UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004, OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM________________ TO ______________
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1351610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 E. Iola
Broken Arrow, Oklahoma 74012
(Address of principal executive office) (Zip Code)
(918) 251-9121
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Shares outstanding of the issuer's $.01 par value common stock as of July 23,
2004 were 10,081,789.
Part I - Financial Information
Page
Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 2004 (Unaudited) and September 30, 2003 3
Consolidated Condensed Statements of Income (Unaudited)
Three Months and Nine Months Ended June 30, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2004 and 2003 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 14
Item 4.
Controls and Procedures 14
Part II - Other Information
Item 6.
Exhibits and Reports on Form 8-K 15
Signatures 16
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, September 30,
2004 2003
(Unaudited) (Audited)
----------- ------------
Assets
Current assets:
Cash $ 1,014,681 $ 496,283
Accounts receivable, net of allowance
of approximately $79,000 6,047,331 3,783,680
Inventories, net of allowance for obsolete
inventory of $1,103,000 and $447,000,
respectively 21,300,811 22,131,096
Deferred income taxes 628,000 367,000
Total current assets 28,990,823 26,778,059
Property and equipment, at cost:
Machinery and equipment 2,131,745 2,061,598
Land and buildings 1,302,527 1,326,939
Leasehold improvements 521,972 521,972
Less accumulated depreciation and amortization (1,485,511) (1,284,347)
------------ ------------
Net property and equipment 2,470,733 2,626,162
Other assets:
Deferred income taxes 1,127,000 1,154,000
Goodwill 1,150,060 1,150,060
Other assets 25,276 39,628
------------ ------------
Total other assets 2,302,336 2,343,688
------------ ------------
Total assets $33,763,892 $31,747,909
============ ============
See notes to unaudited consolidated condensed financial statements.
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, September 30,
2004 2003
(Unaudited) (Audited)
----------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,100,496 $ 2,631,221
Accrued expenses 961,373 829,459
Accrued income taxes 153,324 95,114
Bank revolving line of credit 3,500,999 5,185,902
Notes payable - current portion 36,524 118,393
Dividends payable 310,000 310,000
Stockholder notes 575,000 838,473
Total current liabilities 8,637,716 10,008,562
Notes payable 356,786 384,411
Stockholder notes - 385,171
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$1.00 par value, at stated value:
Series A, 5% cumulative convertible;
200,000 shares issued and outstanding with
a stated value of $40 per share 8,000,000 8,000,000
Series B, 7% cumulative; 300,000 shares
issued and outstanding with a stated value
of $40 per share 12,000,000 12,000,000
Common stock, $.01 par value; 30,000,000
shares authorized; 10,079,589 and
10,030,414 shares issued, respectively 100,796 100,304
Paid-in capital (7,292,092) (7,389,197)
Retained earnings 12,014,850 8,312,822
----------- -----------
24,823,554 21,023,929
Less: Treasury stock, 21,100 shares at cost (54,164) (54,164)
----------- -----------
Total stockholders' equity 24,769,390 20,969,765
----------- -----------
Total liabilities and stockholders' equity $33,763,892 $31,747,909
=========== ===========
See notes to unaudited consolidated condensed financial statements.
