U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X|ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003
|_|TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10799
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Name of small business issuer in its charter)
Oklahoma 73-1351610
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 East Iola
Broken Arrow, Oklahoma 74012
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(Address of principal executive offices) Zip code)
Issuer's telephone number: (918) 251-9121
Securities registered under Section 12(b) of the Act:
Common Stock, $.01 par value
Securities registered under Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year are $33,327,745.
The aggregate market value of the shares of common stock, par value $.01 per
share, held by non-affiliates of the issuer was $6,718,001 as of December 15,
2003.
As of the latest practicable date, the number of the registrant's common stock,
$.01 par value per share, outstanding was 10,009,314 as of December 15, 2003.
The definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with the Registrant's 2004 annual meeting of shareholders is
incorporated by reference in Part III, Items 9, 10, 11, 12 and 14 of this Form
10-KSB. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant's most recent
fiscal year.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE): Yes |_| No |X|
Forward Looking-Statements
Certain matters discussed in this report constitute forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995,
including statements which relate to, among other things, expectations of the
business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding our
goals and objectives and other similar matters. The words "estimates",
"projects," "intends," "expects," "anticipates," "believes," "plans" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this report
and the documents incorporated into it by reference. These and other statements
which are not historical facts are hereby identified as "forward-looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. These statements are subject to a number of risks,
uncertainties and developments beyond the control or foresight of the Company,
including changes in the trends of the cable television industry, technological
developments, changes in the economic environment generally, the growth or
formation of competitors, changes in governmental regulation or taxation,
changes in our personnel and other such factors. Our actual results,
performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in the forward-looking
statements. We do not undertake any obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date of this report or to reflect the occurrence of unanticipated events.
Readers should carefully review the risk factors described in other documents we
file from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Developments in the Business
On September 30, 1999, the former shareholders of TULSAT Corporation
(formerly named DRK Enterprises, Inc.) assumed control of ADDvantage
Technologies Group, Inc. ("ADDvantage," formerly named ADDvantage Media Group,
Inc.) pursuant to the Securities Exchange Agreement ("Agreement") entered into
on September 16, 1999. Pursuant to the Agreement, the TULSAT shareholders
transferred all the issued and outstanding common stock of TULSAT, along with
$10,000,000 of TULSAT promissory notes, to ADDvantage in exchange for 8,000,000
shares of ADDvantage $.01 par value common stock, 200,000 shares of newly issued
Series A 5% Cumulative Convertible Preferred Stock, par value $1.00 per share,
with a stated value of $40.00 per share (convertible into ADDvantage common
stock at a price of $4.00 per share), and 300,000 shares of newly issued Series
B 7% Cumulative Preferred Stock, par value $1.00 per share, with a stated value
of $40.00 per share.
As a result of this transaction, TULSAT became a wholly owned
subsidiary of ADDvantage and the former TULSAT owners acquired approximately 82%
of the issued and outstanding common stock, and 100% of the issued and
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outstanding preferred stock of ADDvantage. TULSAT's management assumed
management and control of ADDvantage.
As a result of the transaction, all of the executive officers and
directors of the Company other than Gary W. Young, Executive Vice President and
a director, resigned. David E. Chymiak became Chairman of the Board and Kenneth
A. Chymiak became President and Chief Executive Officer of the Company. The new
Board of Directors included Stephen J. Tyde and Freddie H. Gibson, in addition
to Messrs. David Chymiak, Kenneth Chymiak and Gary Young. Randy L. Weideman was
elected to the Board of Directors in 2000. He resigned from the Board of
Directors effective September 30, 2003.
On November 22, 1999, our wholly owned subsidiary, Lee CATV
Corporation, a Nebraska corporation ("Lee"), merged with Diamond W Investments,
Inc., a Nebraska corporation ("Diamond"). Lee was the surviving corporation and
is carrying on the business and operations previously conducted by Diamond.
Diamond was established in 1986 as a full service repair and sales center,
selling new and re-manufactured cable equipment, designing, pre-wiring,
installing and repairing along with FCC Proof of Performance on all types of
headend equipment. Diamond built its reputation on high-quality with prompt turn
around in repairs and technical training for their customers. As a result of the
merger, the shareholders of Diamond received 27,211 shares of our Series C
Convertible Preferred Stock (which have since been converted into 272,110 shares
of our common stock) and a promissory note in the original principal amount of
$271,000, which was paid over two years with interest at the rate of 8.0% per
annum.
On December 30, 1999, our name was changed to ADDvantage Technologies
Group, Inc.
In March 2001, we purchased all of the issued and outstanding common
stock of NCS Industries, Inc., a Pennsylvania corporation ("NCS"). The
consideration for the acquisition of $1,988,000 included: (i) $800,000 in cash,
(ii) a promissory note payable to the seller, Richard S. Grasso in the amount of
$200,000, (iii) the assumption of the seller's obligation of $639,000 under a
promissory note issued to the former shareholders, and (iv) $49,000 remaining in
a payable to the seller. As contemplated by the Purchase and Sale Agreement, the
seller entered into a three-year consulting agreement with NCS for $300,000 and
the seller also entered into a non-competition agreement with the Company and
NCS. We financed the purchase price through borrowings under our line of credit
agreement with Bank of Oklahoma. As a result of this transaction, NCS became a
wholly owned subsidiary of ours.
NCS was established in 1973 as a full service repair and sales center,
selling new and re-manufactured cable equipment and has been a leading
distributor of telecommunication equipment and a solutions provider to cable
operators and other related businesses since the market's infancy. The principal
place of business of NCS is located in Warminster, Pennsylvania.
In May 2001, we purchased from Nick Ferolito and Russell Brown all of
the issued and outstanding stock of Fero-Midwest, Inc. dba Comtech Services, a
Missouri corporation ("Comtech"). The consideration for the acquisition was
$250,000 in cash and assumption of certain liabilities totaling approximately
$449,000. As a result of this transaction, Comtech became a wholly owned
subsidiary of ours.
3
Current Business
We are a supplier of a comprehensive line of electronics and hardware
for the cable television ("CATV") industry (both franchise and non-franchise, or
private cable). Our products are used to acquire, distribute and protect the
broad range of communications signals carried on fiber optic, coaxial cable and
wireless distribution systems. These products are sold to customers providing 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, school, cruise boats and
others.
TULSAT, one of our subsidiaries, is an exclusive Scientific-Atlanta
Master Distributor for certain legacy products and distributes most of their
other products. TULSAT has been designated an authorized third party
Scientific-Atlanta repair center for selected products. Another subsidiary, NCS
Industries, is a leading distributor of Motorola broadband products. Other
subsidiaries distribute Standard, Corning-Gilbert, Blonder-Tongue, RL Drake,
Quintech and Videotek products. We continue to upgrade our products to stay in
the forefront of the communications broadband technology revolution.
We continue to expand our core product lines (headend and
distribution), to maintain the ability to provide electronics equipment needed
to build smaller cable systems and much of the equipment needed in larger
systems for the most efficient operation and highest profitability in high
density areas.
We also continue to purchase surplus equipment from cable operators and
others that result from an upgrade in their systems or an overstock in their
warehouses. We maintain one of the industries' largest inventories of new and
refurbished equipment allowing the competitive advantage of providing products
within a short period of time. Each of our six locations operates service
centers specializing in Motorola, Magnavox, Scientific-Atlanta and Alpha Power
Supplies repairs.
