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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 25049
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
----------------------------------------------------
Commission File number 1-10799
ADDvantage Media Group, Inc.
(Name of Small Business Issuer in its charter)
Oklahoma 73-1351610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 East Skelly Drive
Meridian Tower, Suite 1080
Tulsa, Oklahoma 74135
(Address of principal executive office, including zip code)
Issuer's telephone number: (918) 665-8414
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the 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. [ ]
Issuer's revenues for its most recent fiscal year. $7,044,015
As of March 19, 1997, 5,781,089 shares of the Registrant's Common
Stock were outstanding, and the aggregate market value of the Common Stock held
by non-affiliates was approximately $26,167,307.
Documents Incorporated by Reference: Portions of the Registrant's
proxy statement to be sent to shareholders in connection with 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format (Check one):
Yes No X
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PART I
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ITEMS 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES
General
The Company, ADDvantage Media Group, Inc., is in the business of
marketing Shoppers Calculators(R) which are solar-powered calculators which
attach to the handles of shopping carts. The calculators are marketed under the
registered trademark "Shoppers Calculator(R)" and are designed with the three-
fold purpose of increasing the retailer's sales, assisting shoppers while they
are in the store and presenting an advertising message targeted to that consumer
(in the space provided on the calculator unit). Prior to 1996, principal
operating revenues of the Company historically were generated from the sales of
the calculators and of the advertising placed on the calculators. The Company
is currently installing its Shoppers Calculator(R) program in all the
Supercenter stores operated by Wal-Mart Stores, Inc. ("Wal-Mart").
Substantially all of the Company's revenues in 1996 were generated from its
contract with Wal-Mart. See "--Wal-Mart Supercenters" below.
Development of Business
The Company was formed in late 1989 for the purpose of producing the
Shoppers Calculator(R) and marketing them as in-store advertising vehicles. The
Company's business efforts initially were directed toward placing the
calculators in retail grocery chains and then selling the advertising space on
those calculators to national advertisers. During 1991, the Company installed
163,000 Shoppers Calculators(R) in 794 stores representing 13 grocery chains.
The Company incurred a substantial increase in its general and administrative
expenses as it increased the size and scope of its operations, but the
advertising revenues generated from those installations was significantly less
than anticipated under the Company's business plan. Although independent
marketing research substantiated the Company's belief in the Shoppers
Calculator(R) as an effective in-store advertising medium, the Company believes
that national advertisers were reluctant to commit their advertising dollars
because calculators were not installed in enough stores in the top market areas
to be considered a national advertising network.
Consequently, the Company shifted its primary emphasis during 1992
from selling advertising on the installed calculators to selling the calculator
units directly to the grocery chains. Although the shift in emphasis from
advertising sales to unit sales provided some short-term cash flow relief, the
Company believed it was necessary to change its long-term strategy in order to
become successful.
In early 1993, the Company redirected its managed in-store Shoppers
Calculator(R) program away from the retail grocery chain industry to the mass
merchandising industry segment. This move was motivated substantially by the
following:
. The significant decline in advertising revenues from the units
installed in grocery chains during the last half of 1992 due, the
Company believes, to the limited size and location of the Company's
installed network.
. The opportunity to manage a Shoppers Calculator(R) program in a retail
environment that has not previously been available to other in-store
advertising companies.
. The available market penetration (and accompanying media value to
advertisers) of the mass merchants.
Because of the strategic change in direction and in an effort to reduce
operating costs, the Company removed its calculators from its retail grocery
chain network.
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Beginning in 1991, the Company began test marketing the Shoppers
Calculator(R) in several Wal-Mart discount stores and, in 1992, added several
Kmart stores to its test marketing efforts. The Company entered into agreements
with Wal-Mart in July 1993 and June 1994 which provided for the installation of
the Company's calculators in certain Wal-Mart stores. However, the July 1993
and June 1994 contracts were never implemented. In January 1995, the Company
initiated a lawsuit against Wal-Mart based on Wal-Mart's alleged breach of the
terms of the agreements. The Company and Wal-Mart settled the lawsuit and, in
connection with such settlement, entered into a new contract, effective as of
September 1, 1995, calling for the Company to install and maintain its Shoppers
Calculator(R) in all of Wal-Mart's Supercenters in the continental United
States. In July 1996, the chief executive officer of Wal-Mart expressed
concerns over certain aspects of the current Wal-Mart contract. Since that
time, the Company has, at Wal-Mart's request, assumed the primary advertising
responsibilities of Wal-Mart under the contract and has continued its
installation of the Shoppers Calculator(R) program in the Supercenter stores
pursuant to the contract. In August 1996, Wal-Mart issued a press release
stating that it remained committed to honoring its contractual obligations to
the Company. See "--Wal-Mart Supercenters" below.
The Company continued negotiations with Kmart Corporation ("Kmart") after
the Company discontinued its test marketing in Kmart stores in 1993. In June of
1996, the Company entered into an agreement with Kmart. Under the Kmart
agreement, the Company will install and maintain its Shoppers Calculators in
certain Kmart and Super Kmart Center stores and will be responsible for
generating revenues, which will be shared with Kmart, from the sale of the
advertising messages. See "--Kmart Stores."
Shoppers Calculator(R)
Shoppers Calculator(R) is a 3" x 7 1/2" calculator which mounts on the
handles of retail shopping carts and includes an advertising image area of 2
9/16" x 2 1/8" within which advertising messages are positioned. The units
themselves are molded from high impact plastic and are constructed to be both
water and shock resistant. The units are attached to the handle of each
shopping cart with stainless steel clamps, brackets and headless screws. The
calculator performs the basic mathematical functions (add, subtract, multiply
and divide) and has an expected life of approximately five years based on the
life of the solar cell.
Wal-Mart Supercenters
As discussed above under "--Development of Business," the Company and Wal-
Mart entered into a contract, effective as of September 1, 1995, providing for
the installation and maintenance of the Company's Shoppers Calculator(R) in all
of Wal-Mart's Supercenter stores in the continental United States. Under the
contract, the Company is responsible for installing its calculators in Wal-
Mart's Supercenters and Wal-Mart is to be initially responsible for selling the
advertising to be placed on the calculators. The Company is to assist Wal-Mart
and potential advertisers with respect to developing advertising messages and
will be responsible for coordinating and obtaining the necessary camera-ready
art work, printing and producing the advertising messages, placing and changing
the messages on the installed calculators, and servicing and maintaining the
calculators.
Under the contract, Wal-Mart is obligated to pay the Company $2,700 per
installed store, per four week advertising cycle, during the term of the
contract in which Wal-Mart is responsible for selling the advertising and to pay
the Company the amount of any shortfall if the advertising revenues paid to the
Company by October 6, 1998 are less than $23,500,000. After the Company has
received a total of approximately $23,500,000 from Wal-Mart, the Company has the
option to continue the contract and become responsible for all of the
advertising sales activities through October 6, 1999, the
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expiration date of the contract. During this period, Wal-Mart has no obligation
to guarantee advertising revenues and any advertising revenues will be split 90%
to the Company and 10% to Wal-Mart.
During the last quarter of 1996, the Company, at Wal-Mart's request,
assumed primary responsibility for sales of advertising and has submitted to
Wal-Mart proposals relating to the recovery of the Company's costs and expenses
incurred in its advertising sales efforts, amending the sharing ratios after the
guaranteed amount of revenues has been received and extending the contract
termination date. At March 15, 1997, no formal action on these proposals had
been taken. However, Wal-Mart is providing certain assistance to the Company by
providing, without charge to the advertiser or the Company:
. the right to place Shoppers Calculators(R) with flashing lights on the
shelves where the advertised products are located;
. broadcast advertising spots over each store's public address system
for products which are advertised on the Shoppers Calculators(R); and
. statistical information regarding sales of advertised products which
is useful in evaluating the effectiveness of the advertising on the
Shoppers Calculators(R).
This assistance is not required of Wal-Mart under the terms of the contract and
any or all of it could be terminated or modified at any time.
At December 31, 1996, Shoppers Calculators(R) were installed on
approximately 266,000 shopping carts in 327 Wal-Mart Supercenters. This
represents 89% of the Wal-Mart Supercenters open at that date. Shoppers
Calculators(R) will be installed in existing as well as all new Supercenters
opened during the term of the contract. It is estimated that approximately 100
new Supercenters will be opened in each of 1997 and 1998. No installations are
expected to be made in 1997 until about April.
Also under the contract, Wal-Mart guaranteed the Company's additional bank
financing in the amount of $700,000 which was utilized primarily to fund the
acquisition of component parts and injection molding equipment for completing
calculator units, the initial installation and servicing of the calculators at
Supercenter locations, the repayment of a note due with respect to the Company's
acquisition of its interests in certain patent and trademark rights and the
repayment of certain past due trade accounts. The Company repaid the additional
bank financing in October 1996. See "--Manufacturing" below and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Liquidity".
