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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to ____________________
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. $11,607,663
As of March 20, 1998, 5,906,584 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of the Common Stock held by
non-affiliates was approximately $10,693,337.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement to be sent to shareholders in connection with 1998 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
ITEMS 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES
GENERAL
The Company, ADDvantage Media Group, Inc., is in the business of providing
advertising services, primarily on Shoppers Calculators/(R)/ which are solar-
powered calculators which attach to the handles of shopping carts. The
calculators bear 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). The Company's current operations primarily consist of the installation
and operation of its Shoppers Calculator/(R)/ program in Supercenter stores
operated by Wal-Mart Stores, Inc. ("Wal-Mart"). Substantially all of the
Company's revenues in 1997 were generated from a 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 September 1995 contract. In August 1996,
after meeting with Company officers to address the specific concerns, Wal-Mart
issued a press release stating that it remained committed to honoring its
contractual obligations to the Company. Since that time, the Company has
assumed primary responsibilities for selling the advertising on the calculators
under an amendment to the contract and has continued its installation of the
Shoppers Calculator/(R)/ program in the Supercenter stores pursuant to the
contract. 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 has the option to 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)/ PRODUCTS
The 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 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.
The calculator units currently installed in the Wal-Mart Supercenter
network are attached to the handle of each shopping cart with stainless steel
clamps, brackets and headless screws. The Company has developed and produced an
all-new Shoppers Calculator/(R)/ unit which is part of an interchangeable
system. The new system allows the Company to interchange its calculator shapes--
from the flat-ad standard calculator to the Company's "packaged goods" formatted
calculator and vice versa--without having to deinstall the entire unit. This new
interchangeable system features a permanent installation mounting base on the
handle of each cart, which allows service personnel to change out parts or
calculator format with a single mechanical release tool. The advertising image
area on the new flat-ad calculator units will be more than 40% larger than
advertising image area on the old unit. The Company expects to retrofit all
existing Wal-Mart Supercenters with these new units if it enters into a new
contract with Wal-Mart. Based on the expectation of the retrofit, the Company
changed its estimate of the remaining useful lives of its installed calculators
and recorded additional depreciation of $396,375 during 1997. See "Item 6--
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Wal-Mart has also approved use of two additional Shoppers Calculator/(R)/
product applications developed by the Company in the form of (i) dual-panel on-
shelf signage units and (ii) "take-one" dispensers. Both applications allow the
program advertisers to further support the sale of products advertised on the
on-cart unit.
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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, assisting potential advertisers with respect to developing
advertising messages, 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 installed in the Supercenters.
Wal-Mart is obligated under the contract to pay the Company $2,700 per
installed store, per four week advertising cycle, during the "primary" term of
the contract in which Wal-Mart was to be responsible for selling the advertising
on the Shoppers Calculators. Wal-Mart is also obligated to pay the Company the
amount of any shortfall if the revenues paid to the Company by October 6, 1998,
are less than approximately $23.5 million. After the Company has received total
revenues of approximately $23.5 million from Wal-Mart, the Company has the
option to continue the contract through October 6, 1999, the expiration date of
the contract. After the payment of the $23.5 million, Wal-Mart has no obligation
to guarantee advertising revenues, and any advertising revenues received from
third party advertisers 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 this arrangement
was formalized in an amendment to the Wal-Mart contract in August 1997. The
Company has submitted a proposed new contract to Wal-Mart for the Shoppers
Calculator program which would be implemented after the Company has received the
approximately $23.5 million of guaranteed revenues provided for under the
current contract. Based on the current number of Supercenters installed with
the Shoppers Calculator/(R)/ program, the Company anticipates that the Wal-Mart
revenue guaranty will be paid in full by June 14, 1998. There is no assurance
at this time, however, whether the Company and Wal-Mart will enter into a new
contract, or, if a new contract is entered into, what the terms of the contract
will be. As of March 20, 1998, no formal action on the proposed contract had
been taken. However, Wal-Mart is assisting the Company's efforts to further
develop the Shoppers Calculator/(R)/ program in the Supercenter network by
providing, without charge to advertisers or the Company:
. the right to place Shoppers Calculators/(R)/ with a dual ad panel and
flashing lights on the shelves where the advertised products are
located;
. the right to place Shoppers Calculator "Take One" dispensers
(containing recipes, cross-sell information, etc.) 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 gleaned from its retail-link system 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, 1997, Shoppers Calculators/(R)/ were installed on
approximately 275,000 shopping carts in 336 Wal-Mart Supercenters. As of
January 31, 1998, Wal-Mart operated approximately 440
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Supercenters and had announced plans to add approximately 120 additional
Supercenters during 1998. The Company currently does not intend to install
calculators in additional Supercenters under the current contract. If the
Company is successful in negotiating a new contract with Wal-Mart, it
anticipates that it would commence the installation of additional Supercenters,
either in conjunction with or after converting its existing network of installed
calculators with the new interchangeable calculator units.
