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, 2002
[ ] 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 (I.R.S. Employer
of Identification No.)
incorporation or organization)
1605 East Iola
Broken Arrow, Oklahoma 74012
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(Address of principal (Zip code)
executive offices)
Issuer's telephone number: (918) 251-9121
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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
$25,408,931.
The aggregate market value of the shares of common stock, par
value $.01 per share, held by non-affiliates of the issuer was
$1,196,204 as of December 26, 2002.
As of the latest practicable date, the number of the registrant's
common stock, $.01 par value per share, outstanding was
10,010,414 as of December 26, 2002.
The definitive Proxy Statement to be filed pursuant to Regulation
14A in connection with the Registrant's 2003 annual meeting of
shareholders is incorporated by reference in Part III, Items 9,
10, 11 and 12 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 the Company's 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 the Company's personnel and other such factors.
The Company's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in the forward-looking statements. The Company does 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 the Company
files 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 Technologies," 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 Technologies in exchange for 8,000,000
shares of ADDvantage Technologies $.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 Technologies 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
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subsidiary of ADDvantage Technologies and the former TULSAT owners acquired
approximately 82% of the issued and outstanding common stock, and 100% of
the issued and outstanding preferred stock of ADDvantage Technologies.
TULSAT's management assumed management and control of ADDvantage
Technologies.
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.
On November 22, 1999, the Company's 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 the Company's Series C Convertible
Preferred Stock (which have since been converted into 272,110 shares of the
Company's 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, the name of the Company changed to ADDvantage
Technologies Group, Inc.
In March 2001, the Company 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. The Company financed
the purchase price through borrowings under its line of credit agreement
with Bank of Oklahoma. As a result of this transaction, NCS became a
wholly owned subsidiary of the Company.
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 Willow Grove,
Pennsylvania.
In May 2001, the Company purchased from Nick Ferolito and Russell
Brown all of the issued and outstanding stock of Fero-Midwest, Inc. dba
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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 the Company.
Current Business
The principal business of the Company is the sale and repair of cable
television ("CATV") equipment. This includes new, surplus and re-
manufactured equipment. Customers of the Company include: cable operators,
apartment complexes, universities and other entities that distribute
broadband signals. The Company has recently shifted its focus in order to
keep up with the market demands of high-speed, two way interactive network
equipment. TULSAT, a subsidiary of ADDvantage, became Scientific-Atlanta's
first authorized outlet for factory re-manufactured and surplus products in
the United States. TULSAT offers customers recently factory remanufactured
broadband products that will enable them to bring fiber deeper to the home
without hassle and delay. With TULSAT as an authorized distributor for
Scientific-Atlanta, customers seeking these recently discontinued model
products and close-out inventory specials now have a cost-efficient,
reliable, recognized source. While future profit margins could drop
slightly from historical averages, management expects this strategy to
propel revenue and profit growth. By continuing to purchase surplus
equipment from cable operators that result from an upgrade in their systems
or an overstock in their warehouse, and by expanding the repair side of the
business, the Company expects to be able to continue to enjoy a healthy
profit margin. The Company supplies or services virtually any type of
electronic equipment a cable operator would use, from the headend
(receiving and transmitting site) to the converter box at the customer's
home.
Overview of the Industry
CATV is a service that delivers multiple channels of television to
subscribers who pay a monthly fee for the services they receive. A CATV
system consists of four principal components. The first is the "up-link"
where the programmer's signal is first scrambled and addressed, and is then
transmitted to a C-band satellite. The second, known as a cable system
"headend" facility, receives television signals from satellites and other
sources. The headend facility organizes and retransmits those signals
through the third component, the distribution network, to the subscriber.
The third principal component is the distribution network, which consists
of fiber optic and coaxial cables and associated electronic equipment,
which originate at the headend and extend throughout the CATV system. The
fourth component of the CATV system, the subscriber equipment, is comprised
of a "drop wire" which extends from the distribution network to the
subscriber's home and connects either directly to the subscriber's
television set or to a converter box. An addressable converter box is a
home terminal device, which permits the efficient delivery of premium CATV
services, including pay-per-view programming, by enabling the CATV operator
to control CATV subscriber services from a central headend computer.
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The broadband signal distribution industry (involving the high-speed
transmission of television, telephony and internet signals) is currently
dominated by CATV. The markets for wireless, direct-broadcast satellite
("DBS") and digital subscriber line ("DSL") used for this purpose are
growing rapidly, creating increased competition to the cable operator. To
fight competition, the operators offer more services and more TV channels
as well as discounted prices. Lie the systems described in the preceding
paragraph, the lineup of services typically includes an analog block of
channels from 54 to 550 MHz, high speed data service using high-speed cable
modems, cable telephony either interfacing with switched networks or
internet protocol networks, and digital television in the 550 to 750 MHz
range. These upgraded services are possible in every system that has been
rebuilt to 750 MHz of bandwidth. The standard architecture for these
enhanced systems contemplates a hybrid distribution network with a
combination of fiber optic cable to nodes of 100 to 500 subscribers, with
coaxial cable from the node to the customer and full reverse-path
capability for the pay-per-view, data and phone services, typically called
a hybrid fiber coaxial ("HFC") network.
