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 June 30, 2002 [ ] 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 June 30, 2002 were 10,011,716. 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 June 30, 2002 3 Consolidated Statements of Income Three and Nine Months Ended June 30, 2002 and 2001 5 Consolidated Statements of Cash Flows Nine Months Ended June 30, 2002 and 2001 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 6. Exhibits and Reports on 8-K 13 Signatures 14 2 ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEET June 30, 2002 Assets Current assets: Cash $ 494,532 Accounts receivable 2,918,364 Inventories 19,137,837 Deferred income taxes 36,000 ---------------- Total current assets 22,586,733 Property and equipment, at cost Machinery and equipment 1,791,044 Land and buildings 840,138 Leasehold improvements 490,727 3,121,909 Less accumulated depreciation and amortization (969,045) ---------------- Net property and equipment 2,152,864 Other assets: Deferred income taxes 855,282 Investment 11,675 Goodwill, net of accumulated amortization of $380,852 1,359,817 Other assets 28,700 ---------------- Total other assets 2,255,474 ---------------- Total assets $ 26,995,071 ================ See notes to consolidated financial statements 3 ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEET June 30, 2002 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 977,998 Accrued expenses 391,704 Accrued income taxes 344,993 Bank revolving line of credit 4,771,567 Notes payable - current portion 188,006 Dividends payable 310,000 Stockholder loans 1,150,000 ---------------- Total current liabilities 8,134,268 Notes payable 558,740 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 (1,743,890) 18,356,227 Less: Treasury stock, 20,000 shares at cost (54,164) ---------------- Total stockholders' equity 18,302,063 ---------------- Total liabilities and stockholders' equity $ 26,995,071 ================ See notes to consolidated financial statements 4 ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF INCOME Three months ended Nine months ended June 30 June 30 2002 2001 2002 2001 ---------------------------- ----------------------------- Net sales and service income $ 6,827,213 $ 7,551,120 $ 18,255,906 $ 17,122,114 Cost of sales 3,351,194 3,870,713 9,132,552 8,697,281 ---------------------------- ----------------------------- Gross profit 3,476,019 3,680,407 9,123,354 8,424,833 Operating expenses 2,011,821 1,895,669 5,347,862 4,376,525 ---------------------------- ----------------------------- Income from operations 1,464,198 1,784,738 3,775,492 4,048,308 Interest expense 63,624 83,428 178,995 254,093 ---------------------------- ----------------------------- Income before income taxes 1,400,573 1,701,310 3,596,497 3,794,215 Provision for income taxes 545,944 646,950 1,299,944 1,453,678 ---------------------------- ----------------------------- Net income 854,629 1,054,360 2,296,553 2,340,537 Preferred dividends 310,000 310,000 930,000 930,000 ---------------------------- ----------------------------- Net income attributable to common stockholders $ 544,629 $ 744,360 $ 1,366,553 $ 1,410,537 Earnings per share: Basic and diluted $ 0.05 $ 0.07 $ 0.14 $ 0.14 See notes to consolidated financial statements 5 ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF CASH FLOWS FOR NINE MONTHS ENDED JUNE 30, 2002 2001 ------------------------------- Cash Flows from Operating Activities Net income $ 2,296,553 $ 2,340,537 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 229,626 204,778 Provision for deferred income taxes 134,719 134,719 Change in: Receivables 77,122 1,415,330 Other assets 66,118 (3,047) Inventories (1,408,716) (2,821,511) Accounts payable and accrued liabilities (121,713) 657,353 ------------------------------- Net cash provided by operating activities 1,273,709 1,928,159 Cash Flows from Investing Activities Additions to property and equipment (495,075) (213,295) Proceeds from sale of investment in Ventures - 657,572 Acquisition of stock in NCS - (1,689,000) Cash acquired in NCS acquisition - 575,958 Cash acquired in Comtech acquisition - 22,773 ------------------------------- Net cash used in investing activities (495,075) (645,992) Cash Flows from Financing Activities Net borrowings under line of credit 520,434 333,215 Repayment of notes payable (5,094) - Payment on stockholders loan (100,000) (300,000) Payments of preferred dividends (930,000) (930,000) Net cash used in financing activities (514,660) (896,785) ------------------------------- Net increase in cash 263,974 385,382 ------------------------------- Cash, beginning of year 230,558 22,495 ------------------------------- Cash, end of year $ 494,532 $ 407,877 =============================== See notes to consolidated financial