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".
Once the Company has received total payments of approximately $23.5 million
under the Wal-Mart contract (which is anticipated to occur in mid-June, 1998,
and no later than October 6, 1998), the Company has the option to (i) continue
the contract or (ii) allow the contract to terminate. If the Company elects to
continue the contract, the contract is scheduled to terminate on 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 expiration, the Company is 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. As
noted previously, the Company assumed responsibility for obtaining advertising
revenues on the installed calculator network in the fourth quarter of 1996.
Through December 31, 1997, inception-to-date advertising sales by the Company,
including system-wide sales and test program sales, have totaled $1,395,863.
These advertising sales, less recoverable production costs of $227,259 incurred
by the Company for its "packaged good" units, are payable to Wal-Mart under the
contract, of which $477,000 had been paid through December 31, 1997. These
revenues have been recorded in the Company's financial statements as an account
payable since they offset amounts due from Wal-Mart under the contract. See
footnote 7 in the notes to Financial Statements.
If the Wal-Mart contract is not renewed upon its termination and the
Company has not then entered into or implemented contracts with other mass
merchants or other parties or entered into or acquired new lines of business,
the Company may have to cease operations and perhaps liquidate. In any event,
it is anticipated that if the Wal-Mart contract is not renewed, it will very
likely have a material adverse effect on the Company and its operations.
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
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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. No advertising for Shoppers Calculators has been sold or committed at
this time and the Company cannot predict with any certainty what the price for
advertising on such calculators will be if and when they are ultimately
installed.
RECENT DEVELOPMENTS
On January 28, 1998, the Company entered into a letter of intent to acquire
Sports Display, Inc. ("Sports Display") of Rancho Santa Margarita, California,
and its affiliated company Sports Display of Canada, Inc. at a purchase price of
$16.75 million. Sports Display owns and services advertising-supported activity
boards in more than 3,000 health clubs, golf clubs, tennis clubs and grocery
stores throughout the United States. The principal revenues of Sports Display
are derived from the sale of advertising for display on the activity boards.
The purchase price is payable in cash of $8.5 million, seller financed
notes of $5.25 million and convertible preferred stock to be valued at $3.0
million. The Company will also be obligated to pay an additional $1.5 million
at closing for certain non-compete and employment contracts. Consummation of
the acquisition of Sports Display is conditioned upon a number of factors,
including, among others, the negotiation, execution and delivery of a definitive
agreement with respect to such transactions and the Company's obtaining
financing of the cash portion of the purchase price on terms it deems
acceptable. Accordingly, there can be no assurance at this time that the
acquisition will be consummated.
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% of the Company's total revenues in each of 1997 and 1996. The Company
anticipates that the Wal-Mart contract will continue to account for a
significant portion of the Company's revenues in 1998.
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 has assumed primary responsibility for obtaining advertising contracts
from national advertisers for the calculators installed in the Supercenters.
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 has
developed 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. During
1977, the Company spent approximately $300,000 for the engineering, design and
tooling necessary to commence manufacturing the mounting base, package concept
calculators and new standard interchangeable calculators. The Company has
introduced five different "package concept" calculators for certain major
manufacturers.
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 three
independent sales representatives located in the New York and San Francisco
markets. Under its agreements with each of the independent sales
representatives, the Company pays the representative a fixed monthly amount
during the initial stage of the contract, usually six to nine months, and sales
commissions up to 5% 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
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 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.
