco for its SPVTG products through
June 2009. Tulsat also has a Third Party Service Agreement with
Cisco. This service agreement allows Tulsat to act as an authorized
service provider for select Cisco-SPVTG equipment within the United
States.
Over the
past 2 years, we have purchased approximately 216,000 used digital converter
set-top boxes and have approximately 40,000 sellable digital boxes remaining in
inventory as of September 30, 2008. The digital 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 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, were able to continue to purchase these legacy boxes
for a specified period of time. Due in large part to the FCC ban, the
MSOs are no longer selling excess boxes, but rather choosing to keep the legacy
boxes and reuse them, which is causing a tight supply on these used legacy
digital boxes in the market. The uncertainty of 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, which are not
subject to the FCC ban, to our refurbished digital box product line as surplus
boxes become available.
On
September 15, 2008, the Company announced that it had been selected as a Premier
Stocking Distributor for Blonder Tongue products. Blonder Tongue is a principal
provider of integrated network solutions and technical services to broadband
service providers. As a Premier Stocking Distributor, the Company
will provide its customers with Blonder Tongue’s cost effective broadband
equipment used to transmit voice, data, and digital video signals.
Products
and Services
We offer
our customers a wide range of new, surplus new and refurbished products that are
used in connection with 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.
5
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 Cisco 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 Area
Our
revenues by geographic areas were as follows:
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2008
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2007
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2006
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United
States
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$ | 48,597,910 | $ | 59,756,983 | $ | 48,713,482 | ||||||
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Central
America, South America and Other
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7,850,651 | 5,889,102 | 3,827,727 | |||||||||
| $ | 56,448,561 | $ | 65,646,085 | $ | 52,541,209 | |||||||
Revenues
attributed to geographic areas are based on the location of the
customer. All of our long-lived assets are located within the United
States.
Sales
and Marketing
In 2008,
sales of new products represented 61% of our total revenues and
re-manufactured product sales represented 29%. Repair and other services
contributed the remaining 10% 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, Central and South America, Asia and other
international markets. Sales in Mexico and Central and South 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 United States
banks prior to shipment of products.
Suppliers
In 2008,
we purchased approximately $16.2 million of new inventory directly from Cisco
and approximately $4.7 million of new inventory directly from
Motorola. These purchases represented approximately 53% of our total
inventory purchases for 2008. 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.
6
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 large 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 $7.0
million. 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 6% of our revenues in
2008. Approximately 22% of our revenues for 2008 and approximately
34% for 2007 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, 2008, we had 152 employees. Management considers its
relationships with its employees to be excellent. Our employees are
not unionized and we are not subject to any collective bargaining
agreements.
Each of
the following risk factors could adversely affect our business, operating
results and financial condition, as well as adversely affect the value of an
investment in our common stock. Additional risks not presently known,
or which we currently consider immaterial also may adversely affect
us.
We are highly
dependent upon our principal executive officers who also own a significant
amount of our outstanding stock. At September 30, 2008, David
Chymiak, Chairman of the Board, and Kenneth Chymiak, President and Chief
Executive Officer, owned approximately 46% 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.
7
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:
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consolidations
and recapitalizations in the cable television
industry;
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new
housing construction;
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general
economic conditions;
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availability
and cost of capital;
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other
demands and opportunities for
capital;
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regulations;
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demands
for network services;
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competition
and technology; and
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real
or perceived trends or uncertainties in these
factors.
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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.
8
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 Cisco and a value added reseller of Motorola broadband and
transmission products. During 2008, our inventory purchases from
these two companies totaled approximately $20.9 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.
We have purchased
a large quantity of legacy digital converter boxes which could become obsolete
or outdated. Over the past 2 years we have purchased
approximately 216,000 used digital converter boxes and have approximately 40,000
sellable boxes remaining in inventory as of September 30, 2008. 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 United States
and there is a lack of demand for these boxes in the international market, an
additional 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 2008, we sold approximately 88,000
legacy converter boxes generating revenues of approximately $5.4
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 10.3 million shares of common stock outstanding, 46% of these
shares are beneficially owned at September 30, 2008 by David Chymiak and Kenneth
Chymiak. As a consequence, only about 54% 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. In 2007, the Company purchased an office and warehouse
facility from an entity owned by our principal executive officers. In addition,
the Company has leased certain office and warehouse properties from two entities
owned by our principal executive officers, and we continue to lease one of those
properties on a month-to-month basis. We also redeemed all of the
outstanding shares of preferred stock held by these officers in fiscal
2008. 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.
9
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, Japan, Brazil, Columbia, Dominican Republic, Ecuador, Guatemala,
Honduras, Panama, Peru, Mexico 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.
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%. In December 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 $1.6
million to complete and the construction was financed with cash flow from
operations.
|
Tulsat
also continues to lease warehouse space of approximately 56,000 square feet from
an entity that is controlled by David E. Chymiak and Kenneth A.
Chymiak. The lease expired on September 20, 2008 and is now on a
month-to-month basis with a monthly payment of $15,000.
|
·
|
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 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. In October 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, with monthly lease payments of $3,360
through March 31, 2011.
|
|
·
|
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.
|
10
|
·
|
Chambersburg,
Pennsylvania – Broadband Remarketing International leases an office,
warehouse and service center of approximately 11,000 square feet for
$5,958 a month. The term of the lease is for two years
beginning in July 1, 2008 with an option to renew for one additional
year.
|
We
believe that our current facilities are adequate to meet our needs.
From time
to time in the ordinary course of business, we have become a defendant in
various types of legal proceedings. We do not believe that these
proceedings, individually or in the aggregate, will have a material adverse
effect on our financial position, results of operations or cash
flows.
There
were no matters submitted to a vote of our shareholders in the fourth quarter of
fiscal year 2008.
11
PART
II
|
Market
for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
The table
sets forth the high and low sales prices on the NASDAQ Global Market under
the symbol “AEY” and the American Stock Exchange under the same symbol for
the quarterly periods indicated. We moved our listing from the
American Stock Exchange to the NASDAQ on September 13, 2007.
|
Year Ended September 30, 2008
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 9.00 | $ | 5.21 | ||||
|
Second
Quarter
|
$ | 6.29 | $ | 3.45 | ||||
|
Third
Quarter
|
$ | 4.25 | $ | 3.00 | ||||
|
Fourth
Quarter
|
$ | 3.57 | $ | 2.09 | ||||
|
Year Ended September 30, 2007
|
||||||||
|
First
Quarter
|
$ | 4.55 | $ | 2.66 | ||||
|
Second
Quarter
|
$ | 3.74 | $ | 2.77 | ||||
|
Third
Quarter
|
$ | 5.30 | $ | 3.85 | ||||
|
Fourth
Quarter
|
$ | 9.28 | $ | 4.88 | ||||
Holders
As of
September 30, 2008, we have approximately 75 shareholders of record and, based
on information received from brokers, there are approximately
1,600 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
|
210,850
|
$3.67
|
644,656
|
|
Equity
compensation plans not approved by security holders
|
0
|
0
|
0
|
|
Total
|
210,850
|
$3.67
|
644,656
|
12
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 Index
(symbol: XAX) for the period of five fiscal years commencing October 1, 2003 and
ending September 30, 2008. The graph assumes that the value of the
investment in our common stock and each index was $100 on September 30,
2003.