4
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2004 2003 2004 2003
----------------------- -------------------------
Net sales income $11,531,571 $7,146,943 $32,202,923 $21,117,188
Net service income 1,150,878 1,102,789 3,426,067 3,400,248
----------------------- -------------------------
12,682,449 8,249,732 35,628,990 24,517,436
Cost of sales 7,851,550 4,617,887 21,922,581 13,564,660
----------------------- -------------------------
Gross profit 4,830,899 3,631,845 13,706,409 10,952,776
Operating, selling, general and
administrative expenses 2,153,674 1,894,427 6,243,931 5,765,939
Depreciation and amortization 70,589 64,786 201,164 186,469
----------------------- -------------------------
Income from operations 2,606,636 1,672,632 7,261,314 5,000,368
Interest expense 37,404 49,520 134,286 152,906
------------------------ -------------------------
Income before income taxes 2,569,232 1,623,112 7,127,028 4,847,462
Provision for income taxes 854,000 314,520 2,495,000 1,475,286
----------------------- -------------------------
Net income 1,715,232 1,308,592 4,632,028 3,372,176
Preferred dividends 310,000 310,000 930,000 930,000
----------------------- -------------------------
Net income attributable
to common stockholders $ 1,405,232 $ 998,592 $ 3,702,028 $ 2,442,176
======================== =========================
Earnings per share:
Basic $ 0.14 $ 0.10 $ 0.37 $ 0.24
Diluted $ 0.12 $ 0.10 $ 0.33 $ 0.24
Shares used in per share calculation:
Basic 10,057,172 10,010,414 10,034,700 10,008,336
Diluted 12,130,854 12,010,414 12,114,433 12,008,336
See notes to unaudited consolidated condensed financial statements.
5
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
June 30,
2004 2003
---- ----
Cash Flows from Operating Activities
Net income $ 4,632,028 $ 3,372,176
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 201,164 186,469
Loss on disposal of property and equipment 24,412 -
Deferred income tax benefit (234,000) (215,326)
Change in:
Accounts receivable (2,263,651) (354,393)
Inventories 830,285 (2,453,716)
Other assets 14,352 (2,818)
Accounts payable 469,275 305,304
Accrued liabilities 190,124 288,026
------------ ------------
Net cash provided by operating activities 3,863,989 1,125,722
------------ ------------
Cash Flows from Investing Activities
Additions to property and equipment (70,147) (641,586)
------------ ------------
Net cash used in investing activities (70,147) (641,586)
------------ ------------
Cash Flows from Financing Activities
Net change under bank revolving line of credit (1,684,903) (22,251)
Payments on stockholder notes (648,644) (188,503)
Proceeds on notes payable - 440,000
Payments on notes payable (109,494) (136,595)
Proceeds from stock options exercised 97,597 -
Payments of preferred dividends (930,000) (930,000)
------------ ------------
Net cash used in financing activities (3,275,444) (837,349)
------------ ------------
Net increase (decrease) in cash 518,398 (353,213)
Cash, beginning of period 496,283 775,740
------------ ------------
Cash, end of period $ 1,014,681 $ 422,527
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 142,328 $ 152,413
Cash paid for income taxes $ 2,682,170 $ 1,239,612
See notes to unaudited consolidated condensed financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, the information furnished reflects all adjustments,
consisting only of normal recurring items which are, in the opinion of
management, necessary in order to make the financial statements not misleading.
The consolidated financial statements as of September 30, 2003 have been
audited by independent certified public accountants. It is suggested that
these consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2003.
Note 2 - Description of Business
ADDvantage Technologies Group, Inc., through its subsidiaries TULSAT
Corporation, ADDvantage Technologies Group of Nebraska, (dba "Lee Enterprise"),
NCS Industries, Inc. ("NCS"), ADDvantage Technologies Group of Missouri, (dba
"Comtech Services"), ADDvantage Technologies Group of Texas, (dba "Tulsat -
Texas"), and Tulsat - Atlanta LLC ("Tulsat - Atlanta") (collectively, the
"Company"), is in a niche market in the broadband sector as a "Value Added
Reseller" ("VAR") and Master Distributor for Scientific-Atlanta ("SFA") legacy
products and distributor for most of their other products. NCS is a VAR for
Motorola ("MOT") broadband and transmission products. The Company is also a
distributor for such companies as Blonder-Tongue, Videotek, Quintech
Electronics and Corning Gilbert, among others. In addition to selling new,
surplus, and refurbished cable television equipment throughout North America,
we operate repair centers specializing in many different Original Equipment
Manufacturer ("OEM") products. The Company operates in one business segment.