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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 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 a specified number of 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 employs 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, generally consisting of three to four employees, for installing
the calculators on the shopping carts at the Wal-Mart Supercenter locations.
On March 1, 1998, the Company implemented a strategic change in its field
service operations from a strict localized service approach to a more mobile,
territorial workforce. The new strategy utilizes a group of 38 highly trained
area supervisors and roving technicians who have been equipped with customized
service vans. The Company believes this strategy will require fewer personnel
and reduce field service expenses, while retaining the Company's existing level
of high-quality service for its calculator network installed at Wal-Mart
Supercenters.
MANUFACTURING
The Company purchases the components of the Shoppers Calculator/(R)/ from
several manufacturers and completes the final assembly at its warehouse facility
in Tulsa, Oklahoma. The Company utilizes the services of a purchasing agent to
source the components required for assembling the 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 were
utilized in the initial Supercenter installations. 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. During 1997, Gavco manufactured approximately 106,000
standard calculator shell cases, 99,000 "packaged goods" can concept shell cases
and miscellaneous other components.
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The Company currently has 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 utilized in the assembly of the
calculator units. Through February 28, 1998, the Company had received shipments
of 346,000 internal assemblies from Nam Tai. As of February 28, 1998, the
Company had purchase order commitments for delivery of 79,000 internal
assemblies 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 Shoppers Calculator/(R)/, it believes
that there are a number of available suppliers for its component parts and that
the loss of any one supplier would not have a material adverse effect on the
Company's operations.
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. Seven additional design patents were issued in late 1994 for
additional designs for the Shoppers Calculator/(R)/. An additional design patent
was issued to the Company in March 1998 for a calculator design in the form of
certain rectangular packaged goods. The design patents expire 14 years after the
date of their issuance. Registration by the Company of the trademark "Shoppers
Calculator" was granted in July 1992 for a 10 year term. Registration by the
Company of the trademark "Shoppers Calculator and design" with respect to its
new logo was granted in November 1997 for a 10-year term. The trademark
registrations are renewable by the Company at the end of their terms if the
marks are still in use.
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.
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RESEARCH AND DEVELOPMENT ACTIVITIES
Most of the Company's research activities over the past two fiscal years
have consisted of researching the market impact of its Shoppers Calculator
program on sales of advertised products in Wal-Mart Supercenters. Most of this
market research information was supplied to the Company by Wal-Mart. The
Company did not spend a material amount on such research and development
activities during these periods.
During 1997, the Company spent approximately $300,000 for the engineering,
design and tooling necessary to commence manufacturing the new mounting base,
"package concept" calculators and new standard interchangeable calculators. The
Company introduced five different "package concept" calculators for certain
major manufacturers in 1997. During 1996, the Company spent approximately
$100,000 for engineering, design and tooling costs associated with certain
"package concept" calculator products.
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 9,158 square feet of warehouse space in Tulsa, Oklahoma, from a
third party. The lease for the warehouse space expires August 30, 2000, and
requires monthly rental payments of $3,657.
EMPLOYEES
At December 31, 1997, the Company had 125 employees, 13 of which were
employed in the Company's corporate offices, 103 of which were employed in field
service operations and nine of which were employed in the Company's warehouse
and installation operations. Management considers its relationships with its
employees to be excellent. The employees of the Company are not unionized and
the Company is not subject to any collective bargaining agreements.
ITEM 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.
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
and serve at its discretion. The executive officers of the Company, their ages
and positions held in the Company are as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Charles H. Hood 59 Chairman and President
Gary W. Young 56 Executive Vice President--
Finance and Administration and
Treasurer
Steve C. Oden 45 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
---------------
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
-------------
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), 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.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq Small Cap Market
on April 11, 1997 (symbol "ADDM"). Prior to that time, the Company's Common
Stock was traded on the OTC Bulletin Board from January 1994, and was listed on
the Boston Stock Exchange from August 1991 to January 1994, when listing was
terminated for noncompliance with certain capital and surplus 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 Nasdaq Small Cap Market and OTC Bulletin Board, as the case may be.