Upon receipt by the Company of total payments of approximately $23,500,000
under the Wal-Mart contract (which would occur no later than October 6, 1998),
the Company has the option to (i) continue the contract, at which time it will
contractually assume all advertising responsibilities, or (ii) allow the
contract to terminate. If the Company elects to maintain the Shoppers
Calculator(R) program in the Supercenters, the contract will be continued
through October 6, 1999. The contract may be terminated earlier upon the breach
of any covenant, agreement, representation or warranty which is not cured within
30 days after receipt of written notice of such default. Under the contract,
the Company has agreed to reasonably adhere to the schedule for installations
and to service and repair the calculators and advertising messages to the extent
necessary to assure the proper functional performance and first class appearance
of the calculator and advertisement. The Company has warranted to Wal-Mart that
each calculator will be in good working order on its installation date and has
covenanted to make all necessary adjustments, repairs and replacements necessary
to maintain the calculators in good working order. In addition, upon the
termination of the contract or upon its
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expiration, the Company will be solely responsible for removing all the
calculators from the Supercenters.
Under the contract, the Company submits a bill to Wal-Mart in the amount of
$2,700 for each installed Supercenter at the beginning of each four week
advertising cycle. Wal-Mart is obligated to pay the Company within ten business
days of Wal-Mart's receipt of any advertising revenues from third parties, but
in no event later than 30 days from the beginning of an advertising cycle.
Through December 31, 1996, the Shoppers Calculator(R) program was utilized
primarily for advertising Wal-Mart's private label products. During the last
quarter of 1996, the Company sold advertising test programs to three national
advertisers, resulting in advertising revenues of $192,000. These revenues have
been recorded in the Company's financial statements as an account payable since
they may offset amounts due from Wal-Mart under the contract. See footnote 7 in
the notes to Financial Statements.
Kmart Stores
On June 3, 1996, the Company and Kmart entered into an agreement whereby
the Company will install and maintain its Shoppers Calculator(R) in designated
Kmart and Super Kmart Centers stores at no cost to Kmart. Under the agreement,
the Company will be responsible for selling the advertising to be placed on the
calculators and has agreed to pay Kmart a fee equal to 15% of the gross
advertising revenues generated. The agreement is for an initial term of one
year and continues thereafter on a month to month basis until terminated by
either party on 60 days' prior written notice. The agreement is subject to
earlier termination by a party in the event of (i) a material breach of the
agreement by the other party, (ii) a material failure of any covenant,
representation or warranty set forth in the agreement, (iii) the insolvency or
certain events of bankruptcy of the other party, or (iv) the cessation of
operations of the other party.
The number of Kmart stores to initially be included in the Shoppers
Calculator program has not yet been determined by the parties; however, the
Company currently anticipates that the agreement will initially include
approximately 125 Super Kmart Centers and 50 Kmart "Pantry" Stores. The Company
anticipates that it will not commence installation of its calculators in the
Kmart stores until it (i) receives sufficient advertising commitments necessary
to cover the manufacturing and installation costs of the calculators to be
installed in such stores and (ii) the Company's new calculator units are
available for installation. At this time, the Company is not able to predict
when or if installation of Shoppers Calculators(R) in Kmart stores will
commence.
Marketing
Mass Merchandising Program. As discussed above under "--Development of
Business," in early 1993, the Company redirected its efforts away from the
retail grocery chain network towards the mass merchandising industry. The
Company intends to focus its efforts on fully developing its Shoppers
Calculator(R) network under the Wal-Mart and Kmart agreements in the near
future. Accordingly, the Company is not negotiating with any other mass
merchandisers at this time. The Company anticipates that it will offer its
Shoppers Calculator(R) program to other mass merchandisers in the future if it
is successful in developing the Wal-Mart and Kmart networks. Currently, the
Company believes it will offer to install the Shoppers Calculator(R) in a mass
merchandiser's retail store chain at no cost to the merchandiser and, in
consideration therefor, will agree to pay the merchandiser a percentage of the
advertising revenues generated from the units installed in the stores. The
Company expects that it will tailor the specific terms of any future
installation programs to meet the requirements of each of its future mass
merchandiser customers, if any. There can be no assurance at this time what the
specific terms of any such agreements will be should the Company be successful
in its efforts to enter into an agreement with any additional mass merchandisers
in the future.
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Revenues generated from the Wal-Mart contract accounted for approximately
99.5% and 51% of the Company's total revenues in 1996 and 1995, respectively.
The Company anticipates that the Wal-Mart contract will continue to account for
a significant portion of the Company's revenues in 1997.
Advertising. Advertising contracts are sold in cycles of four weeks
each (13 cycles per year). The advertising messages displayed on the
calculators are changed at the beginning of each cycle by the Company.
Advertisers are generally responsible for submitting the proposed ad inserts in
camera-ready art form and the Company then reproduces the ads onto custom cut
advertising inserts for installation on the calculators.
Under the Company's Shoppers Calculator(R) program with Wal-Mart, the
Company, at Wal-Mart's request, has assumed primary responsibility for obtaining
advertising contracts from national advertisers for the calculators installed in
the Supercenters even though Wal-Mart has such responsibility under the
contract. Wal-Mart has the option to advertise its own private label products
or to sell advertising space on the calculators to the national advertisers;
however, after the expiration of the period in which Wal-Mart is responsible
under the contract for obtaining advertising contracts, the Company will be
solely responsible for obtaining advertising contracts. Under the Kmart
agreement, and under the program expected to be offered eventually to other mass
merchandising retail chains, the Company will also be responsible for obtaining
advertising contracts covering the calculator units to be installed in each
merchandiser's chain.
The Company currently offers advertisers contracts to place advertising
messages on a certain percentage of the total calculators installed for a
particular mass merchandising chain (e.g., 25% of the calculators installed in
the Supercenters). In addition, the Company may grant particular advertisers an
exclusive product category for advertising which prohibits the Company from
advertising products of competitors in that product category during the term of
the advertising cycle.
The Company has developed "package concept" calculators, which are
calculators with the shape and design of canned products (such as a soup, soft
drink or beer can) or packaged products (such as a detergent box, rice package
or candy bar), which also are attached to shopping cart handles. These
calculators would duplicate the packaging and bear the trademark and trade name
of a particular brand of product manufactured by an advertiser. The Company is
currently developing a new mounting base so that the Company's package concept
calculators will be more readily interchangeable with the Company's standard
calculator. The package concept and standard calculators manufactured for use
in the future with the new mounting base will contain a larger advertising
space. The Company estimates that the tooling costs necessary to commence
manufacturing the mounting base, package concept calculators and new standard
calculators will be approximately $150,000. The Company has recently begun the
production of its first "package concept" calculator for a major manufacturer.
Installation of these calculators is expected to commence in May 1997.
The Company currently uses a combination of an in-house marketing staff and
independent sales representatives for obtaining advertising commitments for the
Company's Shopper Calculator(R) program. The Company has two full-time
employees comprising its in-house marketing staff and has agreements with four
independent sales representatives located in the New York, Chicago, Dallas and
San Francisco markets. Under its agreements with each of the independent sales
representatives, the Company pays a fixed monthly amount during the initial
stage of the contract, usually six to nine months, and a sales commission
ranging from 5% to 10% on the advertising revenues generated by the
representative. As a result of the establishment of the Company's marketing
force, it is likely that the Company's costs will increase with respect to its
generation of advertising revenues in the future and, as a consequence, without
corresponding increases in the number of stores included in its Shoppers
Calculator(R) program or an increase in the advertising rates obtained, the
Company's net revenues may decline by the increased costs incurred. In
addition, the Company is currently obtaining guaranteed revenues for each
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advertising cycle for each Supercenter which is fully installed with the
Shoppers Calculator(R). There can be no assurance at this time that the Company
will be able to sell all or any available advertising slots during any
advertising cycle in the future or that it will be able to sell such advertising
at prices that are comparable with that received currently under the Wal-Mart
agreement.
Sales of Units. During the period from 1994 through 1995, the majority of
the Company revenues were generated from the sales of the Shoppers
Calculator(R). Most of the sales were to domestic retail grocery chains,
although some sales were made in the international marketplace. Revenues from
sales of Shoppers Calculators(R) have not been material. The Company currently
anticipates that its efforts in 1997 will be focused towards the installation of
its calculators in the mass merchandising industry. Accordingly, the Company
does not intend to actively market the Shoppers Calculator(R) to grocery and
other categories of retailers in the immediate future. Depending on the
availability of the calculators and the demand therefore from grocery or other
retailers, the Company may resume efforts to sell the units from time to time in
the future.
Competition
Currently, most major mass merchandising chains have not licensed third
parties to sell in-store advertising in their retail stores. As a result, the
Company may be one of the first advertising providers serving the mass
merchants' retail stores. However, there are numerous competitors providing
other types of in-store advertising mediums to other types of retailers
including the framed advertising on the front of each shopping cart, shelf and
aisle signs and displays, and check-out counter signage. Most of these possible
competitors have greater financial and human resources and generally a more
diversified product line than the Company. In addition, one or more of the
Company's competitors could develop a product similar or, should it choose to
dispute the validity of the design patent, identical to the Shoppers
Calculator(R) and compete directly against the Company.
Since most manufacturers and suppliers have limited advertising budgets,
the Company competes with all other advertising media. It is still uncertain
whether the Shoppers Calculator(R) will be able to compete effectively for
available advertising dollars.
