10QSB 1 r10-qsb2q2001.txt 2ND QTR 2001 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period ________________ to ______________ Commission File number 1-10799 ADDvantage Technologies Group, Inc. (Exact name of small business issuer as specified in its charter) OKLAHOMA 73-1351610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1605 E. Iola Broken Arrow, Oklahoma 74012 (Address of principal executive office) (Zip Code) (918) 251-9121 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 Shares outstanding of the issuer's $.01 par value common stock as of May 1, 2001 is 9,990,616. Transitional Small Business Issuer Disclosure Format (Check one): Yes No x Part I - Financial Information Page Financial Information: Item 1. Financial Statements Consolidated Balance Sheet March 31, 2001 3 Consolidated Statements of Income Three and Six Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows Three and Six Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operation 10 Part II - Other Information Item 4. Submission of Matter to a Vote of Security Holders 13 Item 6. Exhibits and Reports on 8-K 13 Signatures 14 2
ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEET March 31, 2001 Assets Current assets: Cash $ 361,168 Accounts receivable 2,494,579 Inventories 16,108,930 Deferred income taxes 43,000 --------------- Total current assets 19,007,677 Property and equipment, at cost Machinery and equipment 1,714,451 Leasehold improvements 168,724 Other property and equipment 26,412 --------------- 1,909,587 Less accumulated depreciation and amortization (740,450) --------------- Net property and equipment 1,169,137 Other assets: Deferred income taxes 1,010,188 Investment 11,672 Goodwill, net of accumulated amortization of $185,633 1,523,287 Other assets 77,380 --------------- Total other assets 2,622,527 --------------- Total assets $ 22,799,341 =============== See notes to consolidated financial statements
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ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEET March 31, 2001 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 845,441 Accrued expenses 118,198 Accrued income taxes 116,502 Bank revolving line of credit 3,526,002 Note payable - current portion 217,386 Dividends payable 310,000 Stockholder loans 1,250,000 --------------- Total current liabilities 6,383,529 Note Payable 433,333 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 (4,063,474) --------------- 16,036,643 Less: Treasury stock, 21,100 shares at cost (54,164) --------------- Total stockholders' equity 15,982,479 --------------- Total liabilities and stockholders' equity $ 22,799,341 =============== See notes to consolidated financial statements 4
ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF INCOME Three months ended Six months ended March 31 March 31 2001 2000 2001 2000 --------------------------- --------------------------- Net sales and service income $ 4,754,311 $ 6,747,529 $ 9,570,993 $ 11,283,700 Cost of sales 2,379,304 3,274,865 4,826,568 5,375,870 --------------------------- --------------------------- Gross profit 2,375,007 3,472,664 4,744,425 5,907,830 Operating expenses 1,317,320 1,357,547 2,480,856 2,485,005 --------------------------- --------------------------- Income from operations 1,057,687 2,115,117 2,263,569 3,422,825 Interest expense (82,746) (104,529) (170,665) (178,713) --------------------------- --------------------------- Income before income taxes 974,941 2,010,588 2,092,904 3,244,112 Provision for income taxes 384,055 764,113 806,728 1,192,312 --------------------------- --------------------------- Net income 590,886 1,246,475 1,286,176 2,051,800 Preferred Dividends 310,000 310,000 620,000 620,000 --------------------------- --------------------------- Net income attributable to common stockholders $ 280,886 $ 936,475 $ 666,176 $ 1,431,800 Earnings per Share: Basic $ 0.03 $ 0.10 $ 0.07 $ 0.15 Diluted $ 0.03 $ 0.09 $ 0.07 $ 0.15 See notes to consolidated financial statements