<TABLE>
<CAPTION>
COMMON STOCK
------------
PERIOD HIGH LOW
------ ----- -----
<S> <C> <C>
FISCAL YEAR 1997:
First Quarter...................... $6.38 $4.38
Second Quarter..................... $5.13 $3.25
Third Quarter...................... $4.13 $2.94
Fourth Quarter..................... $4.31 $1.75
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
</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, 1998, there were approximately 86 holders of record
of Common Stock. However, the Company believes there are in excess of 950
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. During 1997, all dividends in
arrears on the Series A Preferred Stock and accrued interest thereon were paid
by the Company.
-11-
<PAGE>
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
- - ----------------------------------------------------------------------
The Company entered into a contract with Wal-Mart effective as of September
1, 1995, whereby the Company has agreed to 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. At December 31, 1997, a total of
336 Wal-Mart Supercenters were installed, with 41 being installed during 1995,
286 in 1996 and nine during 1997.
Advertising revenues increased approximately $4,542,200 (65%) for the year
ended December 31, 1997, as compared to the year ended December 31, 1996.
During 1997, an average of 329 installed stores contributed revenue for the year
as compared to 200 stores for 1996.
The significant increase in revenues improved operating income (income
before interest, taxes and preferred stock dividends) by $1,248,100 for 1997 as
compared to 1996. The Company's net income applicable to common stock was
$2,631,000 for 1997, as compared to $1,723,300 for 1996. As a result of the
implementation of the Wal-Mart contract in September 1995, 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. The 1997 tax expense of
$1,697,800 reflects the amortization of the deferred tax asset recognized in
1995.
Costs of advertising services (representing primarily labor to supervise,
service and clean the installed units and change advertising messages and the
depreciation of installed units) increased approximately $2,712,400 (128%) in
1997 as compared to 1996 as a result of higher labor costs, printing costs and
depreciation due to the increase in the number of Supercenters installed and
calculators serviced during the respective periods. The 1997 increase included
an additional depreciation charge of $396,375 resulting from a change in the
Company's accounting estimate related to the remaining useful lives of the
Shopper Calculators installed in the Wal-Mart Supercenters. This change in
estimate of the remaining useful life was made in anticipation of the
replacement of the currently installed calculators with the Company's latest
model Shoppers Calculator/(R)/ unit. The Company expects to commence
installation of the new units by the end of 1998 if it is successful in
negotiating a new contract with Wal-Mart.
Selling expense increased approximately $366,900 (137%) in 1997 compared to
1996. This was primarily due to increases during 1997 in payroll, payroll
related expenses, sales representative retainer expenses, advertising and
marketing materials costs. During the last quarter of 1996, the Company assumed
primary responsibility for selling advertising on the Shoppers Calculators
installed in Wal-Mart Supercenters.
General and administrative expenses increased $236,200 (17%) in 1997 as
compared to 1996. During 1997, payroll and payroll related expenses increased
$129,700 as a result of higher compensation levels and increased staff required
to administer the Wal-Mart Supercenter contract. Officer and management bonus
accruals increased $86,800 in 1997 as compared to 1996. Executive retirement
plan accruals, including insurance cost to fund future payments, decreased
$65,900 during 1997. Expenses related to
-12-
<PAGE>
broker and analyst meetings and other shareholder expenses increased $39,900
over 1996. Increases amounting to $45,700 occurred in professional fees,
occupancy costs, business taxes and other expenses.
Interest expenses decreased approximately $407,500 (83%) during 1997 as
compared to 1996. Interest on bank borrowings decreased $330,000 due primarily
to the repayment of all bank debt during 1997. Vendor interest was $21,500 lower
and interest accrued on amounts due investors, including the accretion of
discount for the litigation settlement, was $56,000 lower for 1997 as compared
to 1996, all because of the reduction of amounts due and past due.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
- - ---------------------------------------------------------------------
The Company commenced installations of Supercenters under the Wal-Mart
contract 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
-13-
<PAGE>
increased $24,000 over 1995. Increases amounting to $138,700 occurred in
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.
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 which
was used to pay the expenses of the lawsuit against Wal-Mart and certain
operating expenses incurred during the period that the lawsuit was pending. The
offering involved the issuance by the Company of (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) rights to receive amounts equal
to a total of 10% of the net recovery from the Wal-Mart lawsuit described
elsewhere herein; and (c) promissory notes of the Company 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 were paid in full at December 31, 1996.