CATV operators generally offer to subscribers a basic service package
and, for additional charges, additional tiers of services, including
premium services. Basic service programming typically includes broadcast
network local affiliates, independent television stations and other locally
originated programs. Additional tiers of service may consist of different
satellite-delivered services and premium services, such as HBO and ShowTime
that typically are offered to subscribers as a package for a separate
monthly fee. Successive tiers of programming include additional services
for additional monthly fees. In addition, movies and special entertainment
events, such as boxing matches and Olympic Games can be offered to
subscribers with addressable converters on a selective, pay-per-view basis.
CATV operators are also introducing digital cable audio services, which
consist of multiple channels of commercial-free, compact disc quality music
and programming.
The CATV and Broadband industry has experienced a significant
reduction in capital spending beginning with fiscal 2001 that continued
through most of fiscal 2002. In addition, the market capitalization value
of several multiple system operators (MSOs) has recently declined and their
debt level as a percent of total market capitalization value has increased.
The debt ratings of several MSOs have also been downgraded. These
conditions have impacted and may continue to impact the MSOs ability in the
near term to raise additional capital to fund equipment purchases.
Although the conditions described above have slightly impacted net sales,
there is unpredictability of the impact of the economic conditions in the
industry will have in future periods.
Over the last few years, the CATV industry has seen a number of
mergers and acquisitions take place. This consolidation has left over 90%
of the US cable market controlled by seven of the largest MSOs. Of the
over 105 million homes passed by the top twenty-five MSOs in the United
States, only about 18% subscribed to more than "basic cable." Therefore,
substantial opportunity exists for demand-driven growth in the sales of our
products and services, provided the trend of subscriber demand for higher
speed internet, alternative telephony, and other services requiring more
sophisticated equipment continues in the future.
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Business of the Company
The basic strategy of the Company is to: (a) maintain and expand its
current customer base in North America for the sale of new, surplus and re-
manufactured CATV equipment while continuing to expand the repair side of
the business and (b) continue to evaluate and consider the acquisition of
existing companies in the industry within specific geographic areas
utilizing their service and sales staffs to increase sales.
The Company believes that the CATV industry is expanding from a home
entertainment service to providing telecommunications services to both
homes and businesses. Management believes that the Company is well
positioned to thrive and prosper in the industry.
Construction, maintenance, expansion and upgrade of CATV systems
require significant capital expenditures by CATV operators for system
components, including coaxial and fiber optic cable, traditional radio
frequency ("RF") amplifiers and fiber optic electronics, and addressable
system controllers and converters. A major trend in the cable and
satellite television industry has been the continuing expansion of channel
capacity in response to CATV operators' desire to provide subscribers with
more programming selections, including pay-per-view and additional premium
programming services.
The Company expects that CATV operators will continue to upgrade the
technological capabilities of their systems and increase channel capacity
in order to meet subscriber demand for more programming services, such as
expanded pay-per-view, premium services and digital cable audio, which, in
turn, provides opportunities for increased revenues for the CATV operators.
In addition, new technologies can improve a CATV operator's margins and
customer services by increasing the CATV system's reliability, picture
quality and the "user friendliness" of the converter. The Company also
expects CATV operators to increase spending to meet governmental
requirements for renewing franchises and to position themselves to enter
new and potential markets such as telephone and personal communications
networks. With ADDvantage Technologies subsidiaries serving as
distributors for equipment manufacturers (TULSAT - Scientific Atlanta,
Blonder Tongue, Drake and Comscope; Comtech - Standard; NCS - Motorola and
ProMax), the Company can continue to grow its new equipment and surplus
sales to the largest MSOs of the industry by offering a diverse product
line.
In addition, the consolidation of CATV operators and their ongoing
transformation into multi-service companies is prompting a re-evaluation of
the re-manufactured equipment values, as new services roll out using new
technologies and state-of-the-art components. With the cost and
sophistication of new equipment and technologies on the rise, and their
shelf lives shrinking, the savvy use of re-manufactured equipment by cable
operators and manufacturers is becoming a vital component in their overall
operational strategies. The Company believes that it is in a position to
serve this expanding market.
With respect to technology, CATV operators and suppliers, including
the Company, are demonstrating that system upgrades with currently
available equipment and system architectures can be used as a basis to
provide advanced subscriber services, as described earlier in the HFC
network. Moreover, the growing use of United States broadband system
designs and equipment in international markets, where CATV penetration is
low, presents another opportunity for sales of the Company's systems and
equipment.
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Products and Services
The majority of the Company's business is the sale of new and surplus-
new (i.e. excess equipment available from the manufacturer) CATV equipment.