Operations
The Company currently employs a network of field service technicians to
maintain and service the installed units and to replace the advertising inserts
on the calculators at the end of each advertising cycle. Each field service
technician is responsible for approximately five Supercenter locations. The
Company also employs area supervisors who have the responsibility for overseeing
the field service operations for approximately 40 to 50 Supercenter locations,
the exact number of such locations depending on the geographic concentration of
the stores. In addition, the Company currently employs two regional supervisors
who have overall responsibility for the area supervisors and field service
technicians in their respective geographic areas. From time to time the Company
will establish operating crews, consisting of three to four employees, for
installing the calculators on the shopping carts at the Wal-Mart Supercenter
locations.
Manufacturing
All of the calculators previously installed in the Company's grocery chain
network were manufactured by Texas Instruments pursuant to a manufacturing
services agreement between the parties entered into in 1991. The Company
purchased approximately 259,000 units from Texas Instruments under the
agreement. The agreement with Texas Instruments was terminated in 1992 when the
Company ceased manufacturing units due to the significant decline in advertising
revenues experienced. Texas Instruments recently ceased providing custom
manufacturing services and the
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Company has begun ordering components of the Shoppers Calculator(R) from several
manufacturers and intends to complete the final assembly at its warehouse
facility. The Company has engaged the services of a purchasing agent to source
the needed components for assembling the complete calculator units. In
consideration for such services, the Company is paying the agent a consulting
fee equal to 15% of the costs of the components purchased by the Company.
The Company salvaged the internal assemblies (the primary internal
calculator components) from approximately 70,000 of the calculators previously
installed in the Company's grocery chain network. These assemblies have been
utilized to complete the calculator units initially installed in the Supercenter
network. The Company currently utilizes Gavco Plastics Incorporated ("Gavco"),
a manufacturing company located in Broken Arrow, Oklahoma, to manufacture the
plastic cases constituting the shell of the calculators. The Company was able
to acquire the injection molding tools for the calculator units from Texas
Instruments and provide such tools to Gavco for its manufacturing of the shells.
Gavco is currently manufacturing the calculator shells at a rate of
approximately 30,000 per month.
The Company was able to purchase 140,000 pcb boards (a part of the internal
assembly) from Texas Instruments' inventory and Texas Instruments was
responsible for obtaining the remaining internal assembly components from
outside sources necessary for assembling 140,000 complete internal assemblies.
The Company reached an agreement with OAI Electronics, Inc., a manufacturing
company located in Tulsa, Oklahoma, to have one of its plants assemble the
internal assembly components received from Texas Instruments' inventory and
sourcing services. The completed internal assemblies will then be returned to
the Company for final assembly of the calculator units.
The Company has entered into an agreement with Nam Tai Electronic &
Electrical Products Ltd. ("Nam Tai"), a manufacturing company located in Hong
Kong, for the manufacture of the internal assemblies which will be needed to
complete installation of the Supercenter network. The Company received shipment
of 160,000 internal assemblies from Nam Tai through December 31, 1996. As of
February 28, 1997, the Company had purchase order commitments for delivery of
113,000 internal assemblies through July 1997, and has posted a letter of
credit for its purchase commitments.
While the Company is currently dependent on its existing suppliers for
component parts needed to complete the calculators for installation in the
Supercenter network, it believes that there are a number of available suppliers
for its component parts.
Other components for installation of the units (brackets, clamps, screws
and washers) are purchased from various manufacturers in the United States.
Design Patents and Trademarks
An initial design patent was issued on the Shoppers Calculator(R) design
without an advertising space in December 1986. A design patent was issued in
August 1992 for the Shoppers Calculator(R) design which includes the advertising
space. The Company acquired the rights to these design patents in December
1990. Registration by the Company of the trademark "Shoppers Calculator(R)" was
granted in July 1992 for a 10 year term. In December 1995, the Company filed an
application for registration of the trademark "Shoppers Calculator(R)" and
design with respect to its new logo. This application is still pending and the
registration has not yet been granted.
In 1992, the Company filed seven applications for design patents for
additional designs for the Shoppers Calculator(R). Patents for these designs
were granted in late 1994. The design patents issued expire 14 years after the
date of their issuance. In February 1996, the Company filed a U.S. application
for a design patent for a calculator design in the form of certain rectangular
packaged goods. This application is pending.
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The Company has filed the necessary documentation to seek design patents or
registered designs in Australia, Canada, France, Germany, the United Kingdom and
Venezuela with respect to the U.S. design patent issued in August 1992. Design
patents or registered designs for the Shoppers Calculator(R) have been granted
or registered in Australia, Canada, Germany and the United Kingdom. There is no
assurance that foreign design patents will ultimately be granted in those
countries where applications are pending. In addition, there is no assurance
that the granting of design patents or the registration of registered designs
will provide adequate protection against competing products.
The Company believes that the design patent issued in August 1992 is
material and important to its business because of (i) the protection it should
provide against competitors using this precise design of advertising medium,
and (ii) the revenues it believes it will be able to generate through leasing
and sales of the Shoppers Calculators(R) and licensing their use. However, the
Company does not believe that the design patent is essential to its success.
Because of its development and marketing activities to date and the size of the
potential market, the Company believes that it could operate profitably even if
it did not have the protection of the design patent. The granting of a patent
by the U.S. Patent Office is not determinative of the validity of a patent; such
validity can be disputed by third parties in legal proceedings or the Company
may be forced to institute legal proceedings to enforce validity. If any such
legal proceedings were commenced, the costs thereof could be substantial and
have a material adverse effect on the Company. The Company will benefit from
the design patent and pending design patent only if it is successful in its
efforts to market the advertising space to advertisers, however, there is no
assurance that such advertising will be commercially accepted. Additionally,
substitutes for successfully patented items are frequently developed and there
can be no assurance that a substitute for the Shoppers Calculator(R) will not
be successfully developed and marketed, which could have a material adverse
effect on the future operations of the Company.
Properties
The Company maintains its corporate offices at 5100 East Skelly Drive,
Meridian Tower, Suite 1080, Tulsa, Oklahoma 74135. The Company currently leases
approximately 6,300 square feet for its corporate offices from a third party
under a lease which expires on August 31, 1999. The lease provides for monthly
rental payments of $6,715, and the Company currently subleases a portion of its
rented space for which it receives $1,950 per month. The Company also leases
approximately 5,500 square feet of warehouse space in Tulsa, Oklahoma from a
third party. The lease for the warehouse space expires June 4, 1999, and
requires monthly rental payments of $1,614.
Employees
At December 31, 1996, the Company had 105 employees, 12 of which were
employed in the Company's corporate offices, 89 of which were employed in field
service operations and four of which were employed in the Company's warehouse
and installation operations. Management considers its relationships with its
employees to be excellent.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is, or, to the
Company's knowledge, may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to each executive
officer of the Company. Executive officers are elected by the Board of
Directors of the Company and serve at its direction.
The executive officers of the Company, their ages and their positions held
in the Company are as follows:
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Name Age Position
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<S> <C> <C>
Charles H. Hood 58 Chairman, President and Director
Gary W. Young 55 Executive Vice President--
Finance and Administration,
Treasurer and Director
Steve C. Oden 44 Vice President, Sales and Marketing
</TABLE>
The following is a brief account of the business experience of each
director, executive officer and key employee of the Company:
Charles H. Hood. Mr. Hood has served as Chairman, President and a director
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of the Company since its formation in September 1989. From 1987 to June 1990,
he served as Chairman of the Board of Directors of Ackerman, Hood & McQueen,
Inc., an advertising agency headquartered in Oklahoma, with offices located in
Tulsa and Oklahoma City, Oklahoma, Dallas, Texas, Washington, D.C., Cleveland,
Ohio and Fort Smith, Arkansas. From 1970 to 1987, Mr. Hood served as Chairman
of the Board of Directors of Hood, Hope and Associates, Inc., an advertising
agency he co-founded in 1970. Mr. Hood received a Bachelor of Journalism degree
from the University of Missouri.
Gary W. Young. Mr. Young joined the Company in December 1990 as Executive
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Vice President-- Finance and Administration and a director. Mr. Young is also
the owner and President of Young Ideas Inc., a financial consulting and
investment company he founded in 1987. From 1980 to 1986, he served as
Executive Vice President and a Director of Geodyne Resources, Inc., an oil and
gas acquisition and exploration company headquartered in Tulsa, Oklahoma. From
1970 to 1980, Mr. Young was Senior Vice President of Finance and Administration
and a Director of Cotton Petroleum Corporation, a Tulsa, Oklahoma, based oil and
gas exploration company. From 1963 to 1970, he was employed by Arthur Young &
Company (now Ernst & Young, LLP), a national accounting firm. Mr. Young
received a Bachelor of Science degree from Kansas State University and is a
Certified Public Accountant.
Steve C. Oden. Mr. Oden joined the Company in April 1996 as Vice President,
-------------
Sales and Marketing. From May 1988 to April 1996, he served as Vice President,
Sales for Lowrance Electronics, a manufacturer of sonar and navigational
equipment sold to retailers in the marine, sporting goods and avionics markets.