statements 6 ADDVANTAGE TECHNOLOGIES GROUP, INC. STATEMENTS OF CASH FLOWS FOR NINE MONTHS ENDED JUNE 30, 2002 2001 ------------------------------- Supplemental Cash Flow Information Cash paid during the period for: Interest $ 178,995 $ 254,093 Income taxes 1,630,998 1,265,920 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, ADDvantage Technologies Group of Nebraska, (dba "Lee Enterprise"), NCS Industries Inc. ("NCS"), ADDvantage Technologies Group of Missouri, (dba "Comtech Services"), ADDvantage Technologies Group of Texas, (dba "Tulsat - Texas"), and Tulsat - Atlanta LLC (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 Nine months Nine months ended ended ended ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------------- ------------- ------------ ------------ Net Income attributable to common stockholders $ 544,629 $ 744,360 $ 1,366,553 $ 1,410,537 Basic and Diluted EPS Computation: Weighted average outstanding common shares 9,991,716 10,002,957 9,991,716 9,994,730 Earnings per Share $0.05 $0.07 $0.14 $0.14 8 Note 4 - Line of Credit, Stockholder Loans, and Notes Payable At June 30, 2002, a $4.8 million balance is outstanding under a $7.0 million line of credit due June 30, 2003, with interest payable monthly at Chase Manhattan Prime less 1 1/4% (3.5% at June 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. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles. Stockholder loans of $1.2 million bear interest at rates that correspond with the line of credit (3.5% at June 30, 2002) and are subordinate to the bank notes payable. Notes payable consist of the following items - notes arising from the NCS purchase include a $300,000 obligation due $25,000 per quarter (of which a $175,000 balance remains payable at June 30, 2002) and a $200,000 obligation payable quarterly at 7% (of which a balance of $117,000 remains at June 30, 2002). Both notes are payable quarterly, with 7 quarters remaining. Notes payable to Chymiak Investments, LLC for loans used to purchase buildings at Comtech and ADDvantage Technologies Group of Texas, include two notes issued in June 2001 for $328,000 and $150,000, respectively (of which balances of $328,000 and $140,000 remains, respectively) bearing interest at 7.5% due monthly with a 10 year term. 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. As a result of bankruptcies and credit tightening in the broadband and cable industry this quarter, we have seen an impact of overall sales and profits for the third quarter of 2002. However, gross profit margins for the nine-month period and sales are steadily increasing each month at our subsidiaries NCS and Comtech. We believe that as the cable companies look at expanding their services in key markets and companies look to recover from recent stock market impacts, there will be an emphasis on minimizing their costs, thus creating a higher demand for the Company's repair services and re-manufactured equipment. Results of Operations Comparison of Results of Operations for the Three Months Ended June 30, 2002 and June 30, 2001 Net Sales and Service Income. Net Sales decreased $724,000 or 9.6%, to $6.83 million in the third quarter of fiscal 2002 from $7.55 million for the same period in fiscal 2001. Of the decrease, $671,000 was due to one of our major customers filing for Chapter 11 bankruptcy protection. Net sales also decreased as a result of the reduction in capital spending due to recent credit tightening occurring in the cable television industry. New equipment sales were $2.77 million, for the current period compared with $3.05 million in fiscal 2001. Sales from remanufactured equipment were $3.16 million for the current period, compared with $3.36 million in the same period last year. Repairs were $894,000 for the current quarter, compared with $1.05 million last year. Cost of Goods Sold. Cost of goods sold decreased to $3.35 million for the third quarter of fiscal 2002 from $3.87 million for the same period of fiscal 2001. The decrease was primarily due to the decrease in sales for the period. Gross Profit. Gross Profit decreased $204,000 or 5.6% to $3.48 million for the third quarter of fiscal 2002 from $3.68 million for the same period in fiscal 2001. The gross margin percentage was 51.0% for the current quarter, compared to 48.7% for the same quarter last year. Operating Expenses. Operating expenses increased to $2.01 million in the third quarter of fiscal 2002 from $1.90 million in 2001, an increase of 6.1%. The increase in operating expenses was primarily due to higher operating expenses resulting from the acquisition of Comtech, coupled with reserving $62,000 for bad debts associated with one of our customers filing bankruptcy. Income from Operations. Income from operations decreased $321,000, or 18.0% to $1.46 million for the third quarter of fiscal 2002 from $1.78 million for the 10 same period last year. This decrease was primarily due to higher expenses associated with operating expenses resulting from the recent acquisitions. Comparison of Results of Operations for the Nine Months Ended June 30, 2002 and June 30, 2001 Net Sales and Service Income. Net Sales increased $1.1 million or 6.6%, to $18.3 million in the first nine months of fiscal year 2002 from $17.1 million for the same period in 2001. The increase was primarily due to higher new equipment sales, which increased to $7.75 million from $6.93 million last year primarily due to our acquisitions of NCS and Comtech (acquired in the second and third quarters of 2001, respectively) and as a result of our distributorship with Scientific-Atlanta (initiated in the fourth quarter of 2001). In addition, repairs have increased to $2.70 million in this period from $2.37 million last year. Revenue from re-manufactured equipment increased to $7.79 million in the first nine months of fiscal year 2002 from $7.54 million for the same period last year primarily due to the synergies created from our latest acquisitions. NCS and Comtech had sales of $2.58 million and $1.45 million, respectively. Cost of Sales. Cost of goods sold increased to $9.13 million for the nine month period of fiscal 2002 from $8.70 million for the same period of fiscal 2001. The increase was primarily due to the increase in sales. Gross Profit. Gross Profit increased $699,000 or 8.3% to $9.12 million for the nine month period of fiscal 2002 from $8.42 million for the same period last year. The gross margin percentage was 50.0% for the current nine month period, compared to 49.2% for the same period in fiscal 2001. Operating Expenses. Operating expenses increased to $5.35 million in the nine month period of fiscal 2002 from $4.38 million in 2001, an increase of 22.1%. The increase in operating expenses was primarily due to the acquisitions of NCS and Comtech. Income from Operations. Income from operations decreased $273,000 or 6.7%, to $3.78 million for the first nine months of 2002 from $4.05 million for the same period last year. This decrease was primarily due to overall revenue increase offset by higher operating expenses resulting from the recent acquisitions. Liquidity and Capital Resources 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 June 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 line of credit for working capital purposes and $2.0 million for future acquisitions meeting Bank of Oklahoma credit guidelines. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles and had an outstanding balance at June 30, 2002 of $4.8 million, due June 30, 2003. 11 The Company finances its operations primarily through internally generated funds and a bank line of credit. The company also owes from the NCS purchase, a $300,000 obligation due $25,000 per quarter (of which a $175,000 balance remains payable) and a $200,000 obligation payable quarterly at 7%(of which a balance of $117,000 remains). Both notes are payable quarterly, with 7 quarters remaining. Notes payable to Chymiak Investments, LLC for loans used to purchase buildings at Comtech and ADDvantage Technologies Group of Texas, include two notes issued in June 2001 for $328,000 and $150,000, respectively (of which balances of $328,000 and $140,000 remains, respectively) bearing interest at 7.5% due monthly with a 10 year term. Stockholder loans include a $1.2 million note, due on demand, bearing interest at the same rate as the Company's bank line of credit, and is subordinate to the bank notes payable. 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 first nine months of the fiscal year. Forward Looking Statements Certain statements included in this report which are not historical facts are forward-looking statements. These forward-looking statements are based on current expectations, estimates, assumptions and beliefs of management; and words such as "expects," "anticipates," "intends," "plans," "believes," "projects", "estimates" and similar expressions are intended to identify such forward looking statements. These forward-looking statements involve risks and uncertainties, including, but not limited to, the future prospects for 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 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. Description 99.1 Certification of the 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 (b) Reports on Form 8-K for the quarter ended June 30, 2002: None 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 August 13, 2002 Kenneth A. Chymiak (Principal Executive Officer) /S/ Adam R. Havig ----------------------- Controller August 13, 2002 Adam R. Havig (Principal Accounting Officer)