New and surplus sales represent 46% of company revenues and re-manufactured
sales represent 38% of the revenues. The following is a list of the
products sold by the Company with a brief description of the application of
each product line:
Linegear covers all products, which are actually placed on the
cable line. This includes active electronics, trunk stations and line
extenders, which amplify and distribute the cable signal, and passive
equipment such as taps, splitters and directional couplers, which simply
pass the signal through for delivery to additional lines and the customer's
home. The Company focuses on sales and repair of Scientific Atlanta,
Magnavox, Jerrold, General Instruments, Texcan and Thetacom lines of taps,
traps, splitters, DCs, power inserters and pin connectors.
Headend equipment is used to provide signal acquisition,
processing and manipulation for further transmission. Among the products
offered by the Company in this category are Scientific Atlanta, Blonder
Tongue, Magnavox, General Instruments and Drake lines of satellite
receivers, integrated receiver/decoders, videociphers, demodulators,
modulators, amplifiers, equalizers, processors, antennas, and antenna
mounts. The Company specializes in the re-manufacturing and repairing of
various manufacturers' lines of headend products as well as modifying these
for use in different video formats.
Repair Services are offered for all product lines, with an
emphasis in headend equipment. The Company expects this area to grow
significantly with the Company's focus on this side of the business and as
additional mergers or acquisitions develop.
Sales and Marketing
The majority of the Company's sales activity is generated through
personal relationships developed by its sales personnel and executives,
referrals from being distributor for several large manufacturers of CATV
equipment, advertising in trade journals and other periodicals,
telemarketing and direct mail to cable operators in the United States. The
Company has 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. The Company purchases a large amount of its 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.
The Company is 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 the Company's revenues for both fiscal years
2002 and 2001 were derived from sales of products and services to the
Company's five largest customers. There are approximately 6,000 cable
television systems within the United States, each of which is a potential
customer.
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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 the Company throughout the United States
engaged in buying and selling re-manufactured CATV equipment. Most
competitors are not able to maintain the large inventory the Company
maintains due to capital requirements. In terms of sales and inventory,
the Company is the largest in this industry providing both sales and
service of new and re-manufactured CATV equipment.
The Company also faces competition from vendors supplying new
products and various manufacturers in this industry. Due to its large
inventory, the Company generally has 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, 2002, the Company had 134 employees. Management
considers its relationships with its employees to be excellent. The
employees of the Company are not unionized and the Company is not subject
to any collective bargaining agreements.
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 in years 2003 through 2005. At September
30, 2002, total monthly rental payments of $36,500 were required. Lee owns
property of approximately 8,000 square feet, with an investment of
$246,000. NCS rents property of approximately 6,000 square feet. The term
is month-to-month, with monthly rental payments of approximately $3,100
required. Comtech owns property of approximately 11,000 square feet, with
an investment of $342,000, financed by loans of $323,000 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
$137,000 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 2,600 square feet. The term is
month-to-month, with monthly rental payments of approximately $1,400. The
Company believes that its current facilities are adequate to meet its
needs.
ITEM 3. LEGAL PROCEEDINGS
The company is not involved in any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the
Company during the fiscal quarter ended September 30, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under
the symbol ADDM.
The following table sets forth, for the periods indicated, the high
and low closing bid quotations per share for the Company's 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, 2001 High Low
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First Quarter $2.00 $0.81
Second Quarter $2.22 $1.03
Third Quarter $1.63 $0.86
Fourth Quarter $1.90 $0.81
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
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 26, 2002, there were approximately
80 holders of record of common stock. However, the Company believes there
are in excess of 825 beneficial owners of common stock.
Dividend Policy
The Company has never declared or paid a cash dividend on its common
stock. It has been the policy of the Company's Board of Directors to use
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all available funds to finance the development and growth of the Company's
business. The payment of cash dividends in the future will be dependent
upon the earnings and financial requirements of the Company and other
factors deemed relevant by the Board of Directors. Under the terms of the
Company's outstanding preferred stock, no dividends may be paid on the
Company's 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
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ADDvantage Technologies Group, Inc and its 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 MSO's 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
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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 the first quarter of fiscal
2001. We believe we are in a unique position to service those MSO's, which
are looking to minimize costs. We have an abundance of inventory and we
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 MSO's and we have managed
our receivables to minimize any bad debt write-offs. Our efforts have
resulted in increasing sales in a down economy (11.0% over last year),
minimizing the impact of the Adelphia bankruptcy (a $96,000 bad debt write-
off, representing approximately 5% of sales to Adelphia, where the impact
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for other companies had been more severe) and minimizing the overall impact
of bad debts written off in total compared to net income ($136,000,
representing less than 7% of net income). However, our largest risk is our
investment in inventory. After consideration of continued analysis,
review, and evaluation of our inventory, 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 2003 to be significantly
improved based on preliminary results from increased sales in the first
quarter of 2003 compared to first quarter 2002. However, there is no
assurance that revenues in fiscal 2003 will continue to exceed those for
comparable periods in fiscal 2002 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, 2002 Compared to Year Ended September 30,
2001 (all references to years are to fiscal years)
Net Sales. Net sales climbed $2.5 million or 11.0%, to $25.4 million
for the year from $22.9 million for 2001. Despite the decrease in overall
capital spending in the industry and the bankruptcies of several cable
operators, new sales increased 31.7% from $9.0 million last year to $11.8
million this year as a result of our new distributorship with Scientific-
Atlanta and the acquisition of NCS. Our focus on increasing repair revenue
has resulted in an 18.5% increase in those revenues, from $3.3 million last
year to $3.9 million this year primarily due to the acquisitions of Comtech
and NCS. Although we are pleased with the results of repair services, they
were severely impacted by the tightening of credit for the small cable
operators and bankruptcy filings of several of our customers. Our revenue
generated by sales of re-manufactured equipment has also been impacted by
the economic slowdown. Revenue from re-manufactured equipment sales dropped
4.4% from $10.2 million last year to $9.8 million this year. The
collective impact NCS, Comtech, and Tulsat-Texas had on sales in those 2002
months which correspond to the same months in 2001 prior to the
acquisitions of those companies was $1.4 million.