Overview of the industry
Fiscal year 2003 was a good year in the context of a mixed and
sometimes difficult environment. A rebuild cycle in North America is still not
completed as many small and large operators continue to upgrade their
transmission plants. There is a continuous need to add equipment as new
subdivisions and programming presents opportunities to expand their customer
base. Fiscal year 2003 brought many changes to the cable industry. We entered
the year in a slow economy, with the domestic cable industry focused on reducing
capital expenditures. As we enter fiscal year 2004, business conditions remain
mixed, although the cable industry environment appears to have improved during
the past year.
Our operational discipline has allowed us to remain financially strong
with significant increases in revenues and operating income. Our relationships
with Scientific-Atlanta and Motorola contribute to our strong market position.
We have positioned ourselves to compete for more business with their products
and the services we offer. We are focused on the opportunities as technology
changes in the areas of fiber-to-the premises, bandwidth expansion and
international sales.
4
Business of the Company
We continue to add products and services to maintain and expand our
current customer base in North America, South America, Europe and the Far East.
Our focus has been to develop relationships with the larger multiple cable
operators ("MSOs") and other companies that purchase similar products. We
continue to evaluate and consider the acquisition of existing companies in the
industry within specific geographic areas to expand their service and sales
staffs to increase sales.
Time and economics eventually could improve the business models of more
international cable operators. The continuing advances in technology, products
and services will help to create a better financial model for potential
customers outside North America. We require prepayment of purchases or Letters
of Credit from U.S. banks prior to shipment of products to most international
customers. Our stringent credit requirements limit our ability to sell in these
markets.
Products and Services
Our sales of new products represent 59% of our revenue and
re-manufactured product sales represent 27% of the revenues. Repair services
contribute the remaining 14% of their revenues. We sell the following products.
Headend products are used by a system operator for signal acquisition,
processing and the 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 locations where
the multi-channel signal is initially received, converted and allocated to
specific channels for distribution. In some cases, where the signal is
transmitted in encrypted form or digitized and compressed, the receiver will
also be required to decode the signal.
Fiber Products are used to transmit the output of cable system headend
to multiple locations using fiber optic cable. Among the products offered are
optical transmitters, receivers, couplers, splitters and compatible accessories.
These products convert RF frequencies to light frequencies and launch them on
optical fiber. At each receiver site, an optical receiver is used to convert the
signals back to RF VHF frequencies for distribution to subscribers.
Distribution Products 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 offered by the Company in this category are optical
transmitters, optical receivers, line extenders, broadband amplifiers,
directional taps and splitters.
Hardware, connector and cable products are also inventoried and sold to
our customers.
5
Sales and Marketing
We market and sell our products to franchise and private cable
operators, system contractors and others directly to our customers by our
internal sales forces at their six subsidiaries: TULSAT, TULSAT-Texas,
TULSAT-Atlanta, NCS Industries, Comtech Services and Lee Enterprises.
Our sales and marketing function is predominantly preformed by its
internal sales force. We also have sales representatives in particular
geographic areas. The majority of our sales activity is generated through
personal relationships developed by its sales personnel and executives,
referrals from manufacturers they represent, advertising in trade journals,
telemarketing and direct mail to their customer base in the United States. We
have developed contacts with the major CATV operators in the United States and
is constantly in touch with these operators regarding plans for upgrading or
expansion and their needs to either purchase or sell equipment. In 2003, we
purchased approximately 42% of our inventory from Scientific-Atlanta. The
concentration of suppliers of our inventory subjects us to risk. We also
purchase a large amount of our inventory from cable operators who have upgraded,
or are in the process of upgrading their systems. The sales and purchasing
functions operate under the same umbrella using a computerized buy/sell board to
coordinate the activity between the two.
We are not dependent on one or a few customers to support its business.
The customer base consists of over 1,200 active accounts. However, approximately
33% of our revenues for both fiscal years 2003 and 2002 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, each of which is a
potential customer.
Competition
The CATV industry is highly competitive and is characterized by
numerous companies competing in various segments of the market. There are a
number of businesses similar to us throughout the United States engaged in
buying and selling re-manufactured CATV equipment. Most competitors are not able
to maintain the large inventory we maintain due to capital requirements. In
terms of sales and inventory, we are the largest in this industry providing both
sales and service of new and re-manufactured CATV equipment.
We also face competition from vendors supplying new products and
various manufacturers in this industry. Due to its large inventory, we generally
have the ability to ship and supply products to their customers from its large
inventory without having to wait for the manufacturers to supply the items.
Personnel
At September 30, 2003, we had 137 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.
6
ITEM 2. DESCRIPTION OF PROPERTY
Each subsidiary owns or leases property for office space and warehouse
facilities. TULSAT leases a total of approximately 133,050 square feet of
facilities in seven buildings from entities which are controlled by David E.
Chymiak and Kenneth A. Chymiak. Each lease has a renewable five-year term,
expiring at different times through 2005. At September 30, 2003, total monthly
rental payments of $38,800 were required. Lee owns property of approximately
8,000 square feet, with an investment of $267,000. NCS owns property of
approximately 12,000 square feet, with an investment of $567,000, financed by
loans of $419,000, due in monthly payments through 2013 at an interest rate of
5.5% through 2008, converting thereafter to prime minus 1/4%. Comtech owns
property of approximately 11,000 square feet, with an investment of $343,000,
financed by loans of $298,000 from Messrs. David Chymiak and Kenneth Chymiak,
which bear interest at 7.5% and are due in monthly payments through 2011.
TULSAT-Texas owns property of approximately 13,000 square feet, with an
investment of $150,000, financed by loans of $125,000 from Messrs. David Chymiak
and Kenneth Chymiak, which bear interest at 7.5% and are due in monthly payments
through 2011. TULSAT-Atlanta rents property of approximately 4,300 square feet.
The term is month-to-month, with monthly rental payments of approximately
$2,400. We believe that our current facilities are adequate to meet our needs.
7
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our shareholders during
the fiscal quarter ended September 30, 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to November 24, 2003, our common stock was traded on the OTC
Bulletin Board under the symbol ADDM. On November 24, 2003, our common stock
began trading on the American Stock Exchange under the symbol AEY.
The following table sets forth, for the periods indicated, the high and
low bid quotations per share for our common stock as quoted on the OTC Bulletin
Board. Quotations represent inter-dealer prices without an adjustment for retail
mark-ups, mark-downs or commissions and may not represent actual transactions:
Year Ended September 30, 2002
-----------------------------
High Low
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First Quarter $1.05 $0.95
Second Quarter $1.15 $0.65
Third Quarter $1.35 $0.65
Fourth Quarter $1.30 $0.66
Year Ended September 30, 2003
-----------------------------
High Low
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First Quarter $0.90 $0.52
Second Quarter $2.10 $0.60
Third Quarter $2.50 $1.40
Fourth Quarter $4.50 $1.60
Substantially all of the holders of common stock maintain ownership of
their shares in "street name" accounts and are not, individually, shareholders
of record. As of December 15, 2003, there were approximately 80 holders of
record of common stock. However, we believe there are in excess of 500
beneficial owners of common stock.
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Dividend Policy
We have never declared or paid a cash dividend on its common stock. It
has been the policy of our Board of Directors to use all available funds to
finance the development and growth of our business. The payment of cash
dividends in the future will be dependent upon our earnings and financial
requirements and other factors deemed relevant by our Board of Directors. Under
the terms of our outstanding preferred stock, no dividends may be paid on our
common stock unless all cumulative cash dividends due on the preferred stock
have been paid or provided for.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 "Risk Factors" and "Business" and
elsewhere in this report.