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 contract, the
Company has agreed to install the Shoppers Calculators in all of Wal-Mart's
Supercenters in the continental United States, and Wal-Mart was to sell the
advertising for the calculators during the initial phase of the contract.
During the last quarter of 1996, the Company assumed responsibility for sales of
advertising for the calculators, and this arrangement was formalized in an
amendment to the Wal-Mart contract in August 1997. Under the contract, 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. Based on the number of
Supercenters installed, the Company anticipates that the guaranteed revenues
will be paid in full by June 14, 1998, at which time, the Company has the option
to continue the contract through October 6, 1999. If the current contract is
continued by the Company, the Company has the right to retain 90% of the
advertising revenues generated until the contract terminates. Upon conclusion
of the contract, the program is subject to re-evaluation by both parties.
-14-
<PAGE>
The Company has submitted a proposal to Wal-Mart for a new Shoppers
Calculator contract to be implemented after the Company receives payment of the
$23.5 guaranteed revenues provided for under the current contract.
As of December 31, 1997, calculators have been installed in 336
Supercenters. The Wal-Mart Supercenter network currently contains approximately
440 stores, and Wal-Mart has announced plans to add approximately 120 additional
Supercenters during 1998. The Company plans to commence the installation of
additional Supercenters if it is successful in negotiating a new contract with
Wal-Mart.
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 had the right to receive an aggregate of
12% of the net recovery in the Wal-Mart litigation, was calculated by the
Company to be $498,711, excluding accretion of discount, and has been recorded
as accrued settlement obligation in the financial statements. At December 31,
1997, the accrued settlement obligation had been paid in full.
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.
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. The Company repaid the balance of the loan in the first
and second quarters of 1997.
The Company's first revenue period under the existing Wal-Mart contract
began on November 6, 1995. Through December 31, 1997, cumulative revenues
received from Wal-Mart totaled $18.7 million, reducing the guaranteed revenues
to be received in future periods to $4.8 million. 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.
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 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.
-15-
<PAGE>
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 payment of the revenues guaranteed by Wal-Mart.
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
The information required by this item concerning the Company's directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference to the information in the sections
entitled "Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act," respectively, of the Company's Proxy Statement for the 1998
Annual Meeting of Shareholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year ended December 31, 1997. The information required by this
item concerning the Company's executive officers appears as Item 4A of Part I of
this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation is
incorporated by reference to the information set forth in the section entitled
"Compensation of Directors and Executive Officers" of the Company's Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item concerning security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Voting Securities and Principal
Holders Thereof" of the Company's Proxy Statement.
-16-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement.
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 (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).
*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 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).
10.5 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).
-17-
<PAGE>
10.6 Letter agreement dated as of August 25, 1997, between the Company and
Wal-Mart Stores, Inc. amending the Shopper's Calculator Contract
dated September 1, 1995 (incorporated by reference to Exhibit 10 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997).
*10.7 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).
10.8 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).
10.9 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).
10.10 Agreement dated June 3, 1996, between the Company and Kmart
Corporation (incorporated by reference to Exhibit 10.11 to the S-18
Registration Statement).
23.1 Consent of Tullius Taylor Sartain & Sartain LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for 1996.
27.3 Restated Financial Data Schedule for 1997 interim periods.
____________
* Management contract or compensatory plan.
(b) REPORTS ON FORM 8-K:
None.