Note 3 - Earnings per Share
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic net earnings per share is computed by dividing net earnings available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net earnings per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be reacquired under the treasury
stock method from the exercise of stock options.
7
Three months ended Nine months ended
June 30, June 30,
2004 2003 2004 2003
----------------------- -------------------------
Basic EPS Computation:
Net income attributable to
common stockholders $ 1,405,232 $ 998,592 $ 3,702,028 $ 2,442,176
Weighted average outstanding
common shares 10,057,172 10,010,414 10,034,700 10,008,336
Earnings per Share - Basic $ 0.14 $ 0.10 $ 0.37 $ 0.24
=========== ========== =========== ===========
Diluted EPS Computation:
Net income attributable to
common stockholders $ 1,405,232 $ 998,592 $ 3,702,028 $ 2,442,176
Add: Dividends on Series A
convertible preferred stock 100,000 100,000 300,000 300,000
----------- ---------- ----------- -----------
Net income attributable to common
stockholders - Diluted 1,505,232 1,098,592 4,002,028 2,742,176
Weighted average outstanding
common shares 10,057,172 10,010,414 10,034,700 10,008,336
Potentially dilutive securities
- -------------------------------
Assumed conversion of 200,000
Shares of Series A convertible
preferred stock 2,000,000 2,000,000 2,000,000 2,000,000
Effect of dilutive stock options 73,682 - 79,733 -
----------- --------- ----------- -----------
Weighted average shares outstanding
- assuming dilution 12,130,854 12,010,414 12,114,433 12,008,336
Earnings per Share - Diluted $ 0.12 $ 0.10 $ 0.33 $ 0.24
=========== ========== =========== ===========
Note 4 - Line of Credit, Stockholder Loans, and Notes Payable
At June 30, 2004, a $3,500,999 balance is outstanding under a $9.0 million line
of credit due June 30, 2005, with interest payable monthly at Chase Manhattan
Prime less 11/4% (3.0% at June 30, 2004). Borrowings under the line of credit
are limited to the lesser of $7.0 million or the sum of 80% of qualified
accounts receivable and 40% of qualified inventory for working capital purposes
and $2.0 million for future acquisitions meeting Bank of Oklahoma credit
guidelines. The line of credit agreement provides that the Company's net worth
must be greater than $14.0 million and net income before the payment of
preferred dividends greater than $2.0 million. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures, and
general intangibles.
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
of credit. The resulting overdraft balance is included in the bank revolving
line of credit.
8
Stockholder loans of $575,000 bear interest at rates that correspond with the
line of credit (3.0% at June 30, 2004). The notes are due on demand and are
classified as current. In addition, stockholder notes, which were issued for
purchases of real estate, were repaid in April 2004. Notes payable to
unrelated parties totaled $393,310, due in monthly payments through 2013 with
interest at 5.5% through 2008, converting thereafter to prime minus 1/4%.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Value Added Reseller ("VAR") for selected Scientific-Atlanta and
Motorola broadband new products. We also specialize in the sale of
refurbished, previously-owned cable television ("CATV") equipment to CATV
operators and other broadband communication companies. Within the last two
years, we have become distributors for several different manufacturers of
equipment and other related products. It is through our development of these
relationships that we have focused our initiative to market our products and
services to the larger cable multiple system operators ("MSOs"). As a result,
our overall sales are up significantly for the first nine months of 2004. We
continue to believe that as cable companies look at expanding their services in
key markets and to recover from or address the effects of a slow economy and
depressed capital markets, there will be an emphasis on minimizing their costs,
thus creating a higher demand for our repair services and surplus-new
equipment.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30, 2004
and June 30, 2003
Net Sales. Net sales increased $4.4 million, or 53.7%, to $12.7 million in the
third quarter of fiscal 2004, from $8.2 million for the same period in fiscal
2003, primarily due to the positive results of our marketing initiatives and
distributor relationships discussed in the previous paragraph. New equipment
sales were up 75.2% to $9.0 million for the current period, compared with $5.1
million for the same period of fiscal 2003. Sales of remanufactured equipment
increased by 25.7% to $2.5 million for the current period, compared with $2.0
million in the same period last year. Repair service revenues were up 4.4% to
$1.2 million for the current quarter, compared with $1.1 million for the same
period last year.