Cost of Sales. Cost of sales this year was 56.6% of net sales
compared to 51.9% last year. Margins for the current year were affected by
the inventory write-down of $1.4 million, discussed above.
Operating Expenses. Operating expenses increased $1.4 million, or
22.0% in 2002 over the previous year. Most of this increase was directly
attributable to operating expenses (primarily salaries and wages)
associated with NCS, Comtech, Tulsat - Texas and the addition of the new
facility, Tulsat - Atlanta, in 2002.
Income from Operations. Income from operations decreased 27.1 %, to
$3.5 million for 2002 from $4.9 million for 2001. This decrease was
primarily due to the inventory write-down and operating costs associated
with the recent acquisitions offset by higher net sales.
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Interest Expense. Interest expense for fiscal 2002 was $245,000
compared to $337,000 in fiscal 2001. The decrease was primarily
attributable to a lower average interest rate on the Company's line of
credit.
Income Taxes. The provision for income taxes for fiscal 2002
decreased to $1.1 million from $1.7 million in fiscal 2001. The decrease
was primarily due to lower pre-tax earnings coupled with a favorable impact
from changes in the deferred tax valuation allowance.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-KSB for
fiscal year 2002 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
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The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. We base our estimates and judgments on
historical experience, current market conditions, and various other factors
we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. The most significant estimates and assumptions relate to the
carrying value of our inventory and, to a lesser extent, the adequacy of
our allowance for doubtful accounts.
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 MSO's and other users of cable
television equipment who are seeking products for which manufacturers have
discontinued production, or are seeking shipment on a same-day basis. Our
position in the industry requires us to carry large
inventory quantities relative to annual sales, but also allows us to
realize high overall gross profit margins on our sales. Carrying these
large inventories represents the Company's 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.
-12-
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 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.
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. At September 30, 2002, accounts receivable, net of allowance for
doubtful accounts of $85,000, amounted to $3.3 million.
Liquidity and Capital Resources
The Company finances its operations primarily through internally
generated funds and a bank line of credit.
During 2002, the Company generated in excess of $2.4 million cash flow
from operations, which it used to meet its preferred dividend obligations
of $1.24 million, repay debt, and increase cash by $545,000.
The Company has a line of credit with the Bank of Oklahoma under which
it is authorized to borrow up to $9.0 million at a borrowing rate of 1.25%
below Chase Manhattan Prime (3.5% at September 30, 2002.) 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
-13-
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, 2002 of $4.5 million, due June 30, 2003.
The Company 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 the company's employees' stock plans or for
acquisitions. The Company did not repurchase any shares during the fiscal
year.
The Company believes that cash flow from operations, existing cash
balances and its existing line of credit provide sufficient liquidity and
capital resources to meet its needs.
Impact of Recently Issued Accounting Standards
In June 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" (SAFS 141), Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), and Statement No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 141 requires all business combinations to be
accounted for using the purchase method of accounting and is effective for all
business combinations initiated after June 30, 2001. The Company is currently
not affected by SFAS 141, as there are no transactions covered by this
pronouncement.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have
finite lives will continue to be amortized over their useful lives. SFAS
142 is effective for fiscal years beginning after December 15, 2001. The
Company will discontinue the amortization of its goodwill balances and
intangible assets with indefinite useful lives effective October 1, 2002.
The Company has goodwill from recent acquisitions and has not recorded any
impairment at this time. The Company is currently evaluating the impact of
SFAS 142 on its consolidated financial statements.
SFAS 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset. Statement No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 143 to have a material
impact on its financial condition and results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144
supersedes Statement 121, "Accounting for the Impairment of Long-Lived
assets and Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a
business. Goodwill is excluded from the scope of Statement No. 144.
Additionally, Statement No. 144 utilizes a probability-weighted cash flow
estimation approach and establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets. Statement No. 144
is effective for fiscal years beginning after December 15,
2001. The Company does not expect SFAS 144 to have a material impact on
its financial condition and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145).
-14-
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends
FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Company does not expect SFAS
145 to have a material impact on its financial condition and results of
operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The Company is currently not affected by SFAS 146 as there are no
transactions covered by these pronouncements.