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, 2003 in our stock or on September 30, 2003 in each
index including reinvestment of dividends.
|
Cumulative
Total Return
|
||||||||||||||||||||||||
|
9/30/03
|
9/30/04
|
9/30/05
|
9/30/06
|
9/30/07
|
9/30/08
|
|||||||||||||||||||
|
ADDvantage
Technologies Group
|
$ | 100.00 | $ | 101.32 | $ | 102.37 | $ | 110.53 | $ | 213.68 | $ | 70.79 | ||||||||||||
|
NASDAQ
Composite Index
|
100.00 | 110.80 | 123.03 | 132.47 | 185.22 | 128.61 | ||||||||||||||||||
|
NASDAQ
Telecommunications Index
|
100.00 | 128.36 | 175.30 | 192.45 | 243.25 | 180.35 | ||||||||||||||||||
|
American
Stock Exchange Index
|
100.00 | 106.15 | 120.41 | 126.39 | 151.18 | 117.06 | ||||||||||||||||||
13
SELECTED
CONSOLIDATED FINANCIAL DATA
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year
ended September 30,
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Net
sales and service income
|
$ | 56,449 | $ | 65,646 | $ | 52,541 | $ | 50,273 | $ | 47,071 | ||||||||||
|
Income
from operations
|
8,452 | 12,543 | 8,117 | 9,973 | 9,484 | |||||||||||||||
|
Net
income applicable to
common
shareholders
|
4,534 | 6,590 | 4,003 | 4,974 | 4,574 | |||||||||||||||
|
Earnings
per share
|
||||||||||||||||||||
|
Basic
|
0.44 | 0.64 | 0.39 | 0.49 | 0.46 | |||||||||||||||
|
Diluted
|
0.44 | 0.64 | 0.39 | 0.49 | 0.41 | |||||||||||||||
|
Total
assets
|
51,800 | 49,009 | 40,925 | 39,269 | 32,359 | |||||||||||||||
|
Long-term
obligations inclusive
|
||||||||||||||||||||
|
of
current maturities
|
20,510 | 9,009 | 9,385 | 9,382 | 11,610 | |||||||||||||||
14
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 Cisco 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 multiservice operators (“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
Market
conditions during 2008 have had an adverse impact on the economy, and the cable
industry has not been immune. There has been a continued slow down of
installations and upgrades by both large and small MSO and telephone customers
due to the down turn in the housing market and the reduced availability of
credit. While MSOs and telephone companies are not necessarily seeing
a cut back in services from their current customers, they have been adding fewer
new customers. The lack of new customers, coupled with the hesitation
of operators to spend cash during these difficult economic times, have led to
cutbacks in capital expenditures, depleting a lot of the historical
demand. The lack of demand for equipment has also helped the larger
original equipment manufacturers to better manage their delivery schedules,
which has reduced their need to utilize the on-hand inventory maintained by
their distributor networks. All of these factors resulted in a
decrease of $10.3 million in revenues in 2008 from our new product
sales.
Despite a
slowdown in new equipment sales over the past year, we continued to achieve
profitability as a result of what we believe shows the strength of our business
model and solid customer relationships. If the slow-down in capital
expenditures by our top customers continues, our operating results could be
adversely affected. However, we continue to carry the largest
inventory of cable equipment of any reseller in the industry, and we are able to
deploy this equipment as needed. As cable operators begin to increase
their capital expenditures to meet the growing bandwidth needs of their
customers, we will be ready to supply their equipment needs, which will provide
us with long-term growth opportunities.
Our sales
of refurbished digital legacy converter boxes, which we introduced as a new
product line in the fourth quarter of 2006, increased approximately $1.3 million
in 2008 to $5.4 million. We have approximately 40,000 sellable boxes
remaining in inventory as of September 30, 2008. During 2008, an
obsolescence reserve of $0.5 million was established to cover approximately
32,000 Cisco boxes that we deemed unsellable. We originally acquired
these boxes from Adelphia in 2006 as part of a large purchase of 100,000 Cisco
and Motorola boxes for $1.75 million. Our remaining Cisco boxes were
deemed unsellable as the vast majority of the waivers that were granted by the
FCC that allow domestic operators to continue to acquire these legacy boxes
expired. The lack of domestic sales opportunities coupled with the
limited international opportunities to sell our legacy Cisco digital converter
boxes led us to reduce the carrying costs on these boxes to their potential
scrap value. Our ability to continue to obtain surplus digital legacy
converter boxes as well as generate sales of certain boxes currently in
inventory could have an adverse impact on our operating results.
15
Results
of Operations
Year
Ended September 30, 2008, compared to Year Ended September 30, 2007 (all
references are to fiscal years)
Total Net
Sales. Total Net Sales declined $9.2 million, or 14%, to $56.4
million for 2008 from $65.6 million for 2007. Sales of new equipment
decreased $10.3 million, or 23%, to $34.7 million in 2008 from $45.0 million in
2007, driven by decreases in sales of $11.1 million by our top MSO and telephone
customers. Refurbished sales increased $0.8 million, or 5% to
$16.1 million in 2008 from $15.3 million in 2007. This increase came
primarily from sales of refurbished digital converter boxes of $5.4 million in
2008 as compared to $4.1 million in 2007. Net repair service revenues
increased $0.3 million, or 5%, to $5.7 million for 2008 from $5.4 million in
2007. The increase in service revenues results from higher
volumes of equipment failures as certain customers delay equipment upgrades and
then incur additional out of warranty equipment failures.
Cost 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, the related transportation costs and the labor
and overhead directly related to these sales. Cost of sales decreased
$4.5 million, or 10%, to $39.8 million for 2008 from $44.3 million for 2007.
Cost of sales this year were 71% of total net sales compared to 68% last
year. The decrease in cost of sales was directly related to the
decrease in new equipment sales during 2008. Cost of sales was also
impacted by increased charges of $1.0 million to $1.7 million in 2008 from $0.7
million in 2007 to our inventory obsolescence reserve due primarily to a $0.5
million reserve for the Cisco legacy digital converter boxes that were deemed
unsellable, discussed above, and a $0.3 million reserve for unsellable inventory
at our Jones Broadband location.
Gross
Profit. Gross profit in 2008 decreased $4.7 million to $16.6
million from $21.3 million in 2007. The decreased gross profits were
attributed to the decline in sales
of new products. Gross profit margins decreased to 29%
from 32% due primarily to product line mix changes and increased price pressures
from other competitors due to the overall decline in CATV equipment purchasing
during 2008. In addition, our gross margin was impacted due to
increased charges of $1.0 million to our inventory obsolescence reserve,
discussed above.
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 cost
categories. Operating, selling, general and administrative expenses
decreased by $0.6 million to $8.2 million in 2008 from $8.8 million in
2007. The decrease was primarily attributable to reduced payroll
expenses associated with bonuses and commissions, rental costs, property taxes
and charges to bad debt for a combined savings of $0.7 million. These
savings were partially offset by an increase in professional services of $0.2
million due primarily to consulting expenses incurred to assist us in meeting
the internal control assessment requirements of the Sarbanes Oxley Act of
2002.
Income from
Operations. Income from operations decreased $4.1 million to
$8.5 million for 2008 from $12.6 million in 2007. This decrease in
income was primarily attributable to the decline in gross profit.
Interest
Expense. Interest expense for 2008 was $1.0 million compared
to $0.6 million in 2007. Interest expense increased $0.4 million
primarily due to an amendment on November 27, 2007 to our $8.0 million term note
with our primary financial lender to increase the term note to $16.3 million and
extend the maturity date to November 30, 2012. In connection with the
amendment, we also entered into an interest rate swap agreement with our primary
financial lender to effectively fix the rate on this debt at
5.92%. The proceeds from this amended term note of $12.0 million were
used to redeem all of the issued and outstanding shares of the Company’s Series
B 7% Cumulative Preferred Stock, which were beneficially owned by David E.
Chymiak, Chairman of the Company’s Board of Directors, and Kenneth A. Chymiak,
President and Chief Executive Officer of the Company.
Income Taxes. The
provision for income taxes for 2008 decreased $1.8 million to $2.8 million, or
an effective rate of 37.5%, for 2008 from $4.6 million, or an effective rate of
38.0%, for 2007. Our estimated effective tax rate for 2008 decreased
slightly as we expect to utilize certain investment tax credits, which will
result in reduced state income taxes.
16
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.
Cost 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, the related transportation costs and the labor
and overhead directly related to these sales. Cost of sales increased
$8.0 million, or 22%, to $44.3 million for 2007 from $36.3 million for
2006. Cost of sales this year were 68% of total net sales compared to
69% last year. The decrease in cost of sales as a percent of total
net sales 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 cost
categories. Operating, selling, general and administrative expenses
increased by $0.7 million to $8.8 million in 2007 from $8.1 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.
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 increase in gross profit.
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.
Liquidity
and Capital Resources
We
finance our operations primarily through internally generated funds and a bank
line of credit of $7.0 million. During 2008, we generated
approximately $1.6 million of cash flow from operations, which included $1.8
million of borrowings under the line of credit that was reclassed to accounts
payable at the end of the period. We invested an additional $3.9
million in increased inventory. We continue to invest excess profits
in inventory as we believe expanding our product offerings and depth of
inventory increases our ability to grow our business. Our trade
receivables remained flat year-over-year despite lower revenues as it is taking
longer to collect our outstanding balances. However, we have not
experienced an increase in our bad debt despite the tightening
economy. Our trade
17
payables
declined as we made fewer purchases of inventory in the fourth quarter of 2008
as compared to 2007 due primarily to the decrease in business activity in 2008
as compared to 2007.