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ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED MARCH 31, 2001 2000 ---------------------------- Cash Flows from Operating Activities Net income $ 1,286,176 $ 2,051,800 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 122,577 90,590 Provision for deferred income taxes 89,813 89,812 Change in: Receivables 1,384,150 72,786 Prepaid and other expense (11,122) 211,842 Inventories (978,440) (1,933,950) Accounts payable and accrued liabilities (500,354) 258,159 ---------------------------- Net cash provided by operating activities 1,392,800 841,039 Cash Flows from Investing Activities Additions to property and equipment (67,776) (190,818) Proceeds from sale of investment in Ventures 657,572 - Acquisition of stock in NCS (1,439,000) - Cash acquired in NCS Acquisition 575,958 - Cash acquired in LEE CATV merger - 90,047 ---------------------------- Net cash provided by investing activities (273,246) (100,771) ---------------------------- Cash Flows from Financing Activities Net borrowings (repayments) under line of credit 139,119 (504,926) Advances (payment) on stockholders loan (300,000) 74,993 Payments of Preferred Dividends (620,000) (310,000) Proceeds for exercise of common stock options - 7,437 ---------------------------- Net cash used in financing activities (780,881) (732,496) ---------------------------- Net increase in cash 338,673 7,772 Cash, beginning of year 22,495 16,843 ---------------------------- Cash, end of year $ 361,168 $ 24,615 ============================ See notes to consolidated financial statements
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ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED MARCH 31, 2001 2000 ---------------------------- Supplemental Cash Flow Information Interest paid for the period $ 170,665 $ 174,024 Supplemental Disclosure of Non-cash Investing and Financing Activities Acquisition of Lee CATV Corporation: Issuance of preferred stock - 1,000,000 Working capital other than cash - 241,017 Land and equipment - 116,694 Intangibles and other assets - 1,276,229 Assumption of note payable - 723,987 Issuance of note payable - 271,094 Acquisition of NCS, Inc: Working capital other than cash 957,192 - Land and equipment 250,000 - Intangibles and other assets 243,050 - Assumption of note payable 289,000 - Issuance of note payable 249,000 - See notes to consolidated financial statements
7 NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary in order to make the financial statements not misleading. Note 2 - Description of Business ADDvantage Technologies Group, Inc., through its subsidiaries TULSAT Corporation, Lee Enterprise, and NCS Industries Inc. ("NCS") (collectively, the "Company"), sells new, surplus, and refurbished cable television equipment throughout North America in addition to being a repair center for various cable companies. The Company operates in one business segment. Note 3 - Earnings per Share
Three months Three months Six months Six months ended ended ended ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ------------------------- ----------------------- Net Income attributable to common stockholders $280,886 $936,475 $666,176 $1,431,800 Basic EPS Computation: Weighted average outstanding common shares 10,011,716 9,772,448 10,011,716 9,746,647 Earnings per Share $0.03 $0.10 $0.07 $0.15 Diluted EPS Computation: Weighted average outstanding common shares 10,011,716 9,999,206 10,011,716 9,999,206 Earnings per Share $0.03 $0.09 $0.07 $0.14
Note 4 - Acquistions and other events 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 was negotiated between the parties at arm's length and 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 prior owner of NCS and (iv) $49,000 remaining in a payable to the shareholder. As contemplated by the Purchase and Sale Agreement, the Shareholder entered into a three-year consulting agreement with NCS for $300,000 8 and 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 refurbished 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. Following are the unaudited pro-forma results of operations for the three and six month periods ended March 31, 2001, assuming the acquisition occurred at the beginning of the period.