Cost of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, and (iii) the related transportation costs.
Costs of sales increased to $7.9 million for the third quarter of fiscal 2004
from $4.6 million for the same period of fiscal 2003. The increase was
primarily due to the increase in sales for the period. Costs of sales for new
and refurbished equipment increased to 65.5% of the respective net sales for
2004 from 61.1% of net sales for 2003. This increase was primarily due to the
increase in the allowance for obsolete inventory during 2004. Costs of sales
for repair services increased to 25.6% of the respective net sales for 2004
from 22.7% of net sales for 2003. This increase was due primarily to the
high-end hybrid and fiber optic equipment being repaired, which involves a
higher relative cost of material.
Gross Profit. Gross profit climbed $1.2 million or 33.0% to $4.8 million for
the third quarter of fiscal 2004 from $3.6 million for the same period in
fiscal 2003. The gross margin percentage was 38.1% for the current quarter,
compared to 44.0% for the same quarter last year. The percentage decrease was
primarily due to an increase in sales of new and surplus equipment which are
accompanied by margins lower than those of re-manufactured equipment or
repairs.
10
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $259,000 for the third quarter of fiscal 2004 to $2.2 million from
$1.9 million for the same period in 2003, an increase of 13.7%. The increase
in operating, selling, general and administrative expenses was primarily due to
increases in salaries and wages and professional services.
Income from Operations. Income from operations rose $934,000, or 55.8%, to
$2.6 million for the third quarter of fiscal 2004 from $1.7 million for the
same period last year. This increase was primarily due to increases in sales
to the larger MSOs, partially offset by the increase in the allowance for
obsolete inventory in 2004.
Interest Expense. Interest expense for the three months ended June 30, 2004
was $37,000 compared to $50,000 for the same period last year. The decrease
was primarily attributable to a lower average interest rate on our line of
credit and the repayment of stockholder notes early in the period. The
weighted average interest rate paid on the line of credit decreased to 2.75%
for 2004 from 3.0% for 2003.
Income Taxes. The provision for income taxes for the three months ended June
30, 2004 increased to $854,000 from $315,000 for the same period in fiscal
2003. This increase was primarily due to higher pre-tax earnings in fiscal
2004 and a reduction in fiscal 2003 of the Company's allowance against deferred
tax assets due to favorable tax development during that period.
Comparison of Results of Operations for the Nine Months Ended June 30, 2004 and
June 30, 2003
Net Sales. Net sales increased $11.1 million, or 45.3%, to $35.6 million for
the nine months ended June 30, 2004, from $24.5 million for the same period in
fiscal 2003, primarily due to the positive results of our marketing initiatives
and distributor relationships discussed above. New equipment sales were up
76.2% to $25.1 million for the current period, compared with $14.2 million for
the same period of fiscal 2003. Sales of remanufactured equipment increased by
3.4% to $7.1 million for the current period, compared with $6.9 million in the
same period last year. Repair service revenues remained relatively constant at
$3.4 million for each of the nine months ended June 30, 2004 and 2003.
Cost of Sales. Costs of sales includes (i) the costs of new and refurbished
equipment, on a weighted average cost basis, sold during the period, (ii) the
equipment costs used in repairs, and (iii) the related transportation costs.
Costs of sales increased to $21.9 million for the nine months ended June 30,
2004 from $13.6 million for the same period of fiscal 2003. The increase was
primarily due to the increase in sales for the period. Costs of sales for new
and refurbished equipment increased to 65.6% of the respective net sales for
2004 from 61.0% of net sales for 2003. This increase was primarily due to the
increase in the allowance for obsolete inventory during 2004. Costs of sales
for repair services increased to 23.2% of the respective net sales for 2004
from 20.1% of net sales for 2003. This increase was due primarily to the
high-end hybrid and fiber optic equipment being repaired, which involves a
higher relative cost of material.