During
2007, we invested $0.7 million to complete two warehouse construction projects
in Broken Arrow, Oklahoma and Sedalia Missouri. The new 62,500 square
foot warehouse facility in Broken Arrow, Oklahoma is located at the back section
of our 10 acre headquarters facility. The completed warehouse
addition, which cost approximately $1.6 million, was constructed to gain
additional operating efficiencies by consolidating the operations and multiple
outside warehouses located in Broken Arrow, Oklahoma into one facility.
The new 18,000 square foot warehouse facility in Sedalia, Missouri, which cost
approximately $0.4 million, will expand the revenue generating capacity of this
location as it increased the square footage of the operation by approximately
30% and allowed us to consolidate our Stockton, California warehouse into a more
cost-effective location. The combined annual savings from vacated
rental properties is expected to total approximately $0.2 million per
year.
In
November 2007, we executed the Fourth Amendment to the Revolving Credit and Term
Loan Agreement (the “Fourth Amendment”) with our primary lender, Bank of
Oklahoma. Among other things, the Fourth Amendment (i) extended the
$7.0 million line of credit maturity date to November 30, 2010, (ii) increased
the $8.0 million Term Loan, which had a principal balance of $4.3 million, $12.0
million to $16.3 million and (iii) decreased the interest rate on the line of
credit and both Term Loans to the prevailing 30-day LIBOR rate plus
1.4%.
Upon
execution of the Fourth Amendment, the $12.0 million of additional funds under
the $16.3 million Term Loan were fully advanced, and the proceeds were used to
redeem all of the issued and outstanding shares of the Company’s Series B 7%
Cumulative Preferred Stock (“Preferred Stock”), which were beneficially owned by
David Chymiak and Kenneth Chymiak. The $16.3 million Term Loan is
payable over a 5 year period with quarterly payments of approximately $0.4
million plus accrued interest.
The $7.0
million line of credit will continue to be used to finance our working capital
requirements. The lesser of $7.0 million or the total of 80% of the
qualified accounts receivable, plus 50% of qualified inventory, less any
outstanding term note balances is available to us under the line of
credit. The entire balance under the line of credit is due upon
maturity.
The
Revolving Credit and Term Loan Agreement also includes a $2.8 million Term
Loan. This loan was secured in November 2006 to finance the purchase
of the Company’s headquarters facility located in Broken Arrow,
Oklahoma. The $2.8 million Term Loan requires scheduled monthly
payments of $15,334 plus accrued interest over 15 years.
In 2008,
we paid the scheduled accrued dividends of $0.3 million of dividends on the
Preferred Stock, representing the final dividends earned prior to the redemption
the Preferred Stock in November 2007. We also paid $1.6 million of
scheduled note payments.
We
believe that our cash flow from operations, existing cash balances and our
existing line of credit provide sufficient liquidity and capital resources to
meet our working capital and debt payment needs.
Subsequent
Events
In 2000,
our Board of Directors authorized the repurchase of up to $l.0 million of
outstanding shares of our common stock from time to time in the open market at
prevailing market prices or in privately negotiated transactions. The
repurchased shares of common stock will be held in treasury and used for general
corporate purposes including possible use in our employee stock plans or for
acquisitions. During the period of October 1, 2008 – December 11,
2008, we acquired in the open market approximately 111,000 shares of our
Company’s common stock at an average price of $1.64. Repurchases are made in
compliance with the limitations of securities laws, which limit the timing,
volume, price and manner of stock repurchases. When combined with the
treasury shares purchased in prior years, the Company can purchase up to an
additional $0.8 million of shares under this program. We believe that
the recent trading price of our common stock is not fully reflective of the
value of the Company’s business and future prospects. Therefore, we
believe that the repurchase of common stock in the open market is in the best
interests of the Company and its shareholders.
18
Contractual
Obligations
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 operating lease agreements.
Payments
due by period
|
Total
|
2009
|
2010 –2011
|
2012 –2013
|
Thereafter
|
||||||||||||||||
|
Long
term debt
|
$ | 20,509,660 | $ | 4,649,415 | $ | 3,728,302 | $ | 10,629,331 | $ | 1,502,612 | ||||||||||
|
Estimated
interest on long term debt (a)
|
3,881,790 | 991,937 | 1,612,103 | 975,542 | 302,208 | |||||||||||||||
|
Capital
leases
|
- | - | - | - | - | |||||||||||||||
|
Operating
leases
|
553,013 | 267,437 | 285,576 | - | - | |||||||||||||||
|
Purchase
obligations
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 24,944,463 | $ | 5,908,789 | $ | 5,625,981 | $ | 11,604,873 | $ | 1,804,820 | ||||||||||
|
(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 2008. Actual variable rates may vary from
the historical rates used to calculate the estimated interest
expense.
|
Critical
Accounting Policies and Estimates
Note 1 to
the Consolidated Financial Statements in this Form 10-K for fiscal year 2008
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 United States 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 revenues and expenses during the
reporting period. 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 could differ
from these estimates under different assumptions or conditions. The
most significant estimates and assumptions relate to the carrying value of our
inventory and, to a lesser extent, the adequacy of our allowance for doubtful
accounts.
Inventory
Valuation
Our
position in the industry requires us to carry large inventory quantities
relative to annual sales, but it 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 inventory quantities 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, 2008, we had total inventory of
approximately $35.7 million, consisting of approximately $23.6 million in new
products and approximately $12.1 million in used or refurbished products against
which we have a reserve of $2.0 million for excess and obsolete inventory,
leaving us a net inventory of $33.7 million.
19
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 2008, we increased our reserve for excess and
obsolete inventory by approximately $1.7 million. In addition during
2008, we wrote down the carrying value of certain inventory items by
approximately $0.4 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 was
$0.3 million at September 30, 2008 and September 30,
2007. At September 30, 2008, accounts receivable, net of allowance
for doubtful accounts, amounted to approximately $6.7 million.
Impact
of Recently Issued Accounting Standards
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. The purpose of this standard is to
provide a consistent framework for determining what accounting principles should
be used when preparing United States generally accepted accounting principles
financial statements. SFAS No. 162 categorizes accounting
pronouncements in a descending order of authority. In the instance of
potentially conflicting accounting principles, the standard in the highest
category must be used. SFAS No. 162 will be effective 60 days after
the SEC approves the Public Company Accounting and Oversight Board’s related
amendments. We do not expect the adoption of SFAS No. 162 to have a
material effect on our financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,
which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the disclosure requirements of SFAS No. 161 and
plan on including the required information in our first quarter fiscal
2009 financial statements.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141. SFAS No. 141R retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase accounting. It
also changes the recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning July 1,
2009 and will apply prospectively to business combinations completed on or after
that date. We do not expect the adoption of SFAS No. 141R to have a material
effect 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
20
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.
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 Loan. Borrowings
under these obligations bear interest at rates indexed to the 30-day LIBOR rate,
which exposes us to increased costs if interest rates rise. At
September 30, 2008, the outstanding borrowings subject to variable interest rate
fluctuations totaled $3.4 million, and was as high as $7.1 million and as low as
$2.4 million at different times during the 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 $16.3 million Term Loan, 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 November 27, 2007, in an amount equivalent to the
$16.3 million Term Loan. Although the note bears interest at
the prevailing 30-day LIBOR rate plus 1.4%, the swap effectively fixed the
interest rate at 5.92%. The fair value of this derivative will
increase or decrease opposite any future changes in interest
rates.