Unaudited ------------------------------------------------------ Three months Three months Six months Six months ended ended ended ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ------------------------------------------------------ Net Sales and Service Income $ 5,569,311 $ 8,206,529 $ 11,424,993 $ 13,781,700 Net Income $ 581,886 $ 1,391,475 $ 1,281,176 $ 2,238,800 Net Income attributable to common stock $ 271,886 $ 1,081,475 $ 661,176 $ 1,618,800 Weighted average outstanding common shares 10,011,716 9,772,448 10,011,716 9,772,448
Note 5 - Investment in Ventures Education System Corporation On November 1, 2000, Ventures Education System Corporation exercised its option to repurchase 733,333 shares (after giving effect to a recent four for three stock split) of Ventures stock acquired by the company in September 1998. The exercise price consisted of $660,000 ($640,000 cash plus deposits received of $20,000) 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. Note 6 - Revolving Line of Credit On November 4, 2000, the Bank of Oklahoma amended the Company's line of credit, which is due June 30, 2001. The Company is authorized to borrow up to $12,000,000 at the borrowing rate of 1 1/4% below prime (6.75% at March 31, 2001). This line of credit will provide the lesser of $6,000,000 or the sum of 80% of qualified accounts receivable and 40% of qualified inventory in a revolving Line of Credit for working capital purposes ($4,000,000 available at March 31, 2001), $4,000,000 for future acquisitions meeting Bank of Oklahoma credit guidelines and $2,000,000 to be used at the Company's discretion based on assets purchased.The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles. The balance outstanding at March 31, 2001 is $3,526,002. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company specializes in the refurbishment of previously owned cable television ("CATV") equipment and the distribution of new and surplus equipment to CATV operators and other broadband communication companies. On March 2, 2001, the Company entered into a Purchase and Sale Agreement with Richard S. Grasso (the "Shareholder") and NCS Industries, Inc., a Pennsylvania corporation ("NCS"), to purchase from the Shareholder all of the issued and outstanding common stock of NCS. The consideration for the acquisition was negotiated between the parties at arm's length and included: (i) $800,000 in cash , (ii) a promissory note payable to the Shareholder in the amount of $200,000, and (iii) the assumption of Shareholder's obligation under a promissory note issued to a prior owner of NCS. As contemplated by the Purchase and Sale Agreement, the Shareholder entered into a three-year consulting agreement with NCS and a non-competition agreement with the Company and NCS. As a result of this transaction, NCS became a wholly owned subsidiary of the Company. Results of Operations Comparison of Results of Operations for the Three Months Ended March 31, 2001 and March 3l, 2000 Gross profits decreased $1,097,656 or 31.6% in the second quarter of the fiscal year 2001, as compared to 2000. This decrease was primarily due to a reduction in refurbished equipment sales resulting from the overall cable industry slowdown. Net Sales and service income. Net Sales decreased $1,993,218 or 29.5%, to $4,754,311 in the second quarter of fiscal 2001 from $6,747,529 for the same period in fiscal 2000. The decrease was primarily due to lower refurbished equipment sales, which decreased 39.2% for the quarter, partially offset by an increase in new products sales, which increased 22.7%. Sales were affected by an overall cable industry slowdown that occurred during the quarter. Cost of Sales. Cost of goods sold decreased to $2,379,304 for the second quarter of fiscal 2001 from $3,274,865 for the same period of fiscal 2000. The decrease was primarily due to a reduction in overall sales. Operating Expenses. Operating expenses decreased to $1,317,320 in the second quarter of fiscal 2001 from $1,357,547 in the second quarter of 2000. The decrease in operating expenses was primarily due to a reduction in legal and accounting fees. Income from Operations. Income from operations decreased 49.9% to $1,057,687 for the second quarter of 2001 from $2,115,117 for the second quarter of 2000. This decrease was primarily due to a slowdown in the economy which impacted the overall cable industry. 