General
We and our subsidiaries, TULSAT, Lee CATV Corporation, NCS Industries,
Comtech Services, TULSAT - Texas and TULSAT - Atlanta comprise an organization
involved in the re-manufacture, repair and sale of previously owned cable
television ("CATV") equipment and the distribution of new and surplus equipment
to CATV operators. New sales are defined as products that are purchased from the
manufacturer, and includes new surplus, which is defined as inventory items
purchased from other distributors or MSOs with excess equipment that have never
been used. Re-manufactured sales are defined as used inventory that is updated
to meet customer needs and requirements.
Overview
It is difficult to time the placing of orders in our business due to
cyclical conditions that exist in the broadband and cable industry and present
economic conditions that affect it. Last year continued to be a challenging
business environment in the industry due to a significant reduction in capital
spending that began in fiscal 2001. We believe we are in a unique position to
service those MSOs, which are looking to minimize costs. We have a large
inventory of new and used equipment. We also offer repair services, which are
available to our customers, who include some of the largest cable operators of
the industry. The industry conditions have affected all equipment suppliers, and
we have worked to minimize the negative impact of these conditions on our
financial results and operations. We have aggressively sought to stimulate sales
by marketing our products and services to the larger MSOs and we have managed
our receivables to minimize any bad debt write-offs. Our efforts have resulted
in increasing sales in a down economy (31.2% over last year), while minimizing
the overall impact of bad debts written off in total compared to net income
($95,000, representing less than 3% of net income). However, our largest risk is
9
our investment in inventory. After consideration of continued analysis, review,
and evaluation of our inventory, we recorded an allowance for obsolete inventory
of $447,000, representing 2% of inventory at September 30, 2003. At September
30, 2002, we recorded an inventory write-down of $1.4 million due to a reduction
of market prices on certain items of used and new inventory. We expect fiscal
2004 to continue the trend of increasing sales based on preliminary results from
increased sales in the first quarter of 2004 compared to first quarter 2003.
However, there is no assurance that revenues in fiscal 2004 will continue to
exceed those for comparable periods in fiscal 2003 due to the factors discussed
elsewhere in this report.
Set forth below is a description of how the business has performed over
the last two years. The acquisitions of NCS (March 2001), Comtech and the
formation of TULSAT-Texas (May 2001) and TULSAT-Atlanta (June 2002), have
changed business operations significantly and we have seen a positive impact
from these additions as they implement our management philosophies and
strategies.
Results of Operations
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002
(all references to years are to fiscal years)
Net Sales. Net sales climbed $7.9 million or 31.2%, to $33.3 million
for the year from $25.4 million for 2002. Sales of new and refurbished equipment
increased 33.9% from $21.5 million last year to $28.8 million this year as we
have strengthened our role as a Master Distributor for several of
Scientific-Atlanta's legacy products and increased sales of Motorola products.
Our focus on increasing repair revenue has resulted in a 15.8% increase in those
revenues, from $3.9 million last year to $4.5 million this year. The increase in
repair services was due to the continued focus of being a leading repair service
provider and the expansion of our repairs sales to our Atlanta operations which
began in June of 2002.
Costs of Sales. Costs of sales includes the costs of new and
refurbished equipment, on a weighted average cost basis, sold during the period,
the equipment costs used in repairs, and the related transportation costs. Costs
of sales this year were 57.2% of net sales compared to 56.6% last year. Costs of
sales for new and refurbished equipment decreased slightly to 63.3% of net sales
for 2003 from 63.8% of net sales for 2002. This was primarily due to the
write-down of inventory in 2002 of $1.4 million, partially offset by the
allowance for obsolete inventory recorded in 2003 of $447,000. Costs of sales
for repair services increased to 19.9% of net sales for 2003 from 16.9% of net
sales for 2002. This increase was due primarily to the increase in our repairs
on more high-end hybrid and fiber optic equipment, which involve a higher
relative cost of material.
Operating, Selling, General and Administrative Expenses. Operating,
selling, general and administrative expenses includes 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 $629,000, or 8.8% in 2003 over the previous year. Most of this
increase was directly attributable to the commencement of operations of Tulsat -
Atlanta in June 2002, coupled with an expanding sales force and other added
expenses incurred to meet the marketing initiatives described previously.
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Income from Operations. Income from operations increased 74.6%, to $6.2
million for 2003 from $3.5 million for 2002. This increase was primarily due to
the increase in net sales and the inventory write-down in 2002, partially offset
by the charge in 2003 to reduce inventory for obsolete equipment and the
increase in our operating, selling, general and administrative expenses.
Interest Expense. Interest expense for fiscal 2003 was $217,000
compared to $245,000 in fiscal 2002. The decrease was primarily attributable to
a lower average interest rate on our line of credit, partially offset by higher
average balances outstanding on this line during 2003. The weighted average
interest rate paid on the line of credit decreased to 2.98% for 2003 from 3.67%
for 2002.
Income Taxes. The provision for income taxes for fiscal 2003 increased
to $1.5 million from $1.1 million in fiscal 2002. The increase was primarily due
to higher pre-tax earnings, partially offset by a favorable impact from changes
in the deferred tax valuation allowance. For a more complete discussion of
income taxes, please see "Note 4 - Income Taxes" in the notes to the
consolidated financial statements
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 of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We base our estimates and judgments on historical
experience, current market conditions, and various other factors we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to the carrying value of our inventory and, to
a lesser extent, the adequacy of our allowance for doubtful accounts.
Inventory Valuation
Inventory consists of new and used electronic components for the cable
television industry. Inventory is stated at the lower of cost or market. Market
is defined principally as net realizable value. Cost is determined using the
weighted average method.
We market our products primarily to MSOs and other users of cable
television equipment who are seeking products for which manufacturers have
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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 annual 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.
In order to address the risks associated with our investment in
inventory, we regularly review inventory quantities on hand and reduce the
carrying value when the loss of usefulness of an item or other factors, such as
obsolete and excess inventories, indicate that cost will not be recovered when
an item is sold. 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. In comparison, we wrote certain items in
inventory down to their estimated market values at September 30, 2002,
increasing the cost of sales by $1,442,938. Any significant, unanticipated
changes in product demand, technological developments or continued economic
trends affecting the cable industry could have a significant impact on the value
of our inventory and operating results.
Inbound freight charges are included in costs of sales. Purchasing and
receiving costs, inspection costs, warehousing costs, internal transfer costs
and other inventory expenditures are included in operating expenses since the
amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness, as in the case of
the bankruptcy of Adelphia and its affiliates, or weakening in economic trends
could have a significant impact on the collectibility of receivables and our
operating results. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The reserve for bad debts decreased from
$85,212 at September 30, 2002 to $78,359 at September 30, 2003. This decrease is
primarily due to the increasingly optimistic outlook for economic recovery in
the coming year. These reserves resulted from changes in the industry and the
general downturn in the economy causing us to experience an increase in delays
in receiving payments and defaults. At September 30, 2003, accounts receivable,
net of allowance for doubtful accounts, amounted to $3.8 million.
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Liquidity and Capital Resources
We finance our operations primarily through internally generated funds
and a bank line of credit.
During 2003, we generated approximately $1.0 million cash flow from
operations after increasing the net carrying value of inventory by $4.5 million,
and increased our borrowings under the line of credit by $712,000, which we used
to invest in property ($671,000) and meet our preferred stock dividend
obligations of $1.24 million.
We lease various properties primarily from a company owned by our
principal shareholders. Future minimum lease payments under these leases are as
follows:
2004 384,840
2005 105,840
2006 17,640
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$ 508,320
=============
Cash used in financing activities in 2003 was primarily used to pay
dividends on our Series A and Series B Preferred Stock. Dividends on these
preferred stocks total $1,240,000 annually. The outstanding common and preferred
stock is beneficially owned by our principal shareholders as reflected in the
following table.