From June 1983 to May 1988, he served as Sales Manager for Ramsey Industries, a
manufacturer of winches, speed reducers, and transmissions sold to various
commercial users and other winches and accessories sold to recreational markets.
From 1974 to 1983, Mr. Oden served in various positions, including Sales Manager
and International Sales Manager, with the Auto Crane Company, a manufacturer of
electric and hydraulic cranes. Mr. Oden received Bachelor of Arts degrees in
Business Administration and Psychology from Westminster College.
-9-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently quoted on the OTC Bulletin Board
(symbol "ADDM"). The Common Stock was listed on the Boston Stock Exchange from
August 27, 1991 through January 14, 1994, when registration for trading of the
Common Stock was terminated because of the Company's noncompliance with certain
capital and surplus maintenance requirements of the Exchange. The following
table sets forth, for the periods indicated, the range of high and low closing
bid quotations for the Common Stock as quoted on the OTC Bulletin Board.
<TABLE>
<CAPTION>
Common Stock
------------
Period High Low
------ ----- -----
<S> <C> <C>
Fiscal Year 1996:
First Quarter...... $6.50 $2.25
Second Quarter..... $9.00 $4.75
Third Quarter...... $7.00 $1.25
Fourth Quarter..... $6.25 $4.13
Fiscal Year 1995:
First Quarter...... $0.91 $0.13
Second Quarter..... $1.07 $0.28
Third Quarter...... $3.00 $0.63
Fourth Quarter..... $3.38 $1.63
</TABLE>
The above quotations represent inter-dealer bid quotations, without retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
Substantially all of the holders of Common Stock maintain ownership of
their shares in "street name" accounts and are not, individually, stockholders
of record. At February 28, 1997, there were approximately 100 holders of record
of Common Stock. However, the Company believes there are in excess of 800
beneficial owners of Common Stock.
Dividends. The Company has not paid cash dividends with respect to the
Common Stock in the past and has no present plans to pay dividends on the Common
Stock in the foreseeable future. Pursuant to the terms of the Series A
Preferred Stock, the Company may not declare or pay dividends on the Common
Stock unless cumulative dividends on the Series A Preferred Stock have been
paid. At December 31, 1996, Series A Preferred Stock dividends in arrears were
$432,850 and accrued interest on such dividends was $98,943. Also, during the
term of the agreement for the Company's revolving line of credit, no dividends
may be paid on the Common Stock.
-10-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
- - ---------------------------------------------------------------------
The Company entered into a contract with Wal-Mart effective as of September
1, 1995, whereby the Company will install and maintain its Shoppers Calculators
in all of Wal-Mart's Supercenter stores in the continental United States. Under
the contract, Wal-Mart is obligated to pay the Company $2,700 per installed
store, per four-week advertising cycle, until a total of approximately
$23,500,000 has been received by the Company. Supercenter store installations
commenced in October 1995 with 41 stores being installed by year-end. During
1996 a total of 286 additional stores were installed bringing total
installations to 327 by the end of 1996.
The Company's first revenue period under the Wal-Mart contract began on
November 6, 1995. As a result, advertising revenues totaled $126,900 during
1995, as compared to $7,013,000 for 1996.
The significant increase in revenues improved operating income (income
before interest, taxes and preferred stock dividends) by $4,960,000 in 1996 as
compared to 1995. The Company's net income applicable to common stock was
$1,723,300 for year 1996 as compared to net income of $1,587,800 for 1995. As a
result of implementation of the new Wal-Mart contract, 1995 earnings were
increased by $3,910,000 from the accounting recognition of the future tax
benefits of the Company's net operating losses and temporary differences
aggregating $10,290,000 at December 31, 1995. This compares to 1996 tax expense
of $940,000.
Revenues from sales of calculators declined from $114,900 for the year
ended December 31, 1995 to $22,300 for the year ended December 31, 1996.
Approximately 8,300 units were sold during 1995, compared to approximately 1,500
units sold in 1996.
Cost of advertising services, representing primarily labor to supervise,
service and clean the installed units and to change advertising messages, and
depreciation of installed units, increased approximately $1,891,800 (873%) in
1996 as compared to 1995 as a result of higher labor costs, printing costs and
depreciation due to the increase in the number of calculators installed and
serviced during the respective periods.
Cost of sales of calculators, representing the manufacturing costs of units
sold, decreased approximately $38,200 (78%) in 1996 as compared to 1995. This
was due to the decreased number of units sold during 1996 as compared to 1995.
Selling expense increased approximately $234,200 (714%) in 1996. This was
primarily due to increases during 1996 in payroll, payroll related expenses,
sales representative retainer expenses and marketing materials costs. In
approximately July of 1996, the Company assumed primary responsibility for
selling advertising on the Shoppers Calculators(R) installed in Wal-Mart
Supercenters.
General and administrative expenses increased $515,100 (58%) in 1996 as
compared to the same period in 1995. During 1996, payroll and payroll related
expenses increased $124,200 as the Company began to increase staff to handle the
increased work load required from the Wal-Mart Supercenter contract. Officer
bonus accruals decreased $37,500 in 1996 as compared to the same period in 1995.
Executive retirement plan accruals, including insurance cost to fund future
payments, totaled $274,200 during 1996. There were no such accruals in 1995.
Expenses related to broker and analyst meetings and other shareholder expenses
increased $24,000 over 1995. Increases amounting to $138,700 occurred in
-11-
<PAGE>
professional fees, occupancy costs, business taxes and other expenses. The
increase was offset by a decrease in investment banking fees of $8,500 from
1995.
Litigation expenses in the amount of $636,300 were incurred during 1995 in
connection with the Company's lawsuit against Wal-Mart. The Company had no
litigation expenses in 1996.
Interest expenses decreased approximately $15,500 (3%) during 1996 as
compared to the same period in 1995. Interest on bank borrowings increased
$33,800 due to higher levels of bank borrowing offset somewhat by lower prime
interest rates during 1996. Vendor interest was $30,800 lower in 1996 as
compared to 1995. Interest accrued on amounts due investors decreased $18,500 in
1996 as compared to 1995 due to the conversion of certain portions of such
amounts to equity through the exercise of warrants issued to such investors and
payment of all remaining balances in 1996.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
- - ---------------------------------------------------------------------
In early 1993, the Company implemented a strategic change in its business
plan by redirecting its managed in-store Shoppers Calculator program away from
the retail grocery industry into the mass merchandising segment. This strategic
change resulted in significant declines in revenues during 1993, 1994 and 1995.
Through September 30, 1995 business activity had been severely curtailed and was
limited to selling Shoppers Calculators while the lawsuit filed against Wal-Mart
on January 18, 1995 was being processed. In September, 1995 the lawsuit was
settled with a new contract and operating plan. Future business activity will be
primarily related to managing a Shoppers Calculator program in Wal-Mart
Supercenters and developing programs with other mass merchants.
As a result of implementation of the new Wal-Mart contract, fourth quarter
1995 earnings were increased by $3,910,000 from the accounting recognition of
the future tax benefits of the Company's net operating losses and temporary
differences aggregating $10,290,000 at December 31, 1995.
Revenue from sales of calculators decreased from $402,000 for the year
ended December 31, 1994 to $114,900 for the year ended December 31, 1995.
Approximately 30,900 units were sold during 1994, of which 4,000 units were sold
in the domestic market and 26,900 units were sold in the international market.
This compares to approximately 8,300 units being sold in 1995, including sales
of 8,000 units in the domestic market and 300 units in the international market.
The average selling price per unit during 1995 was $13.84 as compared to $13.01
per unit during 1994.
Cost of sales of calculators representing the manufacturing costs of units
sold, decreased approximately $123,000 (72%) in 1995 as compared to 1994. This
was due to the decreased number of units sold in 1995 as compared to 1994. Cost
of services, representing primarily labor to supervise, service and clean the
installed units and to change advertising messages, and depreciation of
installed units, decreased approximately $67,300 (23.7%) in 1995, compared to
1994 as a result of lower labor costs due to a reduction in the number of
calculators installed and serviced during the respective periods.
The complete inventory of calculators, some of which was classified with
property and equipment in 1994 was inspected in preparation for installation in
Wal-Mart Supercenters. Calculators not suitable for installation costing
$132,000 were written off.
Selling expense decreased approximately $92,300 (74%) in 1995 as compared
to the same period in 1994. This was primarily due to reductions during 1995 in
payroll, payroll related expenses, marketing materials costs and travel expense.
General and administrative expenses increased $360,700 (68%) in 1995 as
compared to the same period in 1994. During 1995, payroll and payroll related
expenses increased $73,500 as the company
-12-
<PAGE>
began to increase staff to handle the increased work load required from the Wal-
Mart Supercenter contract. In June, 1995 officer bonuses amounting to $187,500
were paid by issuing common stock and in December $100,000 of additional officer
bonuses were accrued. Expenses related to broker and analyst meetings increased
$21,800 over 1994. Also, investment banking fees of $8,500 were incurred for
financial consulting during the first quarter of 1995. Reductions amounting to
$38,900 occurred in insurance, legal and audit fees, and occupancy costs while
other miscellaneous expenses increased $8,300.