In October 2002, the Financial Accounting Standards Board issued FASB
Statement No. 147, Accounting for Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9 (SFAS 147). SFAS 147 amends SFAS 72 and no longer
requires financial institutions to recognize, and subsequently amortize,
any excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an unidentifiable
intangible asset. In addition, SFAS 147 amends SFAS 144 to include in its
scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets
and credit cardholder intangible assets. Management does not anticipate
that the adoption of SFAS 147 will have any material impact on the
financial statements.
-15-
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements Page
----------------------------- ----
Independent Auditors' Report 17
Consolidated Balance Sheet, September 30, 2002 18
Consolidated Statements of Income for Years Ended
September 30, 2002 and 2001 20
Consolidated Statement of Changes in Stockholders' Equity 21
Consolidated Statements of Cash Flows, Years Ended September 30,
2002 and 2001 22
Notes to Consolidated Financial Statements 24
-16-
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, 2002, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended September 30, 2002 and 2001. 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.
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, 2002, and the consolidated results of its
operations and its cash flows for the years ended September 30, 2002 and
2001, in conformity with accounting principles generally accepted in the
United States of America.
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
December 12, 2002
-17-
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2002
Assets
Current assets:
Cash $ 775,740
Accounts receivable, net of allowance of $85,212 3,349,108
Refundable income taxes 156,190
Inventories 17,584,237
Deferred income taxes 102,000
------------------
Total current assets 21,967,275
Property and equipment, at cost
Machinery and equipment 1,994,045
Land and buildings 763,007
Leasehold improvements 496,509
------------------
3,253,560
Less accumulated depreciation and amortization (1,040,989)
------------------
Net property and equipment 2,212,571
Other assets:
Deferred income taxes 1,005,000
Goodwill, net of accumulated amortization of $428,455 1,319,626
Other assets 26,858
------------------
Total other assets 2,351,484
------------------
Total assets $ 26,531,330
==================
-18-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2002
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,471,672
Accrued expenses 586,598
Bank revolving line of credit 4,473,681
Notes payable - current portion 166,667
Dividends payable 310,000
Stockholder notes 1,135,702
------------------
Total current liabilities 8,144,320
Notes payable 76,620
Stockholder notes 423,647
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; 10,011,716 shares issued 100,117
Common stockholders' deficit (2,159,210)
------------------
17,940,907
Less: Treasury stock, 20,000 shares at cost (54,164)
Total stockholders' equity 17,886,743
------------------
Total liabilities and stockholders' equity $ 26,531,330
==================
-19-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended
September 30,
2002 2001
------------------------------------
Net sales and service income $ 25,408,931 $ 22,884,566
Cost of sales 14,370,776 11,885,210
------------------------------------
Gross profit 11,038,155 10,999,356
Operating expenses 7,498,175 6,144,174
------------------------------------
Income from operations 3,539,980 4,855,182
Interest expense 244,746 336,752
------------------------------------
Income before income taxes 3,295,234 4,518,430
Provision for income taxes 1,104,000 1,667,000
------------------------------------
Net income 2,191,234 2,851,430
Preferred dividends 1,240,000 1,240,000
------------------------------------
Net income attributable to common
stockholders $ 951,234 $ 1,611,430
====================================
Earnings per share:
Basic $ 0.10 $ 0.16
Diluted $ 0.10 $ 0.16
-20-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 2002 and 2001
Series A Series B Common
Common Stock Preferred Preferred Stockholders' Treasury
Shares Amount Stock Stock Deficit Stock Total
--------------------------------------------------------------------------------------------
Balance, September 30, 2000 9,992,956 $ 99,930 $8,000,000 $12,000,000 $(4,735,204) $(54,164) $15,310,562
Net income 2,851,430 2,851,430
Preferred stock dividends (1,240,000) (1,240,000)
Issue common shares 18,760 187 13,330 13,517
--------------------------------------------------------------------------------------------
Balance, September 30, 2001 10,011,716 100,117 8,000,000 12,000,000 (3,110,444) (54,164) 16,935,509
Net income 2,191,234 2,191,234
Preferred stock dividends (1,240,000) (1,240,000)
--------------------------------------------------------------------------------------------
Balance, September 30, 2002 10,011,716 $100,117 $8,000,000 $12,000,000 $(2,159,210) $(54,164) $17,886,743
============================================================================================
-21-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
September 30,
2002 2001
--------------------------------
Cash Flows from Operating Activities
Net income $ 2,191,234 $ 2,851,430
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 325,665 312,441
Provision for deferred income taxes (81,000) 117,000
Change in:
Receivables (509,811) 1,118,782
Inventories 144,883 (2,327,183)
Other assets 79,634 (26,431)
Accounts payable and accrued liabilities 221,863 (177,325)
--------------------------------
Net cash provided by operating activities 2,372,468 1,868,714
--------------------------------
Cash Flows from Investing Activities
Additions to property and equipment (610,630) (583,536)
Proceeds from sale of investment in Ventures - 657,569
Purchase business combinations, net of cash acquired of
$575,958 in 2001 - (1,090,269)
--------------------------------
Net cash used in investing activities (610,630) (1,016,236)
--------------------------------
Cash Flows from Financing Activities
Net borrowings under line of credit 222,548 895,585
Payments on stockholder loans (150,000) (300,000)
Payments on notes payable (49,204) -
Payments of preferred dividends (1,240,000) (1,240,000)
--------------------------------
Net cash used in financing activities (1,216,656) (644,415)
--------------------------------
Net increase in cash 545,182 208,063
Cash, beginning of year 230,558 22,495
--------------------------------
Cash, end of year $ 775,740 $ 230,558
================================
-22-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30,
2002 2001
--------------------------------
Supplemental Cash Flow Information
Cash paid for interest $ 244,253 $ 343,460
Cash paid for income taxes $ 1,832,342 $ 1,462,000
-23-
See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
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.