Stock Ownership
Percent of Percent of
Percent of Series A Series B
Common Preferred Preferred
Stock Stock Stock
Name of Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned (A) Owned (A)
---------------- ----- --------- ---------
David E. Chymiak 41.6% 50.0% 50.0%
Kenneth A. Chymiak 40.0% 50.0% 50.0%
(A) The two series of outstanding preferred stock have an aggregate preference
upon liquidation of $20,000,000.
We have a line of credit with the Bank of Oklahoma under which we are
authorized to borrow up to $9.0 million at a borrowing rate of 1.25% below Chase
Manhattan Prime (2.75% at September 30, 2003.) 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 September 30, 2003 of $5.2 million, due June 30, 2004.
13
Our Board of Directors has authorized the repurchase of up to $l.0
million of its 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. We did not repurchase any shares during the fiscal year.
We believe that cash flow from operations, existing cash balances and
its existing line of credit provide sufficient liquidity and capital resources
to meet our working capital needs.
Impact of Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at
fair value regardless of the probability of the loss. The adoption did not have
a material impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. We believe that the
adoption of this standard will have no material impact on its financial position
and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123, "Accounting for Stock-Based Compensation."
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in
both annual and interim financial statements. The disclosure requirements shall
be effective for financial reports for interim periods beginning after December
15, 2002. We believe that the adoption of this standard will have no material
impact on its financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. Many of such instruments were previously classified as
equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities. The statement is to be
14
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. On November 7, 2003 the FASB deferred the
classification and measurement provisions of SFAS No. 150 as they apply to
certain mandatory redeemable non-controlling interests. This deferral is
expected to remain in effect while these provisions are further evaluated by the
FASB. We believe that the adoption of this statement will not have a significant
impact on our financial position, results of operations or cash flows.
15
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements Page
----------------------------- ----
Independent Auditors' Report 17
Consolidated Balance Sheet, September 30, 2003 19
Consolidated Statements of Income for Years Ended September 30, 2003 and
2002 21
Consolidated Statement of Changes in Stockholders' Equity
22
Consolidated Statements of Cash Flows, Years Ended September 30, 2003 and
2002 23
Notes to Consolidated Financial Statements 24
16
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of ADDvantage Technologies Group, Inc. is responsible
for the accuracy and consistency of all the information contained in the annual
report, including the accompanying consolidated financial statements. These
statements have been prepared to conform with generally accepted accounting
principles appropriate to the our circumstances. The statements include amounts
based on estimates and judgments as required.
ADDvantage Technologies Group, Inc. maintains internal accounting
controls designed to provide reasonable assurance that the financial records are
accurate, that the assets of the Company are safeguarded, and that the financial
statements present fairly the consolidated financial position, results of
operations and cash flows of the Company.
The Audit Committee of the Board of Directors reviews the scope of the
audits and the findings of the independent certified public accountants. The
auditors meet regularly with the Audit Committee to discuss audit and financial
reporting issues, with and without management present.
Tullius Taylor Sartain & Sartain LLP, our independent certified public
accountants, have audited the financial statements prepared by management. Their
opinion on the statements is presented below.
Kenneth A. Chymiak,
President, Chief Executive Officer
and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheet of ADDvantage
Technologies Group, Inc. (the "Company") as of September 30, 2003, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended September 30, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
17
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 2003, and the consolidated results of its operations and its cash
flows for the years ended September 30, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2003, the
Company changed its method of accounting for goodwill as a result of adopting
the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets."
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
December 11, 2003
18
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2003
Assets
Current assets:
Cash $ 496,283
Accounts receivable, net of allowance of $78,359 3,783,680
Inventories 22,131,096
Deferred income taxes 367,000
------------
Total current assets 26,778,059
Property and equipment, at cost:
Machinery and equipment 2,061,598
Land and buildings 1,326,939
Leasehold improvements 521,972
-----------
3,910,509
Less accumulated depreciation and amortization (1,284,347)
-----------
Net property and equipment 2,626,162
Other assets:
Deferred income taxes 1,154,000
Goodwill, net of accumulated amortization of $398,531 1,150,060
Other assets 39,628
-----------
Total other assets 2,343,688
-----------
Total assets $31,747,909
===========
See notes to consolidated financial statements.
19
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2003
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,631,221
Accrued expenses 829,459
Accrued income taxes 95,114
Bank revolving line of credit 5,185,902
Notes payable - current portion 118,393
Dividends payable 310,000
Stockholder notes 838,473
------------
Total current liabilities 10,008,562
Notes payable 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
Series B, 7% cumulative; 300,000 shares issued and
outstanding with a stated value of $40 per share 12,000,000
Common stock, $.01 par value; 30,000,000 shares authorized;
10,030,414 shares issued 100,304
Paid-in capital (7,389,197)
Retained earnings 8,312,822
------------
21,023,929
Less: Treasury stock, 21,100 shares at cost (54,164)
------------
Total stockholders' equity 20,969,765
------------
Total liabilities and stockholders' equity $31,747,909
============
See notes to consolidated financial statements.
20
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
2003 2002
---- ----
Net sales income $ 28,809,947 $ 21,508,380
Net service income 4,517,798 3,900,551
-------------- --------------
33,327,745 25,408,931
Costs of sales 19,072,042 14,370,776
------------- -------------
Gross profit 14,255,703 11,038,155
Operating, selling, general and
administrative expenses 7,801,231 7,172,510
Depreciation and amortization 257,821 315,691
------------- -------------
Income from operations 6,196,651 3,549,954
Interest expense 217,063 244,746
------------- -------------
Income before income taxes 5,979,588 3,305,208
Provision for income taxes 1,487,000 1,104,000
-------------- -------------
Net income 4,492,588 2,201,208
Preferred stock dividends 1,240,000 1,240,000
------------- -------------
Net income attributable
to common stockholders $ 3,252,588 $ 961,208
============= =============
Earnings per share:
Basic $ 0.33 $ 0.10
Diluted $ 0.30 $ 0.10
See notes to consolidated financial statements.
21
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 2003 and 2002
Series A Series B Retained
Common Stock Preferred Preferred Paid-in Earnings Treasury
Shares Amount Stock Stock Capital (Deficit) Stock Total
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 10,011,716 $100,117 $8,000,000 $12,000,000 - $(3,110,444) $(54,164) $16,935,509
Adjust capital
transactions (Note 8) - - - - (7,389,010) 7,209,470 - (179,540)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001
as restated 10,011,716 100,117 8,000,000 12,000,000 (7,389,010) 4,099,026 (54,164) 16,755,969
Net income - - - - - 2,201,208 - 2,201,208
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 10,011,716 100,117 8,000,000 12,000,000 (7,389,010) 5,060,234 (54,164) 17,717,177
Net income - - - - - 4,492,588 - 4,492,588
Preferred stock dividends - - - - - (1,240,000) - (1,240,000)
Issue common shares 18,698 187 - - (187) - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 10,030,414 $100,304 $8,000,000 $12,000,000 $(7,389,197) $8,312,822 $(54,164) $20,969,765
====================================================================================================================================
See notes to consolidated financial statements.