21
|
Index to Financial
Statements
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
23
|
|
Consolidated
Balance Sheets, September 30, 2008 and 2007
|
24
|
|
Consolidated
Statements of Income and Comprehensive Income, Years
|
|
|
ended
September 30, 2008, 2007 and 2006
|
26
|
|
Consolidated
Statements of Changes in Shareholders’ Equity, Years ended
|
|
|
September
30, 2008, 2007 and 2006
|
27
|
|
Consolidated
Statements of Cash Flows, Years ended
|
|
|
September
30, 2008, 2007 and 2006
|
28
|
|
Notes
to Consolidated Financial Statements
|
29
|
22
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2008 and 2007,
and the related consolidated statements of income and comprehensive income,
changes in shareholders’ equity and cash flows for each of the three years in
the period ended September 30, 2008. In connection with our audits of
the financial statements, we have also audited the financial statement schedule
of ADDvantage Technologies Group, Inc., listed in Item 15(a). These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ADDvantage
Technologies Group, Inc. and subsidiaries as of September 30, 2008 and 2007, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2008, 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
17, 2008
Tulsa,
Oklahoma
23
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 15,211 | $ | 60,993 | ||||
|
Accounts
receivable, net of allowance of $253,000 and
|
||||||||
|
$261,000,
respectively
|
6,704,162 | 6,709,879 | ||||||
|
Income
tax refund receivable
|
83,735 | 153,252 | ||||||
|
Inventories,
net of allowance for excess and obsolete
|
||||||||
|
inventory
of $1,958,000 and $697,000, respectively
|
33,678,418 | 31,464,527 | ||||||
|
Deferred
income taxes
|
1,069,000 | 678,000 | ||||||
|
Total
current assets
|
41,550,526 | 39,066,651 | ||||||
|
Property
and equipment, at cost:
|
||||||||
|
Land
and buildings
|
7,181,143 | 6,488,731 | ||||||
|
Machinery
and equipment
|
3,267,868 | 3,144,927 | ||||||
|
Leasehold
improvements
|
205,797 | 205,797 | ||||||
| 10,654,808 | 9,839,455 | |||||||
|
Less
accumulated depreciation and amortization
|
(2,728,633 | ) | (2,341,431 | ) | ||||
|
Net
property and equipment
|
7,926,175 | 7,498,024 | ||||||
|
Other
assets:
|
||||||||
|
Deferred
income taxes
|
625,000 | 679,000 | ||||||
|
Goodwill
|
1,560,183 | 1,560,183 | ||||||
|
Other
assets
|
137,672 | 204,843 | ||||||
|
Total
other assets
|
2,322,855 | 2,444,026 | ||||||
|
Total
assets
|
$ | 51,799,556 | $ | 49,008,701 | ||||
See notes
to audited consolidated financial statements.
24
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 3,267,006 | $ | 4,301,672 | ||||
|
Accrued
expenses
|
1,146,672 | 1,331,890 | ||||||
|
Bank
revolving line of credit
|
2,789,252 | 1,735,405 | ||||||
|
Notes
payable – current portion
|
1,860,163 | 1,427,693 | ||||||
|
Dividends
payable
|
- | 210,000 | ||||||
|
Total
current liabilities
|
9,063,093 | 9,006,660 | ||||||
|
Notes
payable
|
15,860,245 | 5,845,689 | ||||||
|
Other
liabilities
|
299,944 | - | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, 5,000,000 shares authorized, $1.00 par value,
at
stated value:
|
||||||||
|
Series
B, 7% cumulative; 0 and 300,000 shares issued and
|
||||||||
|
outstanding,
respectively, with a stated value of $40 per share
|
- | 12,000,000 | ||||||
|
Common
stock, $.01 par value; 30,000,000 shares authorized;
10,294,115
and 10,270,756 shares issued, respectively
|
102,941 | 102,708 | ||||||
|
Paid
in capital
|
(6,272,897 | ) | (6,383,574 | ) | ||||
|
Retained
earnings
|
32,988,338 | 28,454,024 | ||||||
|
Accumulated
other comprehensive income:
|
||||||||
|
Unrealized
gain (loss) on interest rate swap, net of tax
|
(187,944 | ) | 37,358 | |||||
| 26,630,438 | 34,210,516 | |||||||
|
Less:
Treasury stock, 21,100 shares at cost
|
(54,164 | ) | (54,164 | ) | ||||
|
Total
shareholders’ equity
|
26,576,274 | 34,156,352 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 51,799,556 | $ | 49,008,701 | ||||
See notes
to audited consolidated financial statements.
25
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND
COMPREHENSIVE
INCOME
|
Years
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Sales:
|
||||||||||||
|
Net
new sales income
|
$ | 34,678,054 | $ | 44,991,536 | $ | 38,585,308 | ||||||
|
Net
refurbished sales income
|
16,090,192 | 15,264,336 | 8,815,508 | |||||||||
|
Net
service income
|
5,680,315 | 5,390,213 | 5,140,393 | |||||||||
|
Total
net sales
|
56,448,561 | 65,646,085 | 52,541,209 | |||||||||
|
Cost
of sales
|
39,839,667 | 44,336,505 | 36,321,278 | |||||||||
|
Gross
profit
|
16,608,894 | 21,309,580 | 16,219,931 | |||||||||
|
Selling,
general and administrative expenses
|
8,156,536 | 8,766,136 | 8,103,209 | |||||||||
|
Income
from operations
|
8,452,358 | 12,543,444 | 8,116,722 | |||||||||
|
Interest
expense
|
983,564 | 555,105 | 530,004 | |||||||||
|
Income
before income taxes
|
7,468,794 | 11,988,339 | 7,586,718 | |||||||||
|
Provision
for income taxes
|
2,801,000 | 4,558,000 | 2,744,000 | |||||||||
|
Net
income
|
4,667,794 | 7,430,339 | 4,842,718 | |||||||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized
gain (loss) on interest rate swap, net of
|
||||||||||||
|
$(112,000),
$(34,000) and $2,000 tax provision
|
||||||||||||
|
(benefit),
respectively
|
(187,944 | ) | (55,148 | ) | 3,300 | |||||||
|
Comprehensive
income
|
$ | 4,479,850 | $ | 7,375,191 | $ | 4,846,018 | ||||||
|
Net
income
|
4,667,794 | 7,430,339 | 4,842,718 | |||||||||
|
Preferred
stock dividends
|
133,480 | 840,000 | 840,000 | |||||||||
|
Net
income attributable to common shareholders
|
$ | 4,534,314 | $ | 6,590,339 | $ | 4,002,718 | ||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 0.44 | $ | 0.64 | $ | 0.39 | ||||||
|
Diluted
|
$ | 0.44 | $ | 0.64 | $ | 0.39 | ||||||
|
Shares
used in per share calculation:
|
||||||||||||
|
Basic
|
10,263,365 | 10,237,331 | 10,152,472 | |||||||||
|
Diluted
|
10,281,136 | 10,250,835 | 10,201,474 | |||||||||
See notes
to audited consolidated financial statements.
26
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years
ended September 30, 2008, 2007 and 2006
|
Series
B
|
Retained
|
Other
|
||||||||||||||||||||||||||||||
|
Common
Stock
|
Preferred
|
Paid-in
|
Earnings
|
Comprehensive
|
Treasury
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Capital
|
(Deficit)
|
Income
|
Stock
|
Total
|
|||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||
|
Net
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 | ||||||||||||||||||||||||
|
Net
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 | |||||||||||||||
|
Net
income
|
- | - | - | - | 4,667,794 | - | - | 4,667,794 | ||||||||||||||||||||||||
|
Preferred
stock dividends
|
- | - | - | - | (133,480 | ) | - | - | (133,480 | ) | ||||||||||||||||||||||
|
Repurchase
of preferred stock
|
- | - | (12,000,000 | ) | - | - | - | - | (12,000,000 | ) | ||||||||||||||||||||||
|
Stock
issuance
|
16,359 | 164 | - | 69,836 | - | - | - | 70,000 | ||||||||||||||||||||||||
|
Stock
options exercised
|
7,000 | 69 | - | 20,180 | - | - | - | 20,249 | ||||||||||||||||||||||||
|
Net
unrealized loss on interest swap
|
- | - | - | - | - | (225,302 | ) | - | (225,302 | ) | ||||||||||||||||||||||
|
Share
based compensation expense
|
- | - | - | 20,661 | - | - | - | 20,661 | ||||||||||||||||||||||||
|
Balance,
September 30, 2008
|
10,294,115 | $ | 102,941 | $ | - | $ | (6,272,897 | ) | $ | 32,988,338 | $ | (187,944 | ) | $ | (54,164 | ) | $ | 26,576,274 | ||||||||||||||
See notes
to audited consolidated financial statements.