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
Depreciation is provided using straight line and accelerated methods over
the estimated useful lives of the related assets. Repairs and maintenance
are expensed as incurred, whereas major improvements are capitalized.
Depreciation expense was $157,267 and $165,493 for the years ended
September 30, 2002 and 2001, respectively.
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.
-24-
Revenue recognition
Our principal sources of revenues are from sales of new, remanufactured or
used equipment, and repair services. Revenue is recognized when inventory
or service components are shipped to the customers. The Company's
revenue recognition policies are in compliance with Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" issued by
the Securities and Exchange Commission.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
$224,468 and $229,947 for the years ended September 30, 2002 and 2001,
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 geographically diverse customers make up the Company's customer
base, thus spreading the trade credit risk. The Company controls credit
risk through credit approvals, credit limits, and monitoring procedures.
The Company performs in-depth credit evaluations for all new customers but
does not require collateral to support customer receivables.
Goodwill
Goodwill is amortized on a straight-line basis over periods ranging from 10
to 20 years. Amortization of goodwill for the years ended September 30,
2002 and 2001, was $168,398 and $144,838, respectively.
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,
-25-
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 June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (SAFS 141), Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142), and Statement No. 143, "Accounting for Asset Retirement Obligations"
(SFAS 143). SFAS 141 requires all business combinations to be accounted
for using the purchase method of accounting and is effective for all
business combinations initiated after June 30, 2001. The Company is
currently not affected by SFAS 141, as there are no transactions covered by
this pronouncement.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have
finite lives will continue to be amortized over their useful lives. SFAS
142 is effective for fiscal years beginning after December 15, 2001. The
Company will discontinue the amortization of its goodwill balances and
intangible assets with indefinite useful lives effective October 1, 2002,
and will evaluate the carrying value of goodwill during the first quarter
of fiscal 2003. The Company is currently evaluating the impact of SFAS 142
on its consolidated financial statements.
SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset. Statement No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 143 to have a material
impact on its financial condition and results of operations.
-26-
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144
supersedes Statement 121, "Accounting for the Impairment of Long-Lived
assets and Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a
business. Goodwill is excluded from the scope of Statement No. 144.
Additionally, Statement No. 144 utilizes a probability-weighted cash flow
estimation approach and establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets. Statement No. 144
is effective for fiscal years beginning after December 15, 2001. The
Company does not expect SFAS 144 to have a material impact on its financial
condition and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" (SFAS 145). This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The Company does not expect SFAS 145 to have a material
impact on its financial condition and results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Company is
currently not affected by SFAS 146 as there are no transactions covered by
these pronouncements.
In October 2002, the Financial Accounting Standards Board issued FASB
Statement No. 147, Accounting for Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9 (SFAS 147). SFAS 147 amends SFAS 72 and no longer
requires financial institutions to recognize, and subsequently amortize,
any excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an unidentifiable
intangible asset. In addition, SFAS 147 amends SFAS 144 to include in its
scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets
and credit cardholder intangible assets. Management does not anticipate
that the adoption of SFAS 147 will have any material impact on the
financial statements.
-27-
Note 2 - Inventories
Inventories are summarized as follows:
2002 2001
---------------------------
New $ 11,731,604 $10,642,719
Used 5,852,633 7,086,402
---------------------------
$ 17,584,237 $17,729,121
===========================
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 by recent economic conditions present in the
cable industry. 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, 2002, a $4,473,681 balance is outstanding under a $9.0
million line of credit due June 30, 2003, with interest payable monthly at
Chase Manhattan Prime less 1 1/4% (3.5% at September 30, 2002). 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. In The line of credit
agreement provides that the Company's net worth must be greater than $14.0
million and net income 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 $151,349 at September 30, 2002 and is included in
the bank revolving line of credit.
Stockholder notes of $1,100,000 are subordinate to and bear interest at
rates equal to the line of credit (3.5% at September 30, 2002). The notes
are due on demand and are classified as current. Stockholder notes of
$459,349, 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 $243,291 are due in quarterly payments through 2004
with interest at 7%.
-28-
The aggregate maturities of stockholder and other notes payable for the
five years ending September 30, 2007 are as follows: 2003 - $1,302,369;
2004 - $115,097; 2005 - $41,460; 2006 - $44,679; 2007 - $48,147; thereafter
- $250,884.