22
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
2003 2002
---- ----
Cash Flows from Operating Activities
Net income $ 4,492,588 $ 2,201,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 257,821 315,691
Provision for deferred income taxes (414,000) (81,000)
Change in:
Receivables (278,382) (509,811)
Inventories (4,546,859) 144,883
Other assets (12,770) 79,634
Accounts payable and accrued liabilities 1,497,524 221,863
------------ ------------
Net cash provided by operating activities 995,922 2,372,468
------------ ------------
Cash Flows from Investing Activities
Additions to property and equipment (671,412) (610,630)
------------ ------------
Net cash used in investing activities (671,412) (610,630)
------------ ------------
Cash Flows from Financing Activities
Net borrowings under line of credit 712,221 222,548
Proceeds from stockholder loans - 179,671
Payments on stockholder loans (335,705) (178,237)
Proceeds on notes payable 440,000 -
Repayments on notes payable (180,483) (200,638)
Payments of preferred dividends (1,240,000) (1,240,000)
------------ ------------
Net cash used in financing activities (603,967) (1,216,656)
------------ ------------
Net (decrease) increase in cash (279,457) 545,182
Cash, beginning of year 775,740 230,558
------------ ------------
Cash, end of year $ 496,283 $ 775,740
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 205,626 $ 244,253
Cash paid for income taxes $ 1,699,785 $ 1,832,342
See notes to consolidated financial statements.
23
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies
Description of business
ADDvantage Technologies Group, Inc. and its subsidiaries (the "Company") sell
new, surplus, and re-manufactured cable television equipment throughout North
America in addition to being a repair center for various cable companies. The
Company operates in one business segment.
Principles of consolidation
The consolidated financial statements include the accounts of ADDvantage
Technologies Group, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Accounts receivable
Trade receivables are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition, credit history, and current economic conditions.
Trade receivables are written off when deemed uncollectible. Recoveries of trade
receivables previously written off are recorded when received.
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.
Property and equipment
Property and equipment consists of office equipment, other equipment, and
buildings, with estimated useful lives of 5 years, 10 years, and 40 years,
respectively. Depreciation is provided using straight line and accelerated
methods over the estimated useful lives of the related assets. Leasehold
improvements are depreciated over the remainder of the lease agreement. Repairs
and maintenance are expensed as incurred, whereas major improvements are
capitalized. Depreciation expense was $257,821 and $157,267 for the years ended
September 30, 2003 and 2002, respectively.
24
Income taxes
The Company provides for income taxes in accordance with the liability method of
accounting pursuant to 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 valuation allowance
against deferred tax assets for amounts which are not considered "more likely
than not" to be realized.
Revenue recognition
Our principal sources of revenues are from sales of new, remanufactured or used
equipment, and repair services. The Company recognizes revenue for product sales
when title transfers, the risks and rewards of ownership have been transferred
to the customer, the fee is fixed and determinable, and the collection of the
related receivable is probable which is generally at the time of shipment. The
stated shipping terms are FOB shipping point per our sales agreements with
customers. Accruals are established for expected returns based on historical
activity. Revenue for services is recognized when the repair is completed and
the product is shipped back to the customer.
Freight
Amounts billed to customers for shipping and handling represent revenues earned
and are included in Net Sales Income and Net Service Income in the accompanying
Consolidated Statements of Income. Actual costs for shipping and handling of
these sales is included in Costs of Sales.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $229,534 and
$224,468 for the years ended September 30, 2003 and 2002, respectively.
Management estimates
The preparation of financial statements in conformity with 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 our inventory and operating results.
Concentrations of credit risk
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
25
geographically diverse customers make up our 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. In 2003, we purchased approximately 42% of our inventory
from Scientific-Atlanta. The concentration of suppliers of our inventory
subjects us to risk.
Goodwill
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS 142 requires,
among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. SFAS 142 was adopted by the Company
on October 1, 2002, the date of the annual impairment review. The Company has
completed its transitional impairment testing of goodwill. The results of these
tests indicate that goodwill is not impaired as of October 1, 2002. The adoption
of this pronouncement had no impact on the Company's carrying value of its
goodwill. If SFAS 142 had been adopted in 2002, the Company's earnings would
have been improved because of reduced amortization, as described below:
Goodwill - Adoption of Statement 142
Year ended September 30,
2003 2002
---- ----
Reported Net Income $ 4,492,588 $ 2,201,208
Add back: Goodwill amortization - 158,424
----------- -----------
Adjusted Net Income $ 4,492,588 $ 2,359,632
=========== ===========
Basic Earnings per Share
Reported Net Income $0.33 $0.10
Add back: Goodwill amortization - 0.01
----- -----
Adjusted Net Income $0.33 $0.11
===== =====
Diluted Earnings per Share
Reported Net Income $0.30 $0.10
Add back: Goodwill amortization - 0.01
----- -----
Adjusted Net Income $0.30 $0.11
===== =====
26
Employee stock-based awards
Employee stock-based awards are accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB No. 25, compensation
expense is based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the exercise price. The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."
Earnings per share
Basic earnings per share are based on the sum of the average number of common
shares outstanding and issuable restricted and deferred shares. Diluted earnings
per share include any dilutive effect of stock options, restricted stock and
convertible preferred stock.
Fair value of financial instruments
The carrying amounts of accounts receivable and payable approximate fair value
due to their short maturities. The carrying value of the Company's line of
credit approximates fair value since the interest rate fluctuates periodically
based on the prime rate. Terms of the stockholder loans are similar to the bank
loan. Management believes that the carrying value of the Company's borrowings
approximate fair value based on credit terms currently available for similar
debt.
Impact of recently issued accounting standards
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires certain guarantees to be recorded at fair value
regardless of the probability of the loss. The adoption did not have a material
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. The disclosure requirements shall be effective for
financial reports for interim periods beginning after December 15, 2002. The
Company believes that the adoption of this standard will have no material impact
on its financial position and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
27
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of such instruments were previously classified as equity. The
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The statement is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted. On November 7, 2003, the FASB deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatory
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB. Management
believes that the adoption of this statement will not have a significant impact
on the financial position, results of operations or cash flows of the Company.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation.
Note 2 - Inventories
Inventories are summarized as follows:
2003 2002
------------------------ -----------------------
New $ 16,479,825 $11,731,604
Used 6,098,371 5,852,633
Allowance for obsolete inventory (447,100) -
------------------------ -----------------------
$ 22,131,096 $17,584,237
======================== =======================
New inventory includes products purchased from the manufacturers plus
"surplus-new" which is unused products purchased from other distributors or
multiple system operators. Used inventory includes factory remanufactured,
Company remanufactured and used products.
We regularly review 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. Demand for some of the items in our inventory has been impacted
28
by recent economic conditions present in the cable industry. The Company
recorded a charge to allow for obsolete inventory at September 30, 2003,
increasing the cost of sales by $447,100. We wrote certain items in inventory
down to their estimated market values at September 30, 2002, increasing the cost
of sales by $1,442,938.
Note 3 - Line of Credit, Stockholder Notes, and Notes Payable
At September 30, 2003, a $5,185,902 balance is outstanding under a $9.0 million
line of credit due June 30, 2004, with interest payable monthly at Chase
Manhattan Prime less 1 1/4% (2.75% at September 30, 2003). Borrowings under the
line of credit are limited to the lesser of $7.0 million or the sum of 80% of
qualified accounts receivable and 40% of qualified inventory for working capital
purposes and $2.0 million for future acquisitions meeting Bank of Oklahoma
credit guidelines. The line of credit agreement provides that the Company's net
worth must be greater than $14.0 million and net income before the payment of
preferred dividends greater than $2.0 million. The line of credit is
collateralized by inventory, accounts receivable, equipment and fixtures, and
general intangibles.
Cash receipts are applied from the Company's lockbox account directly against
the bank line of credit, and checks clearing the bank are funded from the line
of credit. The resulting overdraft balance, consisting of outstanding checks, is
$604,498 at September 30, 2003 and is included in the bank revolving line of
credit.