27
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income
|
$ | 4,667,794 | $ | 7,430,339 | $ | 4,842,718 | ||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
388,702 | 307,752 | 247,504 | |||||||||
|
Provision
for losses on accounts receivable
|
38,238 | 185,000 | 445,541 | |||||||||
|
Provision
for excess and obsolete inventories
|
1,670,425 | 746,000 | 439,625 | |||||||||
|
Loss
on disposal of property and equipment
|
- | 100,971 | 76,829 | |||||||||
|
Deferred
income tax benefit
|
(225,000 | ) | 419,000 | (22,000 | ) | |||||||
|
Share
based compensation expense
|
61,492 | 60,314 | 98,111 | |||||||||
|
Cash
provided (used) by changes in current assets
and
liabilities:
|
||||||||||||
|
Accounts
receivables
|
36,996 | (1,422,705 | ) | 1,600,582 | ||||||||
|
Inventories
|
(3,884,316 | ) | (3,219,831 | ) | (4,109,172 | ) | ||||||
|
Other assets
|
58,982 | 75,575 | (132,276 | ) | ||||||||
|
Accounts
payable
|
(1,034,666 | ) | 1,683,182 | (1,985,706 | ) | |||||||
|
Accrued
expenses
|
(185,218 | ) | 296,585 | (660,242 | ) | |||||||
|
Net
cash provided by operating activities
|
1,593,429 | 6,662,182 | 841,514 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Additions
to machinery and equipment
|
(125,610 | ) | (381,471 | ) | (99,520 | ) | ||||||
|
Additions
of land and buildings
|
(694,743 | ) | (4,820,220 | ) | - | |||||||
|
Disposals
of machinery and equipment
|
3,500 | - | - | |||||||||
|
Investment
in Jones Broadband International
|
- | (145,834 | ) | (500,471 | ) | |||||||
|
Acquisition
of business and certain assets
|
- | (166,951 | ) | - | ||||||||
|
Net
cash used by investing activities
|
(816,853 | ) | (5,514,476 | ) | (599,991 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Net
change under bank revolving line of credit
|
1,053,847 | (1,741,217 | ) | 1,241,942 | ||||||||
|
Proceeds
on notes payable
|
12,000,000 | 2,760,291 | - | |||||||||
|
Payments
on notes payable
|
(1,552,974 | ) | (1,394,995 | ) | (1,239,184 | ) | ||||||
|
Repurchase
of preferred stock
|
(12,000,000 | ) | - | - | ||||||||
|
Proceeds
from stock options exercised
|
20,249 | 30,310 | 245,398 | |||||||||
|
Payments
of preferred dividends
|
(343,480 | ) | (840,000 | ) | (840,000 | ) | ||||||
|
Net
cash used by financing activities
|
(822,358 | ) | (1,185,611 | ) | (591,844 | ) | ||||||
|
Net
decrease in cash
|
(45,782 | ) | (37,905 | ) | (350,321 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
60,993 | 98,898 | 449,219 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 15,211 | $ | 60,993 | $ | 98,898 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 901,940 | $ | 558,605 | $ | 531,596 | ||||||
|
Cash
paid for income taxes
|
$ | 2,946,329 | $ | 4,089,459 | $ | 3,019,768 | ||||||
|
Value
of shares issued in exchange for business
|
||||||||||||
|
and
certain assets
|
$ | - | $ | - | $ | 450,000 | ||||||
See notes
to audited consolidated financial statements.
28
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Description of Business and 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, Central
America, South America and, to a substantially lesser extent, other
international regions that utilize the same technology. In addition,
the Company is also a repair center for various cable companies.
Summary
of Significant Accounting Policies
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.
Cash
and cash equivalents
Cash and
cash equivalents includes demand and time deposits, money market funds and other
marketable securities with maturities of three months or less when
acquired.
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 its 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. Gains or losses from the ordinary sale or retirement
of property and equipment are recorded in other income
(expense). Repairs and maintenance costs are generally expensed as
incurred, whereas major improvements are capitalized. Depreciation
and amortization expense was $0.4 million, $0.3 million and $0.2
million for the years ended September 30, 2008, 2007 and 2006,
respectively.
29
Goodwill
Goodwill
represents the excess of cost over fair value of the assets of businesses
acquired. The Company performed annual goodwill impairment tests on
each operating segment of the Company, which indicated that goodwill was not
impaired as of September 30, 2008 or 2007.
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 its 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 its
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.
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 Cost of Sales.
30
Advertising
costs
Advertising
costs are expensed as incurred. Advertising expense was $0.3 million,
$0.4 million and $0.4 million for the years ended September 30, 2008, 2007
and 2006, respectively.
Management
estimates
The
preparation of financial statements in conformity with United States 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 2008 that contributed in
excess of 10% of the total net sales. Sales to foreign (non-U.S.
based customers) total approximately $7.9 million, $5.9 million and $3.8
million for the years ended September 30, 2008, 2007 and 2006,
respectively. In 2008, the Company purchased approximately 41% of our
inventory from Cisco, formerly Scientific-Atlanta, and approximately 12% of
our inventory from Motorola. The concentration of suppliers of our
inventory subjects us to risk.
Employee
stock-based awards
In the
first quarter of fiscal year 2006, the Company adopted SFAS No. 123(R), Share-Based
Payment. SFAS No. 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
No. 123R which requires the fair value of unvested options be calculated and
amortized as compensation expense over the remaining vesting
period. The Company applied the Black-Scholes valuation model in
determining the fair value of stock-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 No. 123(R) had no
impact on the Company's statement of income on the date of
adoption. SFAS No. 123R does not require the Company to restate prior
periods for the value of vested options.
During
2008, 2007 and 2006, stock options were granted to certain members of
management, key employees and the Board of Directors, and during 2008,
restricted stock was awarded to 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. 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.
31
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 No. 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.
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 amount of cash and cash equivalents approximates fair value due to the
short-term maturity of these 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 May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. The purpose of this standard is to
provide a consistent framework for determining what accounting principles should
be used when preparing United States generally accepted accounting principles
financial statements. SFAS No. 162 categorizes accounting
pronouncements in a descending order of authority. In the instance of
potentially conflicting accounting principles, the standard in the highest
category must be used. SFAS No. 162 will be effective 60 days after
the SEC approves the Public Company Accounting and Oversight Board’s related
amendments. We do not expect the adoption of SFAS No. 162 to have a
material effect on our financial statement.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,
which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the disclosure requirements of SFAS No. 161 and
plan on including the required information in our first quarter fiscal
2009 financial statements.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141. SFAS No. 141R retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase accounting. It
also changes the recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning July 1,
2009 and will apply prospectively to business combinations completed on or after
that date. We do not expect the adoption of SFAS No. 141R to have a material
effect 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.
32
Reclassifications
Certain
reclassifications have been made to the 2006 and 2007 financial statements to
conform to the 2008 presentation. These reclassifications had no
effect on previously reported results of operations or retained
earnings.
Note
2 – 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 million 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. Results of JBI’s operations
are included in the Company’s consolidated statements of income from the
acquisition date.
Note
3 – Inventories
Inventories
at September 30, 2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||
|
New
|
$ | 23,563,135 | $ | 17,155,976 | ||||
|
Refurbished
|
12,073,283 | 15,005,551 | ||||||
|
Allowance
for excess and obsolete inventory
|
(1,958,000 | ) | (697,000 | ) | ||||
| $ | 33,678,418 | $ | 31,464,527 | |||||
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 the fiscal years ended September 30, 2008, 2007 and 2006,
increasing the cost of sales by approximately $1.7 million, $0.7 million and
$0.4 million, respectively.
33
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
4 – Income Taxes
The
provisions for income taxes for the years ended September 30, 2008, 2007 and
2006 consist of:
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
$ | 3,138,000 | $ | 4,139,000 | $ | 2,766,000 | ||||||
|
Deferred
|
(337,000)
|
419,000
|
(22,000)
|
|||||||||
| $ | 2,801,000 | $ | 4,558,000 | $ | 2,744,000 | |||||||
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 years ended September 30, 2008, 2007 and 2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Statutory
tax rate
|
34.0%
|
34.0%
|
34.0%
|
|||||||||
|
State
income taxes, net of U.S.
|
||||||||||||
|
federal
tax benefit
|
4.6%
|
4.5%
|
4.9%
|
|||||||||
|
Tax
credits and exclusions
|
(1.1%
|
)
|
(0.5%
|
)
|
(1.7%
|
)
|
||||||
|
Other
|
-
|
-
|
(1.0%
|
)
|
||||||||
|
Company’s
effective tax rate
|
37.5%
|
38.0%
|
36.2%
|
|||||||||
Deferred
tax assets at September 30, 2008 and 2007 consist of the following:
|
2008
|
2007
|
|||||||
|
Net
operating loss carryforwards
|
$ | 916,000 | $ | 1,016,000 | ||||
|
Financial
basis in excess of tax basis of certain assets
|
(589,000) | (403,000) | ||||||
|
Accounts
receivable
|
96,000 | 99,000 | ||||||
|
Inventory
|
966,000 | 492,000 | ||||||
|
Interest
rate swap
|
112,000 | (23,000) | ||||||
|
Other,
net
|
193,000 | 176,000 | ||||||
| $ | 1,694,000 | $ | 1,357,000 | |||||
|
Deferred
tax assets are classified as:
|
||||||||
|
Current
|
$ | 1,069,000 | $ | 678,000 | ||||
|
Non-Current
|
625,000 | 679,000 | ||||||
| $ | 1,694,000 | $ | 1,357,000 | |||||
Utilization
of the Company’s net operating loss carryforward, totaling approximately $2.4
million at September 30, 2008, 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.