-18-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1997 and 1996........................... F-3
Statements of Income for the Years ended December 31, 1997 and 1996....... F-5
Statements of Changes in Stockholders' Equity for the Years ended
December 31, 1997 and 1996.............................................. F-6
Statements of Cash Flows for the Years ended December 31, 1997 and 1996... F-7
Notes to Financial Statements............................................. F-9
<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, 1997 and 1996, 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, 1997 and 1996, 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 LLP
Tulsa, Oklahoma
March 3, 1998
F-2
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,003,165 $ 739,140
Accounts receivable 1,548,961 991,544
Deferred income taxes 1,432,000 3,288,000
Other current assets 36,086 21,166
-----------------------------
Total current assets 5,020,212 5,039,850
Property and equipment, at cost:
Calculators 2,585,693 2,157,010
Office and production equipment 891,743 478,274
Furniture and fixtures 97,879 80,320
-----------------------------
3,575,315 2,715,604
Accumulated depreciation 981,186 482,179
-----------------------------
2,594,129 2,233,425
Deferred tax asset 41,000 -
Patent, net of accumulated amortization of
$627,150 and $536,349 at December 31,
1997 and 1996, respectively 280,960 371,771
Other assets 186,184 37,489
-----------------------------
Total assets $8,122,485 $7,682,535
=============================
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ - $ 1,156,656
Accounts payable 834,115 573,029
Income taxes payable 22,326 -
Accrued interest - 138,505
Accrued settlement obligation - 567,848
Other accrued liabilities 449,944 530,707
Accrued preferred stock dividends - 432,850
Unearned advertising revenue 810,001 819,836
-------------------------------
Total current liabilities 2,116,386 4,219,431
Long-term obligations 228,072 108,600
Deferred income taxes - 318,000
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 shares issued
and outstanding at December 31, 1997 and 1996;
liquidation preference $911,000 760,260 760,260
Common stock, $.01 par value, 10,000,000 shares
authorized; 5,906,584 and 5,731,089 shares
issued and outstanding at December 31, 1997
and 1996, respectively 59,066 57,311
Capital in excess of par value 8,862,634 8,753,869
Accumulated deficit (3,903,933) (6,534,936)
-------------------------------
Total stockholders' equity 5,778,027 3,036,504
-------------------------------
Total liabilities and stockholders' equity $ 8,122,485 $ 7,682,535
===============================
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
-------------------------------
<S> <C> <C>
Revenues:
Advertising $11,555,035 $7,012,864
Other 52,628 31,151
-------------------------------
11,607,663 7,044,015
Costs and expenses:
Cost of advertising services 4,831,397 2,118,966
Selling expenses 633,857 266,985
General and administrative expenses 1,641,545 1,405,336
-------------------------------
7,106,799 3,791,287
-------------------------------
Operating income 4,500,864 3,252,728
Interest expense 80,944 488,408
-------------------------------
Income before income taxes 4,419,920 2,764,320
Provision for income taxes 1,697,817 940,000
-------------------------------
Net income 2,722,103 1,824,320
Preferred stock dividends (91,100) (101,045)
-------------------------------
Net income applicable to common stock $ 2,631,003 $1,723,275
===============================
Net income per share:
Basic $0.45 $0.34
===============================
Diluted $0.42 $0.30
===============================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
<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, 1996 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
Issuance of shares on exercise
of options - - 495 5 1,295 - 1,300
Issuance of shares on exercise
of warrants - - 175,000 1,750 75,750 - 77,500
Sale of warrants - - - - 31,720 - 31,720
Preferred stock dividends
($.40 per share) - - - - - (91,100) (91,100)
Net income - - - - - 2,722,103 2,722,103
---------------------------------------------------------------------------------
Balance, December 31, 1997 227,750 $ 760,260 5,906,584 $59,066 $8,862,634 $(3,903,933) $ 5,778,027
=================================================================================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,722,103 $ 1,824,320
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income tax 1,497,000 940,000
Depreciation and amortization 912,707 403,856
Accrual of long-term obligations 119,472 161,285
Changes in assets and liabilities:
Accounts receivable (557,417) (984,618)
Other current assets (14,920) (12,652)
Other assets (116,974) (25,425)
Accounts payable 261,084 14,281
Income taxes payable 22,326 -
Accrued interest (138,505) (96,949)
Accrued settlement obligation (567,846) -
Other accrued liabilities (80,763) (157,075)
Unearned advertising revenue (9,835) 819,836
---------------------------------
Net cash provided by operating activities 4,048,432 2,886,859
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,182,600) (1,722,761)
---------------------------------
Net cash used in investing activities (1,182,600) (1,722,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options and warrants 78,799 2,501,374
Proceeds from issuance of bank notes - 180,032
Payments on bank notes (1,156,656) (2,950,000)
Payments of preferred stock dividends (523,950) -
Payments on shareholders and directors notes - (176,808)
---------------------------------
Net cash used in financing activities (1,601,807) (445,402)
---------------------------------
Increase in cash and cash equivalents 1,264,025 718,696
Cash and cash equivalents, beginning of year 739,140 20,444
---------------------------------
Cash and cash equivalents, end of year $ 2,003,165 $ 739,140
=================================
Cash paid during the year for interest $ 288,509 $ 549,895
=================================
Cash paid during the year for taxes $ 176,619 $ -
=================================
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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)/."