Stockholder notes of $800,000 are subordinate to and bear interest at rates
equal to the line of credit (2.75% at September 30, 2003). The notes are due on
demand and are classified as current. Stockholder notes of $423,644, which were
issued for purchases of real estate, bear interest at 7.5% and are due in
monthly payments through 2011. Notes payable to unrelated parties of $502,804
are due in monthly payments through 2013 with interest at 5.5% through 2008,
converting thereafter to prime minus 1/4%.
The aggregate maturities of stockholder and other notes payable for the five
years ending September 30, 2008 are as follows: 2004 - $956,866; 2005 - $78,501;
2006 - $83,814; 2007 - $89,495; 2008 - $95,570; thereafter - $422,202.
Note 4 - Income Taxes
The provisions for income taxes consist of:
2003 2002
------------------------ -----------------------
Current $ 1,901,000 $ 1,185,000
Deferred (414,000) (81,000)
------------------------ -----------------------
$ 1,487,000 $ 1,104,000
======================== =======================
29
The following table summarizes the differences between the U.S. federal
statutory rate and the Company's effective tax rate for financial statement
purposes for the year ended September 30,:
2003 2002
------------------------ -----------------------
Statutory tax rate 34.0% 34.0%
State income taxes, net of U.S.
federal tax benefit 5.0 2.4
Non-deductible goodwill
amortization and other
non-deductible expenses - 1.4
Tax credits and exclusions (2.8) -
Adjustment of deferred tax
asset valuation allowance (7.4) (3.8)
Other (3.9) (0.6)
------------------------ -----------------------
24.9% 33.4%
======================== =======================
Deferred tax assets consist of the following at September 30,
2003 2002
------------------------- -------------------------
Net operating loss carryforwards $ 1,269,000 $ 1,358,000
Tax basis in excess of financial basis
of certain assets 186,000 119,000
Financial liability accruals 66,000 73,000
------------------------- -------------------------
Total deferred tax assets 1,521,000 1,550,000
Valuation allowance - (443,000)
------------------------- -------------------------
Net deferred tax asset $ 1,521,000 $ 1,107,000
========================= =========================
Deferred tax assets are classified as:
Current $ 367,000 $ 102,000
Noncurrent 1,154,000 1,005,000
------------------------- -------------------------
$ 1,521,000 $ 1,107,000
========================= =========================
30
Utilization of ADDvantage's net operating loss carryforward of approximately
$3,732,000 to reduce future taxable income is limited to an annual amount of
$265,000. The NOL carryforward expires in varying amounts from 2014 to 2019. The
valuation allowance was provided due to uncertainty surrounding the probability
of utilizing all of the net operating loss carryovers. The allowance is adjusted
annually based on management's current evaluation. This allowance was removed as
a result of favorable tax developments during 2003 that improved management's
evaluation of the likelihood of realizing these benefits.
Note 5 - Stockholders' Equity
The 1998 Incentive Stock Plan provides for the award to officers, directors, key
employees and consultants of stock options and restricted stock. The Plan
provides that upon any issuance of additional shares of common stock by the
Company, other than pursuant to the Plan, the number of shares covered by the
Plan will increase to an amount equal to 10% of the then outstanding shares of
common stock. Under the Plan, option prices will be set by the Board of
Directors and may be greater than, equal to, or less than fair market value on
the grant date.
At September 30, 2003, 1,001,041 shares of common stock were reserved for the
exercise of stock awards under the 1998 Incentive Stock Plan. Of the shares
reserved for exercise of stock awards, 815,041 shares were available for future
grants at September 30, 2003.
A summary of the status of the Company's stock options at September 30, 2003 and
2002, and changes during the years then ended is presented below.
2003 2002
-------------------------------- -------------------------------
Shares Wtd. Avg. Shares Wt. Avg.
Ex. Price Ex. Price
-------------------------------- -------------------------------
Outstanding, beginning of year 114,500 $2.07 114,500 $2.07
Granted 71,500 1.81 - -
Exercised - - - -
Canceled (7,000) - - -
--------------- ----------------
Outstanding, end of year 179,000 $1.97 114,500 $2.07
=============== ================
Exercisable, end of year 129,875 $2.79 46,125 $2.31
=============== ================
Weighted average fair value of
Options granted $1.55 N/A
=============== ================
31
The following table summarizes information about fixed stock options outstanding
at September 30, 2003:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Number Remaining Number
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices At 9/30/03 Life Price at 9/30/03 Price
----------------------------------------------------------------------------- --------------------------------
$1.900 10,000 9.5 years $1.90 - $1.90
$1.650 6,000 8.5 years $1.65 6,000 $1.65
$0.810 6,000 7.5 years $0.81 6,000 $0.81
$1.500 6,000 6.5 years $1.50 6,000 $1.50
$1.500 61,500 5.5 years $1.50 30,750 $1.50
$3.125 39,500 4.5 years $3.13 31,125 $3.13
$4.000 50,000 4.0 years $4.00 50,000 $4.00
---------------- ----------------
179,000 129,875
================ ================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2003: risk-free interest rates of 3.0%; expected
dividend yield of 0.0; expected lives of 6 years; and estimated volatility of
118%.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides an
alternative method of determining compensation cost for employee stock options,
which alternative method may be adopted at the option of the Company. Had
compensation cost been determined consistent with SFAS 123, the Company's net
income would not have changed significantly.
The Series A and Series B Preferred Stock are prior to the Company's common
stock with respect to the payment of dividends and the distribution of assets.
Cash dividends shall be payable quarterly when and as declared by the Board of
Directors. Interest accrues on unpaid dividends at the rate of 5% per annum with
respect to the Series A Preferred Stock and 7% per annum with respect to the
Series B Preferred Stock. No dividends may be paid on any class of stock ranking
junior to the Preferred Stock unless Preferred Stock dividends have been paid.
Liquidation preference is equal to the stated value per share. The Series A and
B Preferred Stock is redeemable at any time at the option of the Board of
Directors at a redemption price equal to the stated value per share. Holders of
the Preferred Stock do not have any voting rights unless the Company fails to
pay dividends for four consecutive dividend payment dates. Shares of Series A
Preferred Stock are convertible into common stock at any time at the option of
the holder. Each share of Series A Preferred Stock is convertible into 10 shares
of common stock.
Note 6 - Related Parties
Cash used in financing activities in 2003 was primarily used to pay dividends on
the Company's Series A and Series B Preferred Stock. Dividends on these
preferred stocks total $1,240,000 annually. The outstanding common and preferred
stock is beneficially owned by our principal shareholders as reflected in the
following table.
32
Stock Ownership
Percent of Percent of
Percent of Series A Series B
Common Preferred Preferred
Stock Stock Stock
Name of Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned (A) Owned (A)
---------------- ----- --------- ---------
David E. Chymiak 41.6% 50.0% 50.0%
Kenneth A. Chymiak 40.0% 50.0% 50.0%
(A) The two series of outstanding preferred stock have an aggregate preference
upon liquidation of $20,000,000.
In fiscal 1999, Chymiak Investments, L.L.C., which is owned by David E. Chymiak
and Kenneth A. Chymiak, purchased from TULSAT Corporation on September 30, 1999
the real estate and improvements comprising the headquarters and a substantial
portion of the other office and warehouse space of TULSAT Corporation for a
price of $1,286,000. The price represents the appraised value of the property
less the sales commission and other sales expenses that would have been incurred
by TULSAT Corporation if it had sold the property to a third party in an
arm's-length transaction. TULSAT Corporation entered into a five-year lease
commencing October 1, 1999 with Chymiak Investments, L.L.C. covering the
property.