34
In
accordance with SFAS 109, the Company records net deferred tax assets to the
extent the Company believes these assets will more likely than not be
realized. In making such determination, the Company considers all
available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. The Company has
concluded, based on its historical earnings and projected future earnings, that
it will be able to realize the full effect of the deferred tax assets and no
valuation allowance is needed.
Note
5 – Accrued Expenses
Accrued
expenses as of September 30, 2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||
|
Employee
costs
|
$ | 791,095 | $ | 1,126,551 | ||||
|
Taxes
other than income tax
|
150,348 | 150,217 | ||||||
|
Interest
|
81,624 | - | ||||||
|
Other,
net
|
123,605 | 55,122 | ||||||
| $ | 1,146,672 | $ | 1,331,890 | |||||
Note
6 – Line of Credit and Notes Payable
Line
of Credit
On
November 27, 2007, the Company executed the Fourth Amendment to Revolving Credit
and Term Loan Agreement (“Fourth Amendment”) with its primary financial lender,
Bank of Oklahoma. The Fourth Amendment renewed the $7.0 Million
Revolving Line of Credit (“line of credit”) and extended the maturity date to
November 30, 2010. The Fourth Amendment also changed the interest
rate from the prevailing 30-day LIBOR rate plus 1.75% to the prevailing 30-day
LIBOR rate plus 1.4%. The interest rate is reset
monthly. In addition, the interest payments were changed from monthly
to quarterly.
At
September 30, 2008, approximately $1.0 million was outstanding under the line of
credit. The line of credit requires quarterly interest payments based
on the prevailing 30-day LIBOR rate plus 1.4% (3.89% at September 30, 2008).
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 must
maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not
less than 1.25 to 1.0, determined quarterly. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures and
general intangibles.
Cash
receipts are applied from the Company’s lockbox account directly against the
bank line of credit, and checks clearing the bank are funded from the line of
credit. The resulting overdraft balance, consisting of outstanding
checks, was approximately $1.8 million at September 30, 2008 and is included in
the bank line of credit.
Notes
Payable
The
Revolving Credit and Term Loan Agreement includes two different term
loans. The first term loan is a $2.8 million term loan, which was
used to finance the purchase of the Company’s headquarters facility located in
Broken Arrow, Oklahoma on November 20, 2006. The outstanding balance
under this note was approximately $2.4 million on September 30,
2008. This note is due on November 20, 2021, with monthly principal
payments of $15,334 plus accrued interest. The Fourth Amendment
changed the interest rate on this note from the prevailing 30-day LIBOR rate
plus 1.75% to the prevailing 30-day LIBOR rate plus 1.4% (3.89% at September 30,
2008). The interest rate is reset monthly.
35
The
second term loan under the Revolving Credit and Term Loan Agreement is an $8.0
million term loan. The outstanding balance under this term loan was
$4.3 million prior to being amended by the Fourth Amendment. The
Fourth Amendment provided $12.0 million of additional funds, which were fully
advanced upon executing the Fourth Amendment. The $12.0 million of
proceeds were used to redeem all of the issued and outstanding shares of the
Company’s Series B 7% Cumulative Preferred Stock on November 27,
2007. At September 30, 2008, the outstanding balance of this note was
$15.1 million. This note is due November 30, 2012, with quarterly
payments of approximately $0.4 million plus accrued interest. The
Fourth Amendment also changed the interest rate on this note from the prevailing
30-day LIBOR rate plus 2.5% to the prevailing 30-day LIBOR rate plus 1.4% (3.89%
at September 30, 2008). The interest rate is reset
monthly.
The
Company’s other note payable of $0.2 million, secured by real estate, is due in
monthly payments through 2013. The interest rate was 5.5% through
March 2008 at which point the rate converted to prime minus 0.25%.
The
aggregate minimum maturities of notes payable and the line of credit for each of
the next five years are as follows:
|
2009
|
$ | 4,649,415 | ||
|
2010
|
1,862,773 | |||
|
2011
|
1,865,529 | |||
|
2012
|
1,868,442 | |||
|
2013
|
8,760,889 | |||
|
Thereafter
|
1,502,612 | |||
|
Total
|
$ | 20,509,660 |
Note
7 – Derivative Financial Instruments
In 2004,
the Company entered into an interest rate swap to effectively fix the interest
rate of the $8.0 million term loan at 6.13%. Upon entering into this
interest rate swap, the Company designated this derivative as a cash flow hedge
by documenting the Company’s risk management objective and strategy for
undertaking the hedge, along with methods for assessing the swap’s effectiveness
in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. On November 27, 2007, the
Company terminated this swap agreement upon amending and extending the $8.0
million term loan to $16.3 million, discussed separately herein. The
Company received approximately $25,000 upon termination of this agreement which
represented the fair value of the swap on that date and offset this gain against
interest expense in the current year.
Additionally,
on November 27, 2007, the Company entered into a new interest rate swap
agreement to effectively fix the interest rate on the $16.3 million term note at
5.92%. The notional value of the interest rate swap amortizes
quarterly with payments that mirror the $16.3 million term note. Upon
entering into this interest rate swap, the Company designated this derivative as
a cash flow hedge by documenting the Company’s risk management objective and
strategy for undertaking the hedge along with methods for assessing the swap’s
effectiveness in accordance with SFAS No. 133. The fair value of the
hedge, which incorporates both an “effective” portion and “ineffective” portion,
has been recorded on the Company’s Consolidated Balance Sheet. The
effective portion of the change in the fair value of this interest rate swap
during the period has been reflected in the other comprehensive income section
of the Consolidated Statements of Income and Comprehensive
Income. The ineffective portion of the change in the fair value of
the interest rate swap was recognized as interest expense in the current period
and was not significant. At September 30, 2008, the notional value of
the swap was $15.1 million and the fair value of the interest rate swap was
approximately $0.3 million, which is included in other liabilities on the
Company’s Consolidated Balance Sheet.
36
Note
8 – Stock-Based Compensation and Preferred Stock
Plan
Information
The 1998
Incentive Stock Plan (the “Plan”) provides for awards of stock options and
restricted stock to officers, directors, key employees and
consultants. 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, 2008, 1,024,656 million shares of common stock were reserved for
the exercise of, or lapse of restrictions on, stock awards under the
Plan. Of the shares reserved for exercise of, or lapse of
restrictions on, stock awards, 644,656 shares were available for future
grants.
Stock
Options
In the
first quarter of fiscal year 2006, the Company adopted SFAS No. 123(R), Share-Based Payment. SFAS No.
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 No. 123(R) which requires the fair value of unvested
options be calculated and amortized as compensation expense over the remaining
vesting period. SFAS No. 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 No. 123(R) had no impact on the
Company's statement of income on the date of its adoption.
Stock
options are valued at the date of the award, which does not precede the approval
date, and compensation cost is recognized on a straight-line basis over the
vesting period. Stock options granted to employees generally become
exercisable over a four-year period from the date of grant and generally expire
ten years after the grant. Stock options granted to the Board of
Directors generally become exercisable on the date of grant and generally expire
ten years after the grant.
A summary
of the status of the Company's stock options at September 30, 2008, 2007 and
2006 and changes during the years then ended is presented
below:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Wtd.
Avg
|
Wtd.
Avg
|
Wtd.