10 Comparison of Results of Operations for the Six Months Ended March 31, 2001 and March 3l, 2000 Gross profits decreased $1,320,498 or 21.8% in the first six months of the fiscal year 2001, as compared to 2000. This decrease was primarily due to a reduction in refurbished equipment sales resulting from the overall cable industry slowdown. Net Sales and service income. Net Sales decreased $1,715,225 or 15.2%, to $9,570,993 in the first six months of fiscal year 2001 from $11,286,218 for the same period in 2000. The decrease was primarily due to lower refurbished equipment sales, which decreased 26.1% for the six month period offset by increases in new product sales of 33.8% and repair services of 21.6%. Sales were affected by an overall cable industry slowdown that occurred during the first six months of fiscal year 2001. Cost of Sales. Cost of goods sold decreased to $4,826,568 for the six month period of fiscal 2001 from $5,221,294 for the same period of 2000. The decrease was primarily due to a reduction in overall sales. Operating Expenses. Operating expenses decreased to $2,480,856 for the first six months of fiscal 2001 from $2,588,535 for the prior year. The decrease in operating expenses was primarily due to a reduction in legal and accounting fees. Income from Operations. Income from operations decreased 34.9% to $2,263,569 for the first six months of 2001 from $3,476,389 for the same period last year. This decrease was primarily due to a slowdown in the economy which impacted the overall cable industry. Liquidity and Capital Resources On November 4, 2000, the Bank of Oklahoma increased the Company's line of credit under which it is authorized to borrow up to $12,000,000 and reduced the borrowing rate to 1 1/4% below prime (6.75% at March 31, 2000). This line of credit will provide the lesser of $6,000,000 or the sum of 80% of qualified accounts receivable and 40% of qualified inventory in a revolving line of credit for working capital purposes, $4,000,000 for future acquisitions meeting Bank of Oklahoma credit guidelines and $2,000,000 to be used at the Company's discretion based on assets purchased. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles. The Company finances its operations primarily through internally generated funds and a bank line of credit totaling $6,000,000 reserved for working capital purposes. At March 31, 2001, the revolving line of credit consisted of a $3,526,002 balance outstanding due June 30, 2001, with interest payable monthly at Chase Manhattan Prime less 1.25% (6.75% at March 31, 2001). The company also owes a $101,719 balance remaining on a note resulting from the Diamond W Investments, Inc. purchase, payable quarterly at 8% to the former owners and $200,000 on a note resulting from the NCS purchase, payable quarterly at 7% to the former owner. Stockholder loans include a $1,250,000 note bearing interest the same rate as the Company's bank line of credit, and is subordinate to the bank notes payable. 11 The Company has authorized the repurchase of up to $l,000,000 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. Forward Looking Statements Certain statements included in this report which are not historical facts are forward-looking statements. These forward-looking statements are based on current expectations, estimates, assumptions and beliefs of management; and words such as "expects," "anticipates," "intends," "plans," "believes," "projects", "estimates" and similar expressions are intended to identify such forward looking statements. These forward-looking statements involve risks and uncertainties, including, but not limited to, the future prospects for the business of the Company, the Company's ability to generate or to raise sufficient capital to allow it to make additional business acquisitions, changes or developments in the cable television business that could adversely affect the business or operations of the Company, general economic conditions, the availability of new and used equipment and other inventory and the Company's ability to fund the costs thereof, and other factors which may affect the Company's ability to comply with future obligations. Accordingly, actual results may differ materially from those expressed in the forward-looking statements. 12 PART II - OTHER INFORMATION OTHER INFORMATION Item 4. Submission of Matter to a Vote of Security Holders The annual meeting of shareholders of the Company was held in Broken Arrow, Oklahoma at the Forrest Ridge Golf Club on March 6, 2001. At the meeting, the following directors were elected for one year terms (with the votes as indicated): FOR WITHHELD Kenneth A. Chymiak 9,638,100 200 David E. Chymiak 9,638,100 200 Stephen J. Tyde 9,638,100 2,200 Freddie H. Gibson 9,638,100 200 Gary W. Young 9,638,100 2,200 Randy L. Weideman 9,635,300 2,300 The shareholders also approved the ratification of appointment of Tullius, Taylor, Sartain & Sartain as the Company's auditors for the 2001 fiscal year by a vote of 9,610,070 shares in favor and 2,275 against, with 25,755 shares abstaining. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.1 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 Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on March 16, 2001. (b) Reports on Form 8-K The Company filed one Form 8-K during the three months ended March 31, 2001. The report dated March 2, 2001 related to the purchase of NCS Industries, Inc. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADDVANTAGE TECHNOLOGIES GROUP, INC. Signature Title Date --------- ----- ---- /S/ Kenneth A. Chymiak Director and President May 14, 2001 ---------------------- (Principal Executive Officer) Kenneth A. Chymiak /S/ Adam R. Havig Controller May 14, 2001 ---------------------- (Principal Accounting Officer) Adam R. Havig 14