On September 1, 1995, the Company and Wal-Mart Stores, Inc. ("Wal-Mart") entered
into a four-year 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 was
responsible for selling the advertising for the calculators during the initial
phase of the contract. During the last quarter of 1996, the Company assumed the
responsibility for sales of advertising and this arrangement was formalized in
an amendment to the Wal-Mart contract dated August 25, 1997. Wal-Mart has agreed
to guarantee advertising revenues to the Company of $23.5 million, subject to
the Company's obligation to install and service the Shoppers Calculators/(R)/
during the revenue guaranty period. After the Company has received payment of
the total guaranteed advertising revenues, the Company has the option to
continue the contract. If the Company elects to continue the contract, 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. Through December 31, 1997, cumulative advertising
revenues have totaled $18.7 million, reducing the guaranteed advertising
revenues to be received in future periods to $4.8 million. Based on the current
number of Supercenters installed with the Shoppers Calculator/(R)/ program, the
Company anticipates that the Wal-Mart revenue guaranty will be paid in full by
June 14, 1998.
The Company has submitted a proposal to Wal-Mart for a new Shoppers
Calculator/(R)/ contract to be implemented after receipt of the full $23.5
revenue guarantee provided for under the current contract. Under the current
contract, which terminates on October 6, 1999, the Company has the right to
retain 90% of the advertising revenue generated after the revenue guarantee
period until the contract terminates.
As of December 31, 1997, calculators have been installed in 336 Supercenters.
The Wal-Mart Supercenter Network currently contains approximately 441 stores and
plans have been announced to add approximately 120 additional Supercenters
during 1998. The Company plans to commence the installation in additional
Supercenters if it is successful in negotiating a new contract with Wal-Mart.
The Company also has a contract with Kmart Stores, which has not yet been
implemented, and expects to contract with other mass merchants in the future.
F-8
<PAGE>
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.
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.
Property and equipment
Property and equipment is recorded at cost. Shoppers Calculators/(R)/ not yet
installed ($352,715 and $333,352 at December 31, 1997 and 1996, 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
During the initial phase of the Wal-Mart 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. Advertising revenues, including Wal-Mart
billings, are recorded on the accrual basis whereby billings for advertising
services attributable to future accounting periods are reported as unearned
advertising revenue, a current liability.
Concentrations of credit risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents and trade receivables. At December
31, 1997, all cash and cash equivalents were on deposit with one bank. The
Company generally does not require collateral from its customers. In 1997 and
1996, sales to Wal-Mart accounted for approximately 99.4% and 99.5% of
advertising revenues. At December 31, 1997 and 1996, accounts receivable from
Wal-Mart total $907,200 and $882,900, respectively.
F-9
<PAGE>
Earnings per share ("EPS")
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") which
is effective for fiscal periods ending after December 15, 1997 (see Note 8).
SFAS 128 replaced primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS is calculated by dividing net earnings available to common
shares by weighted average common shares outstanding. Diluted EPS is calculated
similarly, except that it includes the dilutive effect of the assumed exercise
of all dilutive potential common shares outstanding. SFAS 128 also requires
previously reported EPS to be restated. The adoption of SFAS 128 did not have a
material effect on the calculation of EPS.
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 a 50%
owner. It is carried at acquisition cost, net of accumulated amortization which
is computed on a straight-line basis over the life (three years remaining at
December 31, 1997) of such design patent. Since the initial acquisition referred
to above, the costs of applying for and obtaining additional design patents and
trademarks have been expensed as incurred.
Employee stock options
When the exercise price of employee stock options equals or exceeds the market
value of the stock at date of grant, the Company recognizes no compensation
expense.
New accounting standards
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
during 1998. The Company is evaluating the impact of these Statements.
NOTE 3 - BANK BORROWINGS
During 1997, all bank borrowings outstanding at December 31, 1996 were paid.