Avg
|
||||||||||||||||||||||
|
Shares
|
Ex. Price
|
Shares
|
Ex. Price
|
Shares
|
Ex. Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
117,850 | $ | 4.20 | 104,750 | $ | 4.01 | 144,767 | $ | 3.23 | |||||||||||||||
|
Granted
|
100,000 | $ | 3.00 | 30,000 | $ | 3.45 | 35,000 | $ | 5.78 | |||||||||||||||
|
Exercised
|
(7,000 | ) | $ | 2.89 | (16,900 | ) | $ | 1.69 | (72,500 | ) | $ | 3.38 | ||||||||||||
|
Canceled
|
- | - | - | - | (2,517 | ) | $ | 1.50 | ||||||||||||||||
|
Outstanding,
end of year
|
210,850 | $ | 3.67 | 117,850 | $ | 4.20 | 104,750 | $ | 4.01 | |||||||||||||||
|
Exercisable,
end of year
|
105,850 | $ | 4.21 | 110,350 | $ | 3.15 | 94,750 | $ | 3.83 | |||||||||||||||
37
Information
about the Company’s outstanding and exercisable stock options at September 30,
2008 is as follows:
|
Exercisable
|
Remaining
|
||||||||||
|
Stock
Options
|
Stock
Options
|
Contractual
|
|||||||||
|
Exercise Price
|
Outstanding
|
Outstanding
|
Life
|
||||||||
| $ | 3.001 | 100,000 | - |
9.9
years
|
|||||||
| $ | 3.450 | 25,000 | 25,000 |
8.5
years
|
|||||||
| $ | 5.780 | 35,000 | 30,000 |
7.5
years
|
|||||||
| $ | 4.620 | 25,000 | 25,000 |
6.5
years
|
|||||||
| $ | 4.400 | 4,000 | 4,000 |
5.5
years
|
|||||||
| $ | 1.650 | 2,000 | 2,000 |
4.5
years
|
|||||||
| $ | 0.810 | 2,000 | 2,000 |
3.5
years
|
|||||||
| $ | 1.500 | 4,850 | 4,850 |
2.5
years
|
|||||||
| $ | 3.125 | 13,000 | 13,000 |
1.5
years
|
|||||||
| 210,850 | 105,850 | ||||||||||
In the
fourth quarter of fiscal year 2008, the Company granted nonqualified stock
options to executives and certain employees of the Company totaling 100,000
shares. In the second quarter of fiscal years 2007 and 2006, the
Company granted nonqualified stock options to outside directors and executives
totaling 30,000 shares 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. 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 terms. 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.
The
estimated fair value at date of grant for stock options utilizing the
Black-Scholes option valuation model and the assumptions that were used in the
Black-Scholes option valuation model for the years ended September 30, 2008,
2007 and 2006 are as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Estimated
fair value of options at grant date
|
$108,680
|
$48,060
|
$120,510 | |||||||||
|
Black-Scholes
model assumptions:
|
||||||||||||
|
Average
expected life (years)
|
6.25
|
5.50
|
5.50 | |||||||||
|
Average
expected volatility factor
|
30%
|
25%
|
63%
|
|||||||||
|
Average
risk-free interest rate
|
3.1%
|
4.5%
|
4.7%
|
|||||||||
|
Average
expected dividends yield
|
-
|
-
|
-
|
|||||||||
38
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Compensation
expense related to stock options recorded for the years ended September 30,
2008, 2007 and 2006 is as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Fiscal
year 2006 grant
|
$ | 6,510 | $ | 12,254 | $ | 98,111 | ||||||
|
Fiscal
year 2007 grant
|
- | 48,060 | - | |||||||||
|
Fiscal
year 2008 grant
|
14,151 | - | - | |||||||||
|
Total
compensation expense
|
$ | 20,661 | $ | 60,314 | $ | 98,111 | ||||||
For the
options granted in fiscal years 2008 and 2006, the Company is recording
compensation expense over the vesting term of the related
options. All of the options granted in fiscal year 2007 were fully
vested and, as such, their calculated fair value was expensed on the grant
date.
Restricted
stock
The
Company granted restricted stock in March 2008 to its Board of Directors
totaling 16,359 shares, which were valued at market value on the date of
grant. The shares are being held by the Company for 12 months and
will be delivered to the directors at the end of the 12 month holding
period. The fair value of these shares upon issuance totaled $70,000
and is being amortized over the 12 month period as compensation expense, of
which $40,831 was amortized in fiscal year 2008.
Preferred Stock
All of
the shares of the Company’s Series B 7% Cumulative Preferred Stock were redeemed
for $12.0 million on November 27, 2007 by utilizing proceeds from the term loan
under the Fourth Amendment (see Note 6). These shares of preferred
stock were beneficially held by David E. Chymiak, Chairman of the Company’s
Board of Directors, and Kenneth A. Chymiak, President and Chief Executive
Officer of the Company, and his spouse.
Note
9 – Related Parties
Cash used
in financing activities in 2008, 2007 and 2006 was primarily used to pay
dividends on the Company’s Series B Preferred Stock, which was beneficially
owned by David E. Chymiak, Chairman of the Company’s Board of Directors,
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 redemption
of the Series B Preferred Stock on November 27, 2007 and Series A Preferred
Stock on September 30, 2004, which was also beneficially owned by David E.
Chymiak and Kenneth A. Chymiak. The dividend expense on the Series B
Preferred Stock was $133,480, $840,000 and $840,000 for the years ended
September 30, 2008, 2007 and 2006, respectively.
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 10 acres in
Broken Arrow, OK. Chymiak Investments, LLC is owned by David E.
Chymiak and Kenneth A. Chymiak. During 2006, the Company
began consolidating its warehouses into the newly leased facility and vacated
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.
39
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 and proceeds from a $2.8
million Term Note dated November 20, 2006, under the Third Amendment to the
Revolving Credit and Term Loan Agreement with its primary financial
lender.
The
Company leased several warehouse properties in Broken Arrow, OK from two
companies owned by David E. Chymiak and Kenneth A. Chymiak. As of
September 30, 2008, all of the leases have expired. The total
payments made on the leases to these two companies for the years ended September
30, 2008, 2007 and 2006 totaled $0.2 million, $0.3 million and $0.5 million,
respectively.
David E.
Chymiak and Kenneth A. Chymiak beneficially owned 25% and 21%, respectively, of
the Company’s outstanding common stock as of September 30, 2008.
Note
10 – 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. Costs
recognized under the 401(k) plan for the years ended September 30, 2008, 2007
and 2006 were $0.2 million, $0.3 million and $0.2 million,
respectively.
Note
11 – Earnings per Share
Basic and
diluted earnings per share for the years ended September 30, 2008, 2007 and 2006
are:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income
|
$ | 4,667,794 | $ | 7,430,339 | $ | 4,842,718 | ||||||
|
Dividends
on preferred stock
|
133,480 | 840,000 | 840,000 | |||||||||
|
Net
income attributable to
|
||||||||||||
|
common
shareholders
|
$ | 4,534,314 | $ | 6,590,339 | $ | 4,002,718 | ||||||
|
Basic
weighted average shares
|
10,263,365 | 10,237,331 | 10,152,472 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
17,771 | 13,504 | 49,002 | |||||||||
|
Diluted
weighted average shares
|
10,281,136 | 10,250,835 | 10,201,474 | |||||||||
|
Earnings
per common share:
|
||||||||||||
|
Basic
|
$ | 0.44 | $ | 0.64 | $ | 0.39 | ||||||
|
Diluted
|
$ | 0.44 | $ | 0.64 | $ | 0.39 | ||||||
The table
below includes information related to stock options that were outstanding at the
end of each respective year but have been excluded from the computation of
weighted-average stock options for dilutive securities due to the option
exercise price exceeding the average market price per share of our common stock
for the fiscal year.
|
2008
|
2007
|
2006
|
||||||||||
|
Stock
options excluded
|
60,000 | 60,000 | 35,000 | |||||||||
|
Weighted
average exercise price of
|
||||||||||||
|
stock
options
|
$ | 5.30 | $ | 5.30 | $ | 5.78 | ||||||
|
Average
market price of common stock
|
$ | 4.48 | $ | 4.53 | $ | 5.27 | ||||||
40
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
12 – Commitments and Contingencies
The
Company leases and rents various office and warehouse properties in Oklahoma,
California, Georgia, Indiana and Pennsylvania. The Oklahoma
leases, which expired at various times in fiscal year 2008, consisted of three
separate warehouses, totaling approximately 80,000 square feet, from two
companies owned by David E. Chymiak and Kenneth A. Chymiak. The
Company leases other warehouse and office facilities in California, Georgia,
Indiana and Pennsylvania. The terms on these operating leases vary
but all mature in 3 years or less and contain renewal options.