11
Gross Profit. Gross profit climbed $2.8 million or 25.1% to $13.7 million for
the nine months ended June 30, 2004 from $11.0 million for the same period in
fiscal 2003. The gross margin percentage was 38.5% for the current period,
compared to 44.7% for the same period last year. The percentage decrease was
primarily due to an increase in sales of new and surplus equipment which are
accompanied by margins lower than that of re-manufactured equipment or repairs.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses include all personnel costs, including
fringe benefits, insurance and taxes, occupancy, transportation (other than
freight-in), communication and professional services, among other less
significant accounts. Operating, selling, general and administrative expenses
increased by $478,000 for the nine months ended June 30, 2004, to $6.2 million
from $5.8 million for the same period in 2003, an increase of 8.3%. The
increase in operating, selling, general and administrative expenses was
primarily due to increases in salaries and wages and the incurrence of fees for
the Company's commencement of trading on the American Stock Exchange.
Income from Operations. Income from operations rose $2.3 million, or 45.2%,
to $7.3 million for the nine months ended June 30, 2004 from $5.0 million for
the same period last year. This increase was primarily due to increases in
sales to the larger MSOs, partially offset by the increase in the allowance for
obsolete inventory in 2004.
Interest Expense. Interest expense for the nine months ended June 30, 2004 was
$134,000 compared to $153,000 for the same period last year. The decrease was
primarily attributable to a lower average interest rate on our line of credit.
The weighted average interest rate paid on the line of credit decreased to
2.75% for 2004 from 3.1% for 2003.
Income Taxes. The provision for income taxes for fiscal 2004 increased to $2.5
million from $1.5 million in fiscal 2003. This increase was primarily due to
higher pre-tax earnings in fiscal 2004 and a reduction in fiscal 2003 of the
Company's allowance against deferred tax assets due to favorable tax
developments during that period.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-KSB for fiscal
year 2003 includes a summary of the significant accounting policies or methods
used in the preparation of our Consolidated Financial Statements. Some of those
significant accounting policies or methods require us to make estimates and
assumptions that affect the amounts reported by us. We believe the following
items require the most significant judgments and often involve complex
estimates.
General
-------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates and judgments on historical
experience, current market conditions, and various other factors we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to the carrying value of our inventory and, to
a lesser extent, the adequacy of our allowance for doubtful accounts.
12
Inventory Valuation
-------------------
Inventory consists of new and used electronic components for the cable
television industry. Inventory is stated at the lower of cost or market.
Market is defined principally as net realizable value. Cost is determined
using the weighted average method.
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products of which manufacturers have
discontinued production, or are seeking shipment on a same-day basis. Our
position in the industry requires us to carry large inventory quantities
relative to quarterly sales, but also allows us to realize high overall gross
profit margins on our sales. Carrying these large inventories represents our
largest risk. For individual inventory items, we may carry inventory
quantities that are excessive relative to market potential, or we may not be
able to recover our acquisition costs for sales we are able to make in a
reasonable period. Over the past two years, our investment in inventory has
shifted to become predominantly new products purchased from manufacturers and
"surplus-new" products, which are unused products purchased from other
distributors or MSOs.