In fiscal 2001, ADDvantage Technologies Group of Texas borrowed $150,000 on June
26, 2001 from Chymiak Investments, L.L.C for the purchase of a building
comprising of office and warehouse space at the location in Texas. The note is
payable at 7.5% over 10 years and total interest paid in 2003 and 2002 was
$9,869 and $10,694, respectively.
In fiscal 2002, ADDvantage Technologies Group of Missouri completed additions at
its location in Missouri and financed $342,000 from Chymiak Investments, L.L.C
for a building comprising of office and warehouse space. The note is payable at
7.5% over 10 years and total interest paid in 2003 and 2002 was $23,371 and
$21,657, respectively.
Chymiak Investments Inc., which is owned by Kenneth A. Chymiak and his wife,
Susan C. Chymiak, owns three other properties leased to TULSAT Corporation for
five-year terms (all ending in 2004).
The Company has outstanding, unsecured stockholder loans of $800,000. Of this
amount, $650,000 is payable to revocable trusts for the benefit of Kenneth A.
Chymiak and his wife and $150,000 is payable to David E. Chymiak. The interest
rate on the notes is one and one-quarter percentage point below the Chase
Manhattan Bank Prime, which is the same rate as the Company's bank line of
credit. The current rate on the notes is 2.75% and the total interest paid on
the notes was $30,323 in 2003 and $47,352 in 2002.
33
The Company leases various properties primarily from two companies owned by the
Company's principal shareholders. Future minimum lease payments under these
leases are as follows:
2004 384,840
2005 105,840
2006 17,640
-------------
$ 508,320
=============
Related party rental expense for the years ended September 30, 2003 and 2002 was
$461,000 and $438,000, respectively.
Note 7 - Retirement Plan
The Company sponsors a 401(k) plan that covers all employees who are at least 21
years of age and have completed one year of service as of the plan effective
date. The Company's contributions to the plan consist of a matching contribution
as determined by the plan document. Pension expense under the 401(k) plan was
$140,673 during the year ended September 30, 2003 and $111,144 during the year
ended September 30, 2002.
Note 8 - Capital Restatement
On September 30, 1999, the former shareholders of TULSAT Corporation (formerly
named DRK Enterprises, Inc.) assumed control of ADDvantage Technologies Group,
Inc. (formerly named ADDvantage Media Group, Inc.) The resulting merger was
accounted for as a business combination, with the Preferred Stock issued in the
merger recorded as first a reduction of paid-in capital in an amount to exhaust
the account, and the remainder to retained earnings (deficit). Pursuant to Staff
Accounting Bulletin Topic 4, the Company has revised its accounting for this
series of capital transactions.
The net difference from the previous reporting is that goodwill of $199,490 has
been eliminated and the carrying value of common stock has been accordingly
reduced. In addition, the amount of retained earnings at merger date is adjusted
to $0, while additional paid-in capital has been adjusted to report a deficiency
of paid-in capital of $8,411,731. Common stock activity subsequent to this date
has been credited to the deficiency of paid-in capital.
34
Note 9 - Earnings per Share
Year ended Year ended
September 30, September 30,
2003 2002
------------------- -------------------
Net income $ 4,492,588 $ 2,201,208
Dividends on preferred stock 1,240,000 1,240,000
------------------- -------------------
Net income attributable to
common shareholders - basic 3,252,588 961,208
Dividends on Series A convertible
preferred stock 400,000 400,000
------------------- -------------------
Net income attributable to common
shareholders - diluted $ 3,652,588 $ 1,361,208
=================== ===================
Weighted average shares outstanding 10,007,756 9,991,716
Potentially dilutive securities
-------------------------------
Assumed conversion of 200,000 shares of
Series A convertible preferred stock 2,000,000 2,000,000
Effect of dilutive stock options 13,479 -
------------------- -------------------
Weighted average shares outstanding -
assuming dilution 12,021,235 11,991,716
=================== ===================
Earnings per common share:
Basic $ 0.33 $ 0.10
Diluted 0.30 0.10
=================== ===================
Earnings per common share-diluted for the year ended September 30, 2002 are the
same as basic earnings per share as conversion of potentially dilutive
securities are anti-dilutive.
Note 10 - Subsequent Event
On November 24, 2003, the Company's common stock began trading on the American
Stock Exchange under the symbol AEY.
35
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Our management carried out an evaluation pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended, under the supervision and with the
participation of our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this Report. Based upon that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or furnish under the
Exchange Act are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
During the period covered by this report on Form 10-KSB, there has been no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item concerning our officers,
directors and compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is incorporated by reference to the information in the
sections entitled "Identity of Officers," "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act," respectively, of our Proxy
Statement for the 2004 Annual Meeting of Shareholders (the "Proxy Statement") to
be filed with the Securities and Exchange Commission within 120 days after the
end of our fiscal year ended September 30, 2003.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation
is incorporated by reference to the information set forth in the section
entitled "Compensation of Directors and Executive Officers" of our Proxy
Statement.
36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding certain relationships
and related transactions is incorporated by reference to the information set
forth in the section entitled "Security Ownership of Certain Beneficial Owners
and Management" of our Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships
and related transactions is incorporated by reference to the information set
forth in the section entitled "Certain Relationships and Related Transactions"
of our Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are included as exhibits to this Form
10-KSB. Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, such exhibit is filed herewith.
Exhibit
2.1 The Securities Exchange Agreement, dated as of
September 16, 1999, by and among ADDvantage Media
Group, Inc. and David E. Chymiak, Kenneth A. Chymiak,
as Trustee of the Ken Chymiak Revocable Trust Dated
March 4, 1992, and Susan C. Chymiak, as Trustee of
the Susan Chymiak Revocable Trust Dated March 4, 1992
is incorporated by reference to Exhibit 2 to the
Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on September 24,
1999.
2.2 The Amendment and Clarification of the Securities
Exchange Agreement, dated as of September 16,
1999 incorporated by reference to Exhibit 2.2 to
the Current Report on Form 8-K filed with the
Securities Exchange Commission by the Company on
October 14, 1999.
2.3 The Agreement and Plan of Merger, dated as of
November 22, 1999, by and among ADDvantage Media
Group, Inc., TULSAT Corporation, Lee CATV
Corporation, Diamond W Investments, Inc., Randy L.
Weideman and Deborah R. Weideman incorporated by
reference to Exhibit 2.1 to the Current Report on
Form 8-K filed with the Securities Exchange
Commission by the Company on December 7, 1999.
2.4 The Sale and Purchase Agreement, dated as of March 2,
2001 by and among ADDvantage Technologies Group,
Inc., NCS Industries, Inc. and Richard S. Grasso
incorporated by reference to the Current Report on
Form 8-K filed with the Securities Exchange
Commission by the Company on March 16, 2001.
37
2.5 The Purchase and Sale Agreement with Nick Ferolito,
Russell Brown and Fero-Midwest d/b/a Comtech
Services incorporated by reference to Exhibit
2.5 to the Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission by the Company
on December 28, 2001.
3.1 Certificate of Incorporation of the Company and
amendments thereto incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-KSB filed
with the Securities Exchange Commission by the
Company on January 10, 2003.
3.2 Bylaws of the Company, as amended incorporated by
reference to Exhibit 3.2 to the Annual Report on
Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
4.1 Certificate of Designation, Preferences, Rights and
Limitations of ADDvantage Media Group, Inc. Series 5%
Cumulative Convertible Preferred Stock and Series B
7% Cumulative Preferred Stock as filed with the
Oklahoma Secretary of State on September 30, 1999
incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on October 14,
1999.