Rental
payments associated with leased properties in fiscal years 2008, 2007 and 2006
totaled approximately $0.5 million, $0.7 million and $0.7 million,
respectively. The Company’s minimum annual future obligations as of
September 30, 2008 under all existing operating leases are as
follows:
|
2009
|
$
|
267,437 | ||
|
2010
|
246,910 | |||
|
2011
|
38,666 | |||
|
Total
|
$ | 553,013 |
Note
13 – Subsequent Events
In 2000,
our Board of Directors authorized the repurchase of up to $l.0 million of
outstanding shares of our common stock from time to time in the open market at
prevailing market prices or in privately negotiated transactions. The
repurchased shares of common stock will be held in treasury and used for general
corporate purposes including possible use in our employee stock plans or for
acquisitions. During the period of October 1, 2008 – December 11,
2008, we acquired in the open market approximately 111,000 shares of our
Company’s common stock at an average price of $1.64. Repurchases are made in
compliance with the limitations of securities laws, which limit the timing,
volume, price and manner of stock repurchases. When combined with the
treasury shares purchased in prior years, the Company can purchase up to an
additional $0.8 million of shares under this program.
41
ADDVANTAGE
TECHNOLOGIES GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
14 – Quarterly Results of Operations (Unaudited)
The
following is a summary of the quarterly results of operations for the years
ended September 30, 2008, 2007 and 2006:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Fiscal
year ended 2008
|
||||||||||||||||
|
Net
sales and service income
|
$ | 14,739,368 | $ | 13,851,819 | $ | 13,213,802 | $ | 14,643,572 | ||||||||
|
Gross
profit
|
$ | 4,750,828 | $ | 4,568,063 | $ | 3,363,548 | $ | 3,926,455 | ||||||||
|
Net
income
|
$ | 1,593,111 | $ | 1,411,109 | $ | 605,504 | $ | 1,058,070 | ||||||||
|
Basic
earnings per common share
|
$ | 0.14 | $ | 0.14 | $ | 0.06 | $ | 0.10 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.14 | $ | 0.14 | $ | 0.06 | $ | 0.10 | ||||||||
|
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
|
$ | 0.14 | $ | 0.15 | $ | 0.20 | $ | 0.16 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.14 | $ | 0.15 | $ | 0.19 | $ | 0.16 | ||||||||
|
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
|
$ | 0.15 | $ | 0.09 | $ | 0.11 | $ | 0.05 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.15 | $ | 0.09 | $ | 0.11 | $ | 0.05 | ||||||||
42
None.
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, 2008. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
Management’s
Annual Report on Internal Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934) and for the assessment
of the effectiveness of internal control over financial reporting. Our
internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of financial statements in accordance with accounting principles
generally accepted in the United States. Our internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and board of directors;
and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated
Framework. Based on our assessment, we believe that, as of September
30, 2008, our internal control over financial reporting is effective based on
those criteria.
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
Changes
in Internal Control over Financial Reporting.
During
the fourth quarter ended September 30, 2008, 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.
43
None.
44
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, Code of
Business Conduct and Ethics and Audit Committee 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 2009 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days after
the end of our fiscal year ended September 30, 2008 (the “Proxy
Statement”).
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 the Proxy
Statement.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this item regarding security ownership and equity
compensation plans 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 the 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 the 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 the Proxy
Statement.
45
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 2008, 2007 and 2006.
Consolidated
Balance Sheets as of September 30, 2008 and 2007.
Consolidated
Statements of Income for the years ended September 30, 2008, 2007 and
2006.
Consolidated
Statements of Changes in Shareholders’ Equity for the years endedSeptember
30, 2008, 2007 and 2006.
Consolidated
Statements of Cash Flows for the years ended September 30, 2008, 2007 and
2006.
Notes to
Consolidated Financial Statements.
|
|
2.
|
The
following financial statement Schedule II – Valuation and Qualifying
Accounts for the years ended September 30, 2008, 2007 and 2006 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, 2008
|
||||||||||||||||||||
|
Allowance
for Doubtful Accounts
|
$ | 261,000 | 38,238 | (46,238 | ) | - | $ | 253,000 | ||||||||||||
|
Allowance
for Excess and Obsolete Inventory
|
697,000 | 1,670,425 | (409,425 | ) | - | 1,958,000 | ||||||||||||||
|
Valuation
Allowance of Deferred Tax Asset
|
- | - | - | - | - | |||||||||||||||
|
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
|
- | - | - | - | - | |||||||||||||||
46
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
3.1 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission by the Company on December 31,
2007.
|
|
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 with the Securities and Exchange Commission
on December 22, 2004.
|
|
10.2
|
First
Amendment to the Revolving Credit and Term Loan Agreement dated September
30, 2005, incorporated by reference to Exhibit 10.6 to the Company’s Form
10-K filed with the Securities and Exchange Commission on December 28,
2005.
|
|
10.3
|
Third
Amendment to the 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 with the Securities and Exchange Commission on December 27,
2006.
|
|
10.4
|
Fourth
Amendment to the Revolving Credit and Term Loan Agreement dated November
27, 2007, incorporated by reference to Exhibit 10.3 to the Company’s Form
10-K filed with the Securities and Exchange Commission on December 31,
2007.
|
|
10.5
|
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 with
the Securities and Exchange Commission on April 28,
1998.
|
|
10.6
|
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 with the Securities and Exchange
Commission on November 20, 2003.
|
|
10.7
|
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 22,
2006.
|
|
10.8
|
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.
|
47
|
10.9
|
Employment
Contract between the Company and Daniel E. O’Keefe, incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission by the Company on March 10,
2006.
|
|
10.10
|
Employment
Contract between the Company and Scott A. Francis, 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 September 18,
2008.
|
|
14.1
|
Amended
Code of Business Conduct and Ethics for directors, officers and employees
of the Company, incorporated by reference to Exhibit 14.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by
the Company on March 10, 2006.
|
21.1 Listing of the Company’s
subsidiaries.
|
23.1
|
Consent
of Hogan & Slovacek.
|
|
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.
|
48
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
19,
2008 By: /s/ Kenneth A.
Chymiak
Kenneth
A. Chymiak, President and Chief Executive Officer
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
19, 2008 /s/ David E.
Chymiak
|
David E.
Chymiak, Chairman of the Board of Directors
|
Date: December
19, 2008 /s/ Kenneth A.
Chymiak
|
Kenneth
A. Chymiak, President and Chief Executive Officer (Principal Executive Officer)
and Director
|
Date: December
19, 2008 /s/ Daniel E. O’Keefe
|
Daniel E.
O'Keefe, Chief Operating Officer and Director
|
Date: December
19, 2008 /s/ Scott A.
Francis
|
Scott A.
Francis, Chief Financial Officer (Principal Financial Officer)
|
Date:
December 19, 2008 /s/ James C.
McGill
|
James C.
McGill, Director
|
Date: December
19, 2008 /s/ Paul F.
Largess
|
Paul F.
Largess, Director
|
Date: December
19, 2008 /s/ Stephen J.
Tyde
|
Stephen
J. Tyde, Director
|
Date: December
19, 2008 /s/ Thomas J.
Franz
|
Thomas J.
Franz, Director
49
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 3.1 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on December 31,
2007.
|
|
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 with the Securities and Exchange Commission
on December 22, 2004.
|
|
10.2
|
First
Amendment to the Revolving Credit and Term Loan Agreement dated September
30, 2005, incorporated by reference to Exhibit 10.6 to the Company’s Form
10-K filed with the Securities and Exchange Commission on December 28,
2005.
|
|
10.3
|
Third
Amendment to the 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 with the Securities and Exchange Commission on December 27,
2006.
|
|
10.4
|
Fourth
Amendment to the Revolving Credit and Term Loan Agreement dated November
27, 2007, incorporated by reference to Exhibit 10.3 to the Company’s Form
10-K filed with the Securities and Exchange Commission on December 31,
2007.
|
|
10.5
|
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 with
the Securities and Exchange Commission on April 28,
1998.
|
|
10.6
|
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 with the Securities and Exchange
Commission on November 20, 2003.
|
|
10.7
|
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 22,
2006.
|
|
10.8
|
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.
|
50
|
10.9
|
Employment
Contract between the Company and Daniel E. O’Keefe, incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission by the Company on March 10,
2006.
|
|
10.10
|
Employment
Contract between the Company and Scott A. Francis, 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 September 18,
2008.
|
|
14.1
|
Amended
Code of Business Conduct and Ethics for directors, officers and employees
of the Company, incorporated by reference to Exhibit 14.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by
the Company on March 10, 2006.
|
|
21.1
|
Listing
of the Company's subsidiaries.
|
|
23.1
|
Consent
of Hogan & Slovacek.
|
|
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.
|
51