Note 4 - Income Taxes
The provisions for income taxes consist of:
2002 2001
--------------------------
Current $ 1,185,000 $ 1,550,000
Deferred (81,000) 117,000
--------------------------
$ 1,104,000 $ 1,667,000
==========================
The following table summarizes the differences between the U.S. federal
statutory rate and the Company's effective tax rate for financial statement
purposes for the year ended September 30, :
2002 2001
---------------------
Statutory tax rate 34.0% 34.0%
State income taxes, net
of U.S. federal tax
benefit 2.4 3.4
Non-deductible goodwill
amortization and other
non-deductible expenses 1.5 .9
Adjustment of deferred
tax asset valuation allowance (3.8) (1.2)
Other (0.6) (0.2)
----------------------
33.5% 36.9%
======================
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Deferred tax assets consist of the following at September 30,
2002 2001
-----------------------------
Net operating losses carryforwards $1,358,000 $1,449,000
Tax basis in excess of financial
basis of certain assets 90,000 108,000
Financial liability accruals 102,000 36,000
-----------------------------
Total deferred tax assets 1,550,000 1,593,000
Valuation allowance (443,000) (567,000)
-----------------------------
Net deferred tax asset $1,107,000 $1,026,000
=============================
Deferred tax assets are
classified as:
Current $ 102,000 $ 36,000
Noncurrent 1,005,000 990,000
-----------------------------
$1,107,000 $1,026,000
=============================
Utilization of ADDvantage's net operating loss carryforward of
approximately $3,996,000 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.
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, 2002, 1,004,874 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, 886,476 shares were available
for future grants at September 30, 2002.
A summary of the status of the Company's stock options at
September 30, 2002 and 2001, and changes during the years then ended is
presented below.
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2002 2001
------------------- --------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
------------------- --------------------
Outstanding, beginning of year 114,500 $2.07 40,000 $3.13
Granted - - 74,500 1.50
Exercised - - - -
Canceled - - - -
------- -------
Outstanding, end of year 114,500 $2.07 114,500 $2.07
======= =======
Exercisable, end of year 46,125 $2.31 20,500 $2.65
======= =======
Weighted average fair value of
Options granted N/A $1.82
======= =======
The following table summarizes information about fixed stock options
outstanding at September 30, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Weighted
Average
Number Remaining Number
Range of Outstanding Contract Wtd. Avg. Exercisable Wtd. Avg.
Exercise Prices At 9/30/02 Life Ex. Price at 9/30/02 Ex. Price
----------------------------------------------------- ------------------------
$1.500 74,500 8.5 years $1.50 23,125 $1.50
$3.125 40,000 7.5 years $3.13 23,000 $3.13
------- -------
114,500 46,125
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 2001: risk-free interest rates of 5.5%;
expected dividend yield of 0.0; expected lives of 10 years; and estimated
volatility of 122%.
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
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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 - Operating Leases
The Company leases various properties primarily from a company owned by the
Company's principal shareholders. Future minimum lease payments under
these leases are as follows:
2003 $ 437,700
2004 384,840
2005 105,840
2006 17,640
-------------
$ 946,020
=============
Total rental expense for all operating leases was $520,282 for the year
ended September 30, 2002 and $482,800 for the year ended September 30,
2001. $438,000 of the total rental expense was paid to the Company's
principal shareholders for 2002 and 2001.
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 $111,144 during the year ended September 30, 2002
and $84,134 during the year ended September 30, 2001.
Note 8 - Business Combinations
On March 2, 2001, the Company entered into a Purchase and Sale Agreement
with Richard S. Grasso (the "Shareholder") and NCS, a Pennsylvania
corporation, to purchase from the Shareholder all of the issued and
outstanding common stock of NCS. The consideration for the acquisition of
$1,988,000 included: (i) $800,000 in cash, (ii) a promissory note payable
to the Shareholder in the amount of $200,000, (iii) the assumption of
Shareholder's obligation of $639,000 under a promissory note issued to a
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prior owner of NCS (iv) $49,000 remaining in a payable to the shareholder;
and a three-year consulting agreement with NCS for $300,000. The
Shareholder also entered into a non-competition agreement with the Company
and NCS. The Company financed the purchase price through borrowings under
its line of credit agreement with Bank of Oklahoma. Immediately after
closing, $639,000 was paid for the assumption of the Shareholder's
obligation. As a result of this transaction, NCS became a wholly owned
subsidiary of the Company.
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 Willow Grove,
Pennsylvania.
On May 31, 2001, the Company entered into a Purchase and Sale Agreement
with Nick Ferolito and Russell Brown (the "Shareholders") and Fero-Midwest
dba Comtech Services, a Missouri corporation ("Comtech"), to purchase from
the Shareholders all of the issued and outstanding common stock of Comtech.
The consideration for the acquisition was $250,000 in cash and assumption
of certain liabilities as stated in the agreement. As a result of this
transaction, Comtech became a wholly owned subsidiary of the Company.
Following are the unaudited pro-forma result of operations for the year
ending 2001, assuming the NCS and Comtech acquisitions occurred at the
beginning of 2001.