Litigation expense in the amount of $636,300 was incurred during 1995 which
consisted of legal expenses and amounts due to investors who provided funding to
process the lawsuit against Wal-Mart. See "--Financial Condition and Liquidity"
below.
Interest expenses increased approximately $195,100 (63%) in 1995 as
compared to 1994 due primarily to high levels of borrowing and higher interest
rates. Also during 1995, interest has been accrued on certain past due accounts
payable and accrued preferred stock dividends.
Financial Condition and Liquidity
During the first quarter of 1995, the Company completed an offering of
promissory notes and warrants for an aggregate consideration of $200,000. The
offering included (a) a total of 500,000 warrants, each of which, upon exercise,
entitled the holder to acquire one share of the Company's Common Stock at a
price of $.20 per share, and were exercisable within 24 months from the date of
issuance; (b) a total of 10% of the net recovery from the Wal-Mart lawsuit
described elsewhere herein; and (c) promissory notes in an aggregate principal
amount of $200,000 and bearing interest at the rate of 10% per annum due on or
before 20 days after the final resolution, by settlement, final judgment or
otherwise, of the Wal-Mart litigation. On November 30, 1995, investors holding
warrants to purchase 425,000 shares of Common Stock exercised such warrants by
converting promissory notes in the principal amount of $85,000 to acquire the
shares. At the same date, new promissory notes totaling $130,808 (representing
$115,000 principal and $15,808 accrued interest on the original notes) were
issued. These notes mature on June 30, 1997.
During the second quarter of 1995, the Company issued 200,000 shares of
Common Stock as a partial settlement of a past due account. As a result of this
transaction, accounts payable and accrued interest were reduced by $75,000 and
$14,800 respectively.
The Company entered into separate agreements with Wal-Mart in July 1993 and
June 1994 which provided for the installation of the Company's calculators in
certain Wal-Mart stores. The July 1993 and June 1994 contracts were never
implemented and on January 18, 1995, the Company filed a suit against Wal-Mart
for the alleged breach of the terms of those contracts.
On September 1, 1995 the Company and Wal-Mart entered into a new contract
and the Company dismissed the lawsuit. Under the terms of the new four-year
contract, the Company is required to install the Shoppers Calculators in all of
Wal-Mart's Supercenters in the continental United States, and Wal-Mart is to
sell the advertising for the calculators during the initial phase of the
contract. During the term of the contract in which Wal-Mart sells the
advertising, Wal-Mart has agreed to guarantee advertising revenues to the
Company of approximately $23.5 million subject to the Company's obligation to
install and service the Shoppers Calculators during the revenue guaranty period.
At the conclusion of the Wal-Mart sales phase, the Company has the option to
continue the contract through October 6, 1999, by assuming the advertising sales
responsibilities for the program. Upon conclusion of the contract, the program
is subject to re-evaluation by both parties.
The present value of the amount payable to the participants in the
Company's private placement (including Messrs. Hood and Young who provided the
initial funding for the lawsuit), who have the right to
-13-
<PAGE>
receive an aggregate of 12% of the net recovery in the Wal-Mart litigation, has
been calculated by the Company to be $498,711 and has been recorded as
litigation expense in the financial statements.
In compliance with the terms of the new contract, on October 17, 1995, the
Company furnished Wal-Mart with a detailed "operating plan" which projects
advertising revenues, capital costs and operating expenses based on the new
contract. The purpose of this operating plan was to determine the financial
impact of the new contract to the Company, F&M Bank and creditors. The
operating plan in its final form covered years 1995, 1996, 1997 and 1998. The
key assumptions used to develop the operating plan were provided to the Company
by Wal-Mart and were as follows:
Supercenter Installations
<TABLE>
<CAPTION>
Year Stores Shopping Carts
---- ------ --------------
<S> <C> <C>
1995 33 39,600
1996 200 240,000
1997 100 120,000
1998 100 120,000
--- -------
Total Installations 433 519,600
=== =======
</TABLE>
The Wal-Mart contract provided the Company with additional bank financing,
which has been guaranteed by Wal-Mart, in the amount of $700,000. The note
evidencing such financing, including $60,270 of accrued interest, was paid in
October 1996.
On March 6, 1996, the Company completed a restructuring of all past due
bank debt effective as of October 1, 1995. The $1,800,000 revolving line of
credit, other notes totaling $1,132,622 and accrued interest through September
30, 1995 of $474,034 were combined into a new note in the amount of $3,406,656.
This new loan bears interest at the Chase Manhattan Bank prime rate (8.25% on
December 31, 1996) plus 1%. The loan has a maturity date of May 31, 1998, with
payment terms tied to the Company's projected revenues under the Wal-Mart
contract. During the fourth quarter of 1996, cash flow from operations and
proceeds from the Company's warrant redemption were utilized to reduce the
principal amount of the loan by $2,250,000. Based on current cash flow
projections, the Company anticipates the balance of the loan will be repaid
during the second quarter of 1997.
The Company's first revenue period under the new contract began on November
6, 1995. Through December 31, 1996, cumulative revenues received from Wal-Mart
totaled $7,139,959, reducing the guaranteed revenues to be received in future
periods to $16,354,571. The Company believes the cash flow from the Wal-Mart
contract should allow the Company to meet its anticipated cash requirements for
the foreseeable future, including repayment of all past due obligations.
During June 1996, certain warrants to purchase up to 60,000 units (each
unit consisting of two shares of Common Stock and one warrant to purchase one
share of Common Stock for $4.80 per share) were exercised. These unit warrants
were issued in June 1991 to the selling agent in connection with the Company's
initial public offering. A total of 120,000 shares of Common Stock and warrants
to purchase 60,000 shares of Common Stock at $4.80 per share were issued, with
net proceeds to the Company amounting to $432,000. The warrants to purchase
60,000 shares of Common Stock, set to expire on December 31, 1996, were extended
to December 31, 1998.
During August 1996, 50,000 shares of the Company's Series A, 10% Cumulative
Convertible Preferred Stock, including accrued dividends and interest thereon,
were converted into 75,532 shares of
-14-
<PAGE>
the Company's Common Stock at the conversion rate of $4.00 per share. As a
result of this transaction, stockholders' equity was increased $102,200.
On November 22, 1996, the Company completed the redemption of its 600,000
outstanding Common Stock Purchase Warrants that were set to expire on December
31, 1996. A total of 582,907 Warrants, or 97%, were exercised with gross
proceeds aggregating $2,331,628. This amount, net of commissions and
registration expenses of approximately $260,000, was committed to repayment of
the Company's bank debt. From the net proceeds, the Company paid $2,000,000 of
its outstanding bank debt in December 1996.
The Company's total stockholders' equity as reflected on its balance sheet
at December 31, 1992, fell below the minimum capital and surplus requirements
necessary to maintain the listing of the Common Stock on the Nasdaq Small Cap
Market. Consequently, the Common Stock was delisted from the Nasdaq system on
April 23, 1993 and from the Boston Stock Exchange on January 14, 1994. The
Company's securities are traded on the OTC Bulletin Board. The Company has
submitted an application for its Common Stock to be quoted on the Nasdaq Small
Cap Market.
Forward Looking Statements
Certain statements included in this report which are not historical facts
are forward looking statements, including the information provided with respect
to the projected installations of the Shoppers Calculator(R) in the Supercenters
and the anticipated dates of repayment of the restructured bank debt. These
forward looking statements are based on current expectations, estimates,
assumptions and beliefs of management; and words such as "expects,"
"anticipates," "intends," "plans," "believes," "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 Company's dependence on the Wal-Mart contract, the number and
rate of new Supercenters constructed by Wal-Mart, general economic conditions
and conditions affecting the mass merchandising industry, the availability of
raw materials and manufactured components and the Company's ability to fund the
costs thereof, the Company's ability to adequately install and service the
calculator units as required by the contract, and other factors which may affect
the Company's ability to comply with its obligations under the contract.
Accordingly, actual results may differ materially from those expressed in the
forward looking statements.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item begins at page F-1 following page 18
hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Information required by this item with respect to the Company's Directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the Section entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, of the
-15-
<PAGE>
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1997 Annual Meeting. The
information required by this item with respect to the Company's executive
officers appears at Item 4A of Part I of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
Section entitled "Compensation of Directors and Executive Officers" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1997 Annual Meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
Section entitled "Voting Securities and Principal Holders Thereof" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1997 Annual Meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1997 Annual Meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
-------
3.1 Certificate of Incorporation of the Company and amendments thereto
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, File No. 33-39902-FW, as
amended by that certain post-effective amendment on Form SB-2
declared effective on June 12, 1996 (the "S-18 Registration
Statement").
3.2 Fourth Amendment to the Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File No. 33-49892 (the "S-1
Registration Statement")).
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the S-18 Registration Statement).
4.1 Certificate of Designation, Preferences, Rights and Limitations of
Series A 10% Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991).
4.2 Warrant Agreement (incorporated by reference to Exhibit 4.1 to the
S-18 Registration Statement).