10.1 Lease Agreement dated September 15, 1999 by and
between Chymiak Investments, L.L.C. and TULSAT
Corporation (formerly named DRK Enterprises, Inc.)
incorporated by reference to Exhibit 10.3 to the
Annual Report on Form 10-KSB filed with the
Securities Exchange Commission by the Company on
December 30, 1999.
10.2 Schedule of documents substantially similar to
Exhibit 10.1 incorporated by reference to Exhibit
10.3 to the Annual Report on Form 10-KSB filed with
the Securities Exchange Commission by the Company
on December 30, 1999.
10.3 Employment Agreement, dated as of November 22, 1999,
by and between Lee CATV Corporation, Randy L.
Weideman and TULSAT Corporation incorporated by
reference to Exhibit 10.2 to the Current Report on
Form 8-K filed with the Securities Exchange
Commission by the Company on December 7, 1999.
10.4 Form of promissory notes issued by TULSAT to David
Chymiak and to Ken Chymiak Revocable Trust and Susan
C. Chymiak Revocable Trust dated as of February 7,
2000 incorporated by reference to Exhibit 10.7 to the
Annual Report on Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
38
10.5 Amended and restated loan agreement dated June 30,
1997, by and between Bank of Oklahoma, N.A.
("Lender") and Registrant's wholly owned subsidiary,
Tulsat Corporation, formerly DRK Enterprises, Inc.,
an Oklahoma corporation doing business as Tulsat
("Borrower"), as amended through the eighth amendment
dated as of November 3, 2000 incorporated by
reference to Exhibit 10.8 to the Annual Report on
Form 10-KSB filed with the Securities Exchange
Commission on January 9, 2001.
21.1 Subsidiaries incorporated by reference to Exhibit
21.1 to the Annual Report on Form 10-KSB filed with
the Securities Exchange Commission by the Company on
January 10, 2003.
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
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 Periodic Report by the Chief
Executive Officer and Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to SEC Release No. 33-8183 (as corrected by Release No. 33-8183A),
the disclosure requirements of this Item are not effective until our Annual
Report on Form 10-KSB for our first fiscal year ending after December 15, 2003.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADDvantage Technologies Group, Inc.
Date: December 23, 2003 By: /s/ Kenneth A. Chymiak
--------------------------------------
Kenneth A. Chymiak, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: December 23, 2003 /s/ David E. Chymiak
--------------------------------
David E. Chymiak, Chairman of the
Board of Directors
Date: December 23, 2003 /s/ Kenneth A. Chymiak
--------------------------------
Kenneth A. Chymiak, President, Chief
Executive Officer and Director
(Principal Executive Officer and
Principal Financial Officer)
Date: December 23, 2003 /s/ Dee Cooper
---------------------------------
Dee Cooper, Controller (Principal
Accounting Officer)
Date: December 23, 2003 /s/ Gary W. Young
--------------------------------
Gary W. Young, Director
Date: December 23, 2003 /s/ Stephen J. Tyde
--------------------------------
Stephen J. Tyde, Director
Date: December 23, 2003 /s/ Freddie H. Gibson
-------------------------------
Freddie H. Gibson, Director
40
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-KSB. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit Description
2.1 The Securities Exchange Agreement, dated as of
September 16, 1999, by and among ADDvantage Media
Group, Inc. and David E. Chymiak, Kenneth A. Chymiak,
as Trustee of the Ken Chymiak Revocable Trust Dated
March 4, 1992, and Susan C. Chymiak, as Trustee of
the Susan Chymiak Revocable Trust Dated March 4, 1992
is incorporated by reference to Exhibit 2 to the
Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on September 24,
1999.
2.2 The Amendment and Clarification of the Securities
Exchange Agreement, dated as of September 16,
1999 incorporated by reference to Exhibit 2.2 to
the Current Report on Form 8-K filed with the
Securities Exchange Commission by the Company on
October 14, 1999.
2.3 The Agreement and Plan of Merger, dated as of
November 22, 1999, by and among ADDvantage Media
Group, Inc., TULSAT Corporation, Lee CATV
Corporation, Diamond W Investments, Inc., Randy L.
Weideman and Deborah R. Weideman incorporated by
reference to Exhibit 2.1 to the Current Report on
Form 8-K filed with the Securities Exchange
Commission by the Company on December 7, 1999.
2.4 The Sale and Purchase Agreement, dated as of March 2,
2001 by and among ADDvantage Technologies Group,
Inc., NCS Industries, Inc. and Richard S. Grasso
incorporated by reference to the Current Report on
Form 8-K filed with the Securities Exchange
Commission by the Company on March 16, 2001.
2.5 The Purchase and Sale Agreement with Nick Ferolito,
Russell Brown and Fero-Midwest d/b/a Comtech
Services incorporated by reference to Exhibit
2.5 to the Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission by the Company
on December 28, 2001.
3.1 Certificate of Incorporation of the Company and
amendments thereto incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-KSB
filed with the Securities Exchange Commission
by the Company on January 10, 2003.
3.2 Bylaws of the Company, as amended incorporated by
reference to Exhibit 3.2 to the Annual Report on
Form 10-KSB filed with the Securities Exchange
Commission by the Company on January 10, 2003.
41
4.1 Certificate of Designation, Preferences, Rights and
Limitations of ADDvantage Media Group, Inc. Series 5%
Cumulative Convertible Preferred Stock and Series B
7% Cumulative Preferred Stock as filed with the
Oklahoma Secretary of State on September 30, 1999
incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the Securities
Exchange Commission by the Company on October 14,
1999.
10.1 Lease Agreement dated September 15, 1999 by and
between Chymiak Investments, L.L.C. and TULSAT
Corporation (formerly named DRK Enterprises, Inc.)
incorporated by reference to Exhibit 10.3 to the
Annual Report on Form 10-KSB filed with the
Securities Exchange Commission by the Company on
December 30, 1999.
10.2 Schedule of documents substantially similar to
Exhibit 10.1 incorporated by reference to Exhibit
10.3 to the Annual Report on Form 10-KSB filed with
the Securities Exchange Commission on December 30,
1999.
10.3 Employment Agreement, dated as of November 22, 1999,
by and between Lee CATV Corporation, Randy L.
Weideman and TULSAT Corporation incorporated by
reference to Exhibit 10.2 to the Current Report on
Form 8-K filed with the Securities Exchange
Commission on December 7, 1999.
10.4 Form of promissory notes issued by TULSAT to David
Chymiak and to Ken Chymiak Revocable Trust and Susan
C. Chymiak Revocable Trust dated as of February 7,
2000 incorporated by reference to Exhibit 10.7 to the
Annual Report on Form 10-KSB filed with the
Securities Exchange Commission on January 9, 2001.
10.5 Amended and restated loan agreement dated June 30,
1997, by and between Bank of Oklahoma, N.A.
("Lender") and Registrant's wholly owned subsidiary,
Tulsat Corporation, formerly DRK Enterprises, Inc.,
an Oklahoma corporation doing business as Tulsat
("Borrower"), as amended through the eighth amendment
dated as of November 3, 2000 incorporated by
reference to Exhibit 10.8 to the Annual Report on
Form 10-KSB filed with the Securities Exchange
Commission on January 9, 2001.
21.1 Subsidiaries incorporated by reference to Exhibit
21.1 to the Annual Report on Form 10-KSB filed with
the Securities Exchange Commission by the Company on
January 10, 2003.
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
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 Periodic Report by the Chief
Executive Officer and Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
42