In order to address the risks associated with our investment in
inventory, we regularly review inventory quantities on hand and reduce the
carrying value by recording a provision for excess and obsolete inventory based
primarily on inventory aging and forecasts of product demand and pricing. The
broadband industry is characterized by changing customer demands and changes in
technology that could result in significant increases or decreases of inventory
pricing or increases in excess or obsolete quantities on hand. Our estimates
of future product demand may prove to be inaccurate, in which case, the
provision required for excess and obsolete inventory may have been understated
or overstated. Although every effort is made to ensure the accuracy of
internal forecasting, any significant changes in demand or prices could have a
significant impact on the carrying value of our inventory and reported
operating results. Demand for some of the items in our inventory has been
impacted by recent economic conditions present in the cable industry. We
recorded an allowance of 2%, or $447,000, of the inventory balance at September
30, 2003 as a reserve for obsolete equipment. For the nine months ended June
30, 2004, we increased this allowance by 3%, or $656,000, as a reserve for
obsolete equipment purchased during the period. No allowance was recorded for
the nine months ended June 30, 2003.
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 collectibility of
receivables and our operating results. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. At June 30, 2004,
accounts receivable, net of allowance for doubtful accounts of $79,000,
amounted to $6.0 million.
13
Liquidity and Capital Resources
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $9.0 million at a borrowing rate of 11/4% below
Chase Manhattan Prime (3.0% at June 30, 2004). This line of credit will
provide the lesser of $7.0 million or the sum of 80% of qualified accounts
receivable and 40% of qualified inventory in a revolving line of credit for
working capital purposes and $2.0 million for future acquisitions meeting Bank
of Oklahoma credit guidelines. The line of credit is collateralized by
inventory, accounts receivable, equipment and fixtures, and general intangibles
and had an outstanding balance at June 30, 2004 of $3.5 million, due June 30,
2005.
We finance our operations primarily through internally generated funds and
a bank line of credit. Monthly payments of principal for loans used to
purchase buildings total $37,000 in the next 12 months. We expect to fund
these payments through cash flows from operations.
We also have two stockholder loans totaling $575,000, due on demand,
bearing interest at the same rate as our bank line of credit. These notes are
being repaid at the rate of $25,000 per month. It is not expected that these
notes will be called within the next year.
Forward-Looking Statements
Certain statements included in this report which are not historical facts
are forward-looking statements. These forward-looking statements are based on
current expectations, estimates, assumptions and beliefs of management; and
words such as "expects," "anticipates," "intends," "plans," "believes,"
"projects," "estimates" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including, but not limited to, the future prospects for our
business, our ability to generate or to raise sufficient capital to allow it to
make additional business acquisitions, changes or developments in the cable
television business that could adversely affect our business or operations, the
continued availability to us of our key management personnel, general economic
conditions, the availability of new and used equipment and other inventory and
our ability to fund the costs thereof, and other factors which may affect our
ability to comply with future obligations. Accordingly, actual results may
differ materially from those expressed in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its revolving line of credit and stockholder notes. The
interest rates under the line of credit and the stockholder notes fluctuate
with the prime rate. At June 30, 2004, the outstanding balances subject to
variable interest rate fluctuations totaled $4.1 million. Future changes in
interest rates could cause our borrowing costs to increase or decrease.
The Company maintains no cash equivalents and does not enter into
derivative financial instruments. All sales and purchases are denominated in
U.S. dollars.
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Item 4. Controls and Procedures
Based on his evaluation, our Chief Executive Officer and Principal
Financial Officer has concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this report on Form 10-Q are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act are recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
During the period covered by this report on Form 10-Q, there have been no
changes in our internal control over financial reporting that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
PART II-OTHER INFORMATION
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. Description
31.1 Certification of Periodic Report by Chief Executive Officer
and Chief Financial Officer under Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K for the quarter ended June 30, 2004:
The Company furnished several reports on Form 8-K covering
matters disclosed under Items 9 and 12 but no reports on Form 8-K
were filed during the period.
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SIGNATURES
Pursuant to the requirements 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.
(Registrant)
By: /s/ Kenneth A. Chymiak
-------------------------------------
Date: August 3, 2004 Kenneth A. Chymiak,
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
By: /s/ Dee Cooper
-------------------------------------
Date: August 3, 2004 Dee Cooper,
Controller
(Chief Accounting Officer)
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