-16-
<PAGE>
4.3 Form of Warrant (incorporated by reference to Exhibit A to Warrant
Agreement filed as Exhibit 4.1 to the S-18 Registration Statement).
4.4 First Supplement and Amendment to Warrant Agreement dated June 25,
1994 (incorporated by reference to Exhibit 4.4 to the S-18
Registration Statement).
4.5 Second Supplement and Amendment to Warrant Agreement dated June 25,
1995 (incorporated by reference to Exhibit 4.5 to the S-1
Registration Statement).
*10.1 ADDvantage Media Group, Inc. 1991 Employee Stock Plan
(incorporated by reference to Exhibit 10.7 to the S-18
Registration Statement).
10.2 Loan Agreement for $1,800,000 line of credit dated June 5, 1992,
between the Company and F&M Bank and Trust Company, as amended
(incorporated by reference to Exhibit 10.5 to the S-1 Registration
Statement).
10.3 Amendment dated December 16, 1992 to the Loan Agreement
(incorporated by reference to Exhibit 10.5a to the S-1 Registration
Statement).
10.4 Promissory Note for $100,000 line of credit dated September 17,
1992, between the Company and The F&M Bank and Trust Company and
related agreements, guaranties and promissory notes between the
Company and its directors (incorporated by reference to Exhibit
10.6 to the S-1 Registration Statement).
10.5 Promissory Note for $125,000 line of credit dated October 29, 1992,
between the Company and The F&M Bank and Trust Company
(incorporated by reference to Exhibit 10.8 to the S-1 Registration
Statement).
10.6 Shopper's Calculator Contract, dated as of September 1, 1995,
between the Company and Wal-Mart Stores, Inc., as amended by the
First Amendment to the Shopper's Calculator Contract, the Second
Amendment to the Shopper's Calculator Contract and the Third
Amendment to the Shopper's Calculator Contract (incorporated by
reference to Exhibit 10.6 to the S-18 Registration Statement).
10.7 Promissory Note for $700,000 from the Company to The F&M Bank &
Trust Company dated September 5, 1995 (incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
*10.8 ADDvantage Media, Inc. Supplemental Executive Retirement Plan
effective December 7, 1995 and Subsequently Amended March 14, 1996
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995).
10.9 Letter Agreement between the Company and The F&M Bank & Trust
Company dated March 6, 1996, with respect to $3,406,655.66 credit
facility (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1995).
10.10 Promissory Note for $3,406,655.66 from the Company to The F&M Bank
& Trust Company effective October 11, 1995 (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
-17-
<PAGE>
10.11 Agreement dated June 3, 1996, between the Company and Kmart
Corporation (incorporated by reference to Exhibit 10.11 to the S-
18 Registration Statement).
11.1 Statement re: computation of per share earnings.
23.1 Consent of Tullius Taylor Sartain & Sartain
27 Financial Data Schedule.
- - ------------
* Management contract or compensatory plan.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on December 30, 1996, to report the completion on December
2, 1996, of the redemption of its outstanding Common Stock Purchase Warrants
(the "Warrants") and the exercise of 582,907 of the Warrants prior to
redemption.
-18-
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Independent Auditors' Report...................................F-2
Balance Sheets.................................................F-3
Statements of Income...........................................F-5
Statements of Stockholders' Equity.............................F-6
Statements of Cash Flows.......................................F-7
Notes to Financial Statements..................................F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ADDvantage Media Group, Inc.
We have audited the accompanying balance sheets of ADDvantage Media Group, Inc.
as of December 31, 1996 and 1995, and the related statements of income, changes
in stockholders' equity, and cash flows for the years then ended. 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 generally accepted auditing
standards. 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 financial position of ADDvantage Media Group, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
TULLIUS TAYLOR SARTAIN & SARTAIN
Tulsa, Oklahoma
March 10, 1997
F-2
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 739,140 $ 20,444
Accounts receivable 991,544 6,926
Deferred income taxes 3,288,000 667,000
Other current assets 21,166 8,514
---------------------------
Total current assets 5,039,850 702,884
Property and equipment, at cost:
Calculators 2,157,010 749,107
Office and production equipment 478,274 341,575
Furniture and fixtures 80,320 64,417
---------------------------
2,715,604 1,155,099
Accumulated depreciation 482,179 331,385
---------------------------
2,233,425 823,714
Deferred income taxes 41,000 3,243,000
Patent, net of accumulated amortization of
$536,349 and $445,533 at December 31,
1996 and 1995, respectively 371,771 462,577
Deferred charges 37,489 12,064
---------------------------
Total assets $7,723,535 $5,244,239
===========================
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to bank $ 1,156,656 $ 519,968
Notes payable to shareholders and directors -- 176,808
Accounts payable 573,029 558,748
Accrued interest 138,505 252,677
Accrued settlement obligation 567,848 --
Other accrued liabilities 530,707 687,782
Accrued preferred stock dividends 432,850 416,777
Unearned advertising revenue 819,836 --
------------------------------------
Total current liabilities 4,219,431 2,612,760
Long-term obligations 108,600 515,163
Deferred income taxes 359,000 --
Long-term bank debt -- 3,406,656
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized; Series A, 10%
cumulative convertible, preferred stock; 227,750 and 277,750 shares
issued and outstanding at December 31, 1996 and 1995, respectively;
liquidation preference $911,000 and $1,111,000 at December 31, 1996
and 1995, respectively 760,260 927,167
Common stock, $.01 par value, 10,000,000 shares
authorized; 5,731,089 and 4,927,620 shares
issued and outstanding at December 31, 1996
and 1995, respectively 57,311 49,276
Capital in excess of par value 8,753,869 5,991,428
Accumulated deficit (6,534,936) (8,258,211)
------------------------------------
Total stockholders' equity 3,036,504 (1,290,340)
------------------------------------
Total liabilities and stockholders' equity $ 7,723,535 $ 5,244,239
====================================
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
---------------------------------
<S> <C> <C>
Revenues:
Advertising $ 7,012,864 $ 126,900
Sales of calculators 22,338 114,862
Other 8,813 7,790
---------------------------------
7,044,015 249,552
Costs and expenses:
Cost of advertising services 2,108,419 216,660
Cost of sales of calculators 10,547 48,714
Write-off of calculators -- 132,025
Selling expenses 266,985 32,785
General and administrative expenses 1,405,336 890,228
Litigation expense -- 636,310
---------------------------------
3,791,287 1,956,722
---------------------------------
Operating income (loss) 3,252,728 (1,707,170)
Interest expense 488,408 503,897
---------------------------------
Income (loss) before income taxes 2,764,320 (2,211,067)
Provision (benefit) for income taxes 940,000 (3,910,000)
---------------------------------
Net income 1,824,320 1,698,933
Preferred stock dividends (101,045) (111,100)
---------------------------------
Net income applicable to common stock $ 1,723,275 $ 1,587,833
=================================
Net income per share:
Primary $ 0.30 $ 0.35
=================================
Fully diluted $ 0.30 $ 0.31
=================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Capital in
Preferred Stock Common Stock Excess of Accumulated
Shares Amount Shares Amount Par value Deficit Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 277,750 $ 927,167 3,908,620 $39,086 $5,558,063 $(9,846,044) $(3,321,728)
Issuance of shares to settle
past due accounts payable -- -- 209,000 2,090 94,465 -- 96,555
Issuance of shares for officer
bonuses -- -- 300,000 3,000 184,500 -- 187,500
Issuance of shares for legal fees -- -- 25,000 250 62,250 -- 62,500
Issuance of shares on exercise
of options -- -- 60,000 600 11,400 -- 12,000
Issuance of shares on exercise
of warrants -- -- 425,000 4,250 80,750 -- 85,000
Preferred stock dividends
($.40 per share) -- -- -- -- -- (111,100) (111,100)
Net income -- -- -- -- -- 1,698,933 1,698,933
----------------------------------------------------------------------------------------
Balance, December 31, 1995 277,750 927,167 4,927,620 49,276 5,991,428 (8,258,211) (1,290,340)
Conversion of preferred stock (50,000) (166,907) 75,562 756 268,346 -- 102,195
Issuance of shares on exercise
of options -- -- 25,000 250 6,062 -- 6,312
Issuance of shares on exercise
of warrants -- -- 702,907 7,029 2,488,033 -- 2,495,062
Preferred stock dividends
($.40 per share) -- -- -- -- -- (101,045) (101,045)
Net income -- -- -- -- -- 1,824,320 1,824,320
----------------------------------------------------------------------------------------
Balance, December 31, 1996 227,750 $ 760,260 5,731,089 $57,311 $8,753,869 $(6,534,936) $ 3,036,504
========================================================================================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,824,320 $ 1,698,933
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred income tax 940,000 (3,910,000)
Depreciation and amortization 403,856 154,043
Write-off of calculators -- 132,025
Accrual of long-term obligations 161,285 13,935
Stock compensation -- 187,500
Obligation in settlement of lawsuit -- 515,163
Changes in assets and liabilities:
Accounts receivable (984,618) 3,299
Inventory -- 32,944
Other current assets (12,652) (2,717)
Deferred charges (25,425) 11,775
Accounts payable 14,281 177,027
Accrued interest (96,949) 444,714
Other accrued liabilities (157,075) 249,736
Unearned advertising revenue 819,836 --
---------------------------------
Net cash provided by (used in) operating activities 2,886,859 (291,623)
Cash Flows from Investing Activities
Purchases of property and equipment (1,722,761) (322,470)
---------------------------------
Net cash used in investing activities (1,722,761) (322,470)
Cash Flows from Financing Activities
Exercise of stock options and warrants 2,501,374 12,000
Proceeds from issuance of investor notes -- 220,000
Proceeds from issuance of bank notes 180,032 519,968
Payments on bank notes (2,950,000) --
Payments on patent note -- (117,600)
Payments on shareholders and directors notes (176,808) --
---------------------------------
Net cash provided by (used in) financing activities (445,402) 634,368
---------------------------------
Increase in cash 718,696 20,275
Cash and cash equivalents, beginning of year 20,444 169
---------------------------------
Cash and cash equivalents, end of year $ 739,140 $ 20,444
=================================
Cash paid during the year for interest $ 549,895 $ 18,466
=================================
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
Note 1 - Description of the Business
ADDvantage Media Group, Inc. (the "Company") markets and sells in-store
advertising to national advertisers. This advertising is positioned on solar
powered calculators attached to the handles of shopping carts. The patented
calculators are marketed under the registered trademark "Shoppers
Calculator(R)." The Company also sells Shoppers Calculators(R) to third parties,
including independent retailers and international licensees.