2001
(Unaudited)
----------------
Net sales and service income $ 25,291,350
Income before income tax 4,355,760
Income tax 1,494,026
The unaudited pro-forma result have been prepared for comparison
purposes only and do not purport to be indicative of the results
of operations which would have actually resulted had the
combination been in effect on the dates indicated, or of future
results of operations.
Note 9 - Investment in Ventures Education System Corporation
On November 1, 2000, Ventures Education System Corporation
exercised its option to repurchase the Company's 27% interest in
Ventures. The exercise price consisted of $660,000 and common
stock warrants to purchase 50,000 shares at $.90 per share. The
warrants expire on January 31, 2004 or one year after a public
offering, whichever first occurs. The warrants were valued at
$12,000. The transaction resulted in no gain or loss.
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Note 10 - Earnings per Share
Year ended Year ended
September 30 September 30
2002 2001
--------------------------------
Net income $ 2,191,234 $ 2,851,430
Dividends on preferred stock 1,240,000 1,240,000
Net income attributable to
common shareholders -basic 951,234 1,611,430
Dividends on Series A convertible
preferred stock 400,000 400,000
--------------------------------
Net income attributable to common
shareholders - diluted $ 1,351,234 $ 2,011,430
================================
Weighted average shares outstanding 9,991,716 9,991,716
Weighted average shares outstanding
assuming dilution 11,991,716 11,991,716
================================
Earnings per common share:
Basic $ 0.10 $ 0.16
Diluted 0.10 0.16
================================
Earnings per common share-diluted are the same as basic earnings
per share as conversion of potentially dilutive securities are
anti-dilutive.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-34-
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 the Company's
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 the Company's Proxy Statement for the 2003 Annual Meeting
of Shareholders (the "Proxy Statement") to be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal
year ended September 30, 2002.
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
the Company's Proxy Statement.
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 the Company's 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 the Company's Proxy Statement.
-35-
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.
2.5 The Purchase and Sale Agreement with Nick Ferolito,
Russell Brown and Fero-Midwest d/b/a Comtech Services. The
Registrant undertakes to furnish supplementally to the
Commission upon request a copy of any omitted schedule or
exhibit listed in the Exhibit Index set forth elsewhere
herein.
3.1 Certificate of Incorporation of the Company and amendments.
-36-
3.2 Bylaws of the Company, as amended.
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
field 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 Current 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
Current 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.
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.
21.1 Subsidiaries.
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-37-
(b) Reports on Form 8-K
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
With the participation of management, the Company's chief
executive officer and chief financial officer evaluated the
Company's disclosure controls and procedures on September 30,
2002. Based on this evaluation, the chief executive officer and
chief financial officer concluded that the disclosure controls
and procedures are effective in connection with ADDvantage
Technologies, Inc.'s filing of its annual report on Form 10-KSB
for the year ended September 30, 2002.
(b) Changes in internal controls.
Subsequent to September 30, 2002 through the date of this filing
of Form 10-KSB for the year ended September 30, 2002, there have
been no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls,
including any significant deficiencies or material weaknesses of
internal controls that would require corrective action.
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: January 9, 2002 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 30, 2002
/S/ David E. Chymiak
---------------------------------------
David E. Chymiak, Chairman of the Board
of Directors
Date: December 30, 2002 /S/ Kenneth A. Chymiak
---------------------------------------
Kenneth A. Chymiak, President, Chief
Executive Officer and Director (Principal
Executive Officer and Principal Financial
Officer)
-38-
<
Date: December 30, 2002 /S/ Adam R. Havig
---------------------------------------
Adam R. Havig, Controller (Principal
Accounting Officer)
Date: December 30, 2002 /S/ Gary W. Young
---------------------------------------
Gary W. Young, Director
Date: December 30, 2002 /S/ Stephen J. Tyde
---------------------------------------
Stephen J. Tyde, Director
Date: December 30, 2002 /S/ Freddie H. Gibson
---------------------------------------
Freddie H. Gibson, Director
Date: December 30, 2002 /S/ Randy L. Weideman
---------------------------------------
Randy L. Weideman, Director
CERTIFICATION
I, Kenneth A. Chymiak, certify that:
1. I have reviewed this annual report on Form 10-KSB of ADDvantage
Technologies Group, Inc, (the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Company and have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
-39-
c. Presented in this annual report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of
the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the audit committee of the Company's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weakness in internal controls; and
b. Any fraud, whether or not material that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
my most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 9, 2003
/s/ Kenneth A. Chymiak
_______________________________________
Kenneth A. Chymiak
Chief Executive Office and Chief Financial
Officer
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
-40-
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. The
Registrant undertakes to furnish supplementally to the
Commission upon request a copy of any omitted schedule or
exhibit listed in the Exhibit Index set forth elsewhere
herein.
3.1 Certificate of Incorporation of the Company and
amendments.
3.2 Bylaws of the Company, as amended.
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
field 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
-41-
Exhibit 10.3 to the Current 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
Current 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.
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.
21.1 Subsidiaries.
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-42-