On September 1, 1995, the Company and Wal-Mart Stores, Inc. ("Wal-Mart") entered
into a four-year contract ("the Wal-Mart contract") in settlement of a lawsuit
related to prior contracts, under which the Company will install and maintain
Shoppers Calculators(R) in all of Wal-Mart's Supercenters in the continental
United States and Wal-Mart will sell the advertising for the calculators during
the initial phase of the contract. During the term of the contract in which Wal-
Mart sells the advertising, Wal-Mart has agreed to guarantee advertising
revenues to the Company in excess of $23.5 million subject to the Company's
obligation to install and service the Shoppers Calculators(R) during the revenue
guaranty period. At the conclusion of the Wal- Mart sales phase, the Company
will assume the advertising sales responsibilities for the program. The program
will then continue on this basis for a fixed period of time, and upon conclusion
of the term of the contract, the program will be subject to re-evaluation by
both parties. The Company's first revenue period under the contract began
November 6, 1995. During 1995 and 1996, all advertising revenue was earned under
this contract.
As of December 31, 1996, calculators have been installed in 327 Supercenters and
the Company expects to install approximately 100 additional Supercenter
locations during each of 1997 and 1998. As of December 31, 1996, $7.1 million of
revenue has been earned and $16.4 million of guaranteed revenue remains to be
earned under the contract.
The Company also has a contract with Kmart Stores and expects to contract with
other mass merchants in the future.
Note 2 - Summary of Significant Accounting Policies
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.
F-8
<PAGE>
Cash and cash equivalents
Cash and cash equivalents include cash on deposit with financial institutions
and certificates of deposit with a maturity of 90 days or less. At December 31,
1996, all cash and cash equivalents were on deposit with one bank.
Property and equipment
Property and equipment is recorded at cost. Shoppers Calculators(R) not yet
installed ($333,352 and $516,581 at December 31, 1996 and 1995, respectively)
are reported in property and equipment. Shoppers Calculators(R) installed and in
use are depreciated over a five-year straight-line life. Calculator replacements
are charged to accumulated depreciation. Gain or loss is recognized upon
complete de-installation of a customer's store or similar service unit. Other
property and equipment is depreciated on the straight-line method over estimated
useful lives ranging from three to ten years.
Revenue recognition
The Company recognizes revenues from advertising sales ratably over the
advertising cycle. Sales of Shoppers Calculators(R) are recognized in the period
such units are shipped to the customer.
Net income per common share
Net income per common share is based on the sum of the weighted average number
of common and common equivalent shares outstanding. The number of common and
common equivalent shares utilized in the per share computations are 5,683,251
for primary and 6,147,706 for fully diluted in 1996, and 4,600,078 for primary
and 5,108,433 for fully diluted in 1995. Conversion of preferred stock and
related dividend and interest accruals into common stock is not considered in
the computations of fully diluted earnings per share since the effect would not
provide further dilution.
Patent
The Company's Shoppers Calculators(R) patent was acquired from a person who, at
the time, was a director of the Company, and a company in which he was 50%
owner. It is carried at acquisition cost, net of accumulated amortization which
is computed on a straight-line basis over the life (four years remaining at
December 31, 1996) of such design patent. Since the initial acquisition referred
to above, the costs of applying for and obtaining design patents and trademarks
have been expensed as incurred.
Note 3 - Bank Borrowings
The bank loan is secured by essentially all corporate assets and the agreement
prohibits the payment of common stock dividends, requires consent for the
payment of preferred stock dividends prior to December 1, 1997, and limits the
amount of additional borrowings to $50,000 and capital expenditures to $15,000
exclusive of calculator purchases. Officers, directors and a stockholder have
guaranteed $270,000 of the note. The loan bears interest at Chase Manhattan
F-9
<PAGE>
Bank prime rate plus 1% (9.25% on December 31, 1996). The loan has a maturity
date of May 31, 1998 with payment terms tied into the operating plan which is an
exhibit to the Wal-Mart Contract. The Company estimates that its cash flow will
allow it to retire the bank note payable during 1997 and, accordingly, it is
classified as a current liability in the accompanying balance sheet.
Note 4 - Income Taxes
There is no current tax provision for 1996 and 1995. As a result of the Wal-Mart
contract, the Company recognized the tax benefits of its net operating losses
and temporary differences in the fourth quarter of 1995, resulting in a tax
benefit of $3,910,000. The Company utilized $2,451,000 of the net operating loss
carryforward in 1996. The remaining net operating loss carryforward is
$7,245,000 at December 31, 1996. These carryforwards expire in 2008.
The tax effects of temporary differences and tax loss carryforwards that give
rise to the deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $2,753,000 $3,719,000
Accrued expenses 535,000 259,000
Long-term obligation 41,000 190,000
----------------------------------
Total deferred tax assets 3,329,000 4,168,000
Deferred tax liability:
Financial basis in excess of
tax basis of fixed assets (359,000) (258,000)
----------------------------------
Net deferred tax asset $2,970,000 $3,910,000
==================================
</TABLE>
Note 5 - Stockholders' Equity
On July 17, 1991, the Company completed an initial public offering of 600,000
units (the "Units"), each unit consisting of two shares of common stock and one
redeemable common stock purchase warrant (the "Warrants") to purchase one share
of common stock. Each of the 600,000 outstanding Warrants entitled the holder,
upon exercise, to purchase one share of common stock at a price of $4.00 per
share. During 1996, the Company called the Warrants for redemption, and the
holders of 97% of the Warrants elected to purchase common stock. Net of offering
expenses, the Company realized $2,073,062 from the exercise.
In connection with the 1991 public offering of common stock and common stock
purchase warrants, the Company sold to the underwriter warrants to purchase up
to 60,000 units at a price of $.001 per warrant. The warrants were exercisable
at $7.20 per unit. Each unit consisted of two shares of common stock and one
warrant to purchase one share of common stock for $4.80 per share. The
underwriter warrants were exercised during 1996, but the underlying $4.80 stock
F-10
<PAGE>
purchase warrants, which were set to expire on December 31, 1996, have been
extended to December 31, 1998.
The 227,750 shares of Series A preferred stock outstanding are redeemable by the
Company at its option at $4.00 per share plus accrued and unpaid dividends and
unpaid interest thereon, and are convertible into shares of common stock at a
conversion price of $4.00 per share. The holders of the Series A preferred stock
have the right to convert such shares, unpaid dividends and interest into shares
of common stock at the rate of $4.00 per share. The holders are entitled to vote
the number of whole shares of common stock into which their shares of preferred
stock are convertible. During 1996, the holder of 50,000 shares of Series A
preferred stock converted the preferred stock and accumulated dividends and
interest into 75,562 shares of common stock.
During the first quarter of 1995, the Company completed an offering of
promissory notes and warrants for an aggregate consideration of $200,000. The
offering included (a) 500,000 warrants each of which will, upon exercise,
entitle the holder to acquire one share of common stock at a price of $.20 per
share, with a term of 24 months from the date of issuance and may only be
exercised during their term; (b) a total of 10% of the net recovery from a
lawsuit with Wal-Mart; and (c) Promissory Notes totaling an indebtedness of
$200,000 and bearing interest at the rate of 10% per annum. On November 30,
1995, investors holding warrants to purchase 425,000 shares of common stock
exercised their option by converting promissory notes in the amount of $85,000
to acquire the shares.
In order to fund the initial filing of the Wal-Mart lawsuit, the Company's two
executive officers each loaned the Company $10,000 for which they each received
a $10,000 unsecured promissory note and the right to receive one percent of any
recovery, net of related expenses, received in the Wal-Mart litigation. The
present value of the amount payable to the participants in the Company's 1995
offering of promissory notes and warrants, who have the right to receive an
aggregate of 12% of any recovery in the litigation, was calculated by the
Company to be $498,711 at December 31, 1995, and was recorded as litigation
expense in the financial statements. Including accretion of the discount, the
obligation is $567,848 at December 31, 1996. The amounts due are payable from
the cash flow from the Wal-Mart contract and are reported in the financial
statements as long-term obligation payable in 1995 and as accrued settlement
obligation payable in 1996.
At December 31, 1996 and 1995, respectively, 535,698 and 1,232,750 shares of
common stock are reserved for the exercise of warrants and conversions of the
Series A preferred stock.
In April 1991, the stockholders adopted the 1991 Employee Stock Plan which
provides for the award to key employees of stock options, stock appreciation
rights and shares of restricted stock. The Plan provides that upon any issuances
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. The purchase price per
share for stock options may not be less than the fair market value of the stock
on the date of grant.
Under existing accounting standards for stock options, no compensation expense
is recognized when the exercise price of stock options equals or exceeds the
market value of the stock at date of grant. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
F-11
<PAGE>
Compensation" ("SFAS No. 123") provides an alternative method of determining
compensation cost for stock options, which alternative method may be adopted at
the option of the Company. Had compensation cost for these plans been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
("EPS") would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Net income:
As reported $1,824,320 $1,698,933
Pro forma 1,726,470 1,613,532
Primary EPS:
As reported $ 0.30 $ 0.35
Pro forma 0.29 0.33
Fully diluted EPS:
As reported $ 0.30 $ 0.31
Pro forma 0.29 0.29
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's stock options at December 31, 1996 and
1995, and changes during the years then ended is presented below.
F-12
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 475,000 $ 0.50 427,500 $ 1.08
Granted 157,000 2.13 277,500 0.42
Exercised (25,000) 0.25 (60,000) 0.20
Canceled (10,000) 4.00 (170,000) 1.93
------------ ------------
Outstanding at end of year 597,000 0.88 475,000 0.50
============ ============
Exercisable at end of year 530,000 0.57 450,000 0.51
============ ============
Weighted average fair value of options
granted $ 1.80 $ 0.57
============ ============
Options granted during year for which market price
exceeded exercise price on date of grant:
Weighted average exercise price $ - $ 0.20
============ ============
Weighted average fair value $ - $ 0.94
============ ============
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.20 to $1.25 545,000 7.61 years $0.59 530,000 $0.57
$2.625 to $4.75 52,000 9.20 3.91 - -
--------------- ---------------
597,000 7.75 years $0.88 530,000 $0.57
=============== ===============
</TABLE>
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 1996 and 1995, respectively: risk-free interest
rates of 5.42% in 1996 and 7.02% in 1995; expected dividend yields of 0.0, in
1996 and 1995; expected lives of 5 years in 1996 and 1995; and expected
volatility of 120% in 1996 and 1995.
F-13
<PAGE>
Directors and consultants held options outside the Employee Stock Plan for
100,000 shares at December 31, 1996, all of which were exercisable, and 120,000
shares at December 31, 1995, of which options for 95,000 shares were exercisable
at that date.
At December 31, 1996 and 1995, 570,809 and 492,762 shares of common stock were
reserved for the exercise of stock awards of which 73,809 and 137,762 shares
were available for future grants.
Note 6 - Executive Retirement Plan
Effective December 7, 1995, the Company adopted the Supplemental Executive
Retirement Plan (Plan), a nonqualified plan. Two of the Company's executive
officers are the initial participants. Generally, the Plan provides for
retirement benefits for participants who remain employed with the Company until
age 65, with a reduced benefit available for early retirement at age 62.
Benefits will be funded by life insurance policies of $1,900,000 and $1,800,000
on the lives of the participants, for which the Company is the beneficiary. The
insurance policies replaced a $1,000,000 key man insurance policy on the life of
the Company's chief executive officer. At December 31, 1996, deferred
compensation cost of $108,600 was accrued under the Plan, and the liability is
included in the balance sheet in long-term obligations payable. No expense was
accrued under the Plan in 1995. For 1996, the cost of the related life insurance
is $165,648.
Note 7 - Commitments and Contingencies
Although not required to do so under the Wal-Mart contract, during 1996, the
Company, at Wal- Mart's request, commenced activities to sell advertising in the
Wal-Mart Supercenter to parties other than Wal-Mart. Amounts billed for these
sales, $192,000 at December 31, 1996, have been recorded, in accounts payable
because they may offset amounts due from Wal-Mart under its contract. The
ultimate treatment of these amounts, and the Company's costs related thereto,
reported as selling expenses in the accompanying statements, are subject to
future negotiation with Wal-Mart. However, it is expected that advertising sales
generated by the Company, net of agreed-upon selling expenses, will reduce
Wal-Mart's guarantee.
At December 31, 1996, the Company had outstanding commitments to purchase
calculator and installation components in the amount of $350,000. An open letter
of credit for $116,000 has been obtained to support future payment of the
outstanding commitments.
Commitments at December 31, 1996 under noncancellable operating leases for
office and warehouse space are as follows: 1997 - $99,947, 1998 - $99,947 and
1999 - $63,403.
Total rent expense for the years ended December 31, 1996 and 1995 was $ 78,265
and $47,470, respectively.
Note 8 - Other Financial Information
Wal-Mart accounted for 99.5% and 50.8% of the Company's total revenues for the
years ended December 31, 1996 and 1995, respectively.
Export sales were $11,592 and $3,300 for the years ended December 31, 1996 and
1995,
F-14
<PAGE>
respectively.
The carrying amounts of the Company's borrowings under its variable rate bank
debt obligation, and long-term obligations approximates the fair value.
Note 9 - Quarterly Financial Data (Unaudited)
Selected comparative fourth quarter data are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------
<S> <C> <C>
Revenues $ 2,818,830 $ 139,186
Costs and expenses 1,498,030 563,450
-------------------------------------
Operating income (loss) 1,320,800 (424,264)
Interest expense 89,897 156,945
-------------------------------------
Income (loss) before income taxes 1,230,903 (581,209)
Provision (benefit) for income taxes 357,219 (3,910,000)
-------------------------------------
Net income 873,684 3,328,791
Preferred stock dividends (22,899) 27,927
-------------------------------------
Net income applicable to common stock $ 850,785 $ 3,300,864
=====================================
Net income per common share:
Primary $ 0.14 $ 0.63
=====================================
Fully diluted $ 0.14 $ 0.60
=====================================
</TABLE>
F-15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADDVANTAGE MEDIA GROUP, INC.
Date: March 20, 1997 By: /s/ Charles H. Hood
------------------------
Charles H. Hood
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:
Signature Title Date
--------- ----- ----
/s/ Charles H. Hood President and Director March 20, 1997
-------------------- (Principal Executive Officer)
Charles H. Hood
/s/ Gary W. Young Executive Vice President- March 20, 1997
-------------------- Finance and Administration,
Gary W. Young Treasurer and Director
(Principal Financial Officer and
Principal Accounting Officer)
Director
--------------------
J. Larre Barrett
/s/ John W. Condon Director March 20, 1997
--------------------
John W. Condon
<PAGE>
EXHIBIT 11
ADDVANTAGE MEDIA GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
Year ended December 31, 1996
<TABLE>
<CAPTION>
Fully
Primary Diluted
----------------------------------
<S> <C> <C>
Net income $1,824,320 $1,824,320
Less preferred stock dividends (primary only) (101,045) --
Plus interest on unpaid preferred stock dividends -- 42,257
----------------------------------
Adjusted earnings 1,723,275 1,866,577
Weighted average shares outstanding 5,095,434 5,095,434
Effect of options and warrants 587,817 691,574
Effect of converting preferred stock, unpaid
dividends and related interest -- 360,698
----------------------------------
Weighted average common, common equivalents
and contingently issuable shares 5,683,251 6,147,706
----------------------------------
Earnings per share $ 0.30 $ 0.30
==================================
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated March 10, 1997 on
the financial statements of ADDvantage Media Group, Inc. (the "Company") at
December 31, 1996 and 1995, included in this Annual Report on Form 10-KSB for
the year ended December 31, 1996, into the Company's previously filed
Registration Statement on Form S-8 (File No. 333-12641).
TULLIUS TAYLOR SARTAIN & SARTAIN
Tulsa, Oklahoma
March 19, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 739,140
<SECURITIES> 0
<RECEIVABLES> 991,544
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,039,850
<PP&E> 2,715,604
<DEPRECIATION> 482,179
<TOTAL-ASSETS> 7,723,535
<CURRENT-LIABILITIES> 4,219,431
<BONDS> 0
0
760,260
<COMMON> 57,311
<OTHER-SE> 2,218,933
<TOTAL-LIABILITY-AND-EQUITY> 7,723,535
<SALES> 7,035,202
<TOTAL-REVENUES> 7,044,015
<CGS> 0
<TOTAL-COSTS> 3,791,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488,408
<INCOME-PRETAX> 2,764,320
<INCOME-TAX> 940,000
<INCOME-CONTINUING> 1,824,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,824,320
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