NOTE 4 - INCOME TAXES
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Current provision:
Federal $ 200,817 $ -
Deferred provision:
Federal 1,339,000 841,000
State 158,000 99,000
--------------------------
1,497,000 940,000
--------------------------
Total provision $1,697,817 $940,000
==========================
</TABLE>
F-10
<PAGE>
As a result of the Wal-Mart contract, the Company recognized the tax benefits of
its net operating losses and temporary differences in the financial statements.
The Company utilized $3,349,000 and $2,451,000 of the net operating loss
carryforward in 1997 and 1996, respectively. The remaining net operating loss
carryforward of $3,740,000 at December 31, 1997 expires in 2009.
The tax effects of temporary differences and the tax loss carryforward that give
rise to the deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $1,405,000 $2,753,000
Alternative Minimum Tax credit carryforward 177,000 -
Accrued expenses 27,000 535,000
Long-term obligation 87,000 41,000
-----------------------------
Total deferred tax assets 1,696,000 3,329,000
Deferred tax liability:
Financial basis in excess of tax basis of fixed assets (223,000) (359,000)
-----------------------------
Net deferred tax assets $1,473,000 $2,970,000
=============================
</TABLE>
The components of the net deferred income tax balances recognized in the balance
sheet at December 31 follow:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Current deferred tax assets $1,432,000 $3,288,000
Non-current deferred tax assets 41,000 -
Non-current deferred tax liabilities - (318,000)
---------------------------
Net deferred tax assets $1,473,000 $2,970,000
===========================
</TABLE>
The Company's management believes that it is more likely than not that the
deferred tax assets will be realized based upon the expected continuation of
profitable results of operations.
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State income taxes, net 4.0 -
Other .4 -
-----------------------
38.4% 34.0%
=======================
</TABLE>
F-11
<PAGE>
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
purchase warrants, which were set to expire on December 31, 1996, have been
extended to December 31, 1998. The Company extended the warrants solely as
additional consideration in connection with the common stock issuance. As a
result, any value attributed to the warrant extension would have no effect on
the Company's capital, and was thus afforded no accounting recognition.
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. The warrant
exercise price was determined by the low bid price of the Company's common stock
on the date of issuance. At the date of issuance, the ability of the Company to
continue as a going concern was in doubt, and the value attributed to the
warrants was minimal. Therefore, no portion of the note proceeds was attributed
to the warrants. 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. 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 matured on
June 30, 1997, but were prepaid in 1996.
F-12
<PAGE>
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. This amount was calculated by
estimating the net after tax cash flow that would result from the Wal-Mart
contract, and discounting 12% of such cash flow using 9.75% interest rate. The
obligation is to be paid out of available cash flow. Including accretion of the
discount, the obligation is $567,848 at December 31, 1996. All amounts due were
paid in 1997.
At December 31, 1997 and 1996, respectively, 337,750 and 535,698 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.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides an
alternative method of determining compensation cost for employee stock options,
which alternative method may be adopted at the option of the Company. Had
compensation cost for these plans been determined consistent with SFAS 123, the
Company's net income and EPS would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Net income:
As reported $2,631,003 $1,824,320
Pro forma 2,553,258 1,726,470
Basic EPS:
As reported $ 0.45 $ 0.34
Pro forma 0.44 0.32
Diluted EPS:
As reported $ 0.42 $ 0.30
Pro forma 0.40 0.28
</TABLE>
F-13
<PAGE>
A summary of the status of the Company's stock options at December 31, 1997 and
1996, and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
-----------------------------------------------------------
<S> <C> <C> <C> <C>
EMPLOYEES:
Outstanding at beginning of year 497,000 $0.52 355,000 $0.32
Granted 42,250 3.38 157,000 2.13
Exercised (500) 2.63 (15,000) 0.29
Canceled (21,000) 2.30 - -
------------- ------------
Outstanding at end of year 517,750 1.04 497,000 0.52
============= ============
Exercisable at end of year 430,000 0.52 430,000 0.57
============= ============
Weighted average fair value of options granted $ 1.87 $1.80
============= ============
DIRECTORS AND CONSULTANTS:
Outstanding at beginning of year 100,000 $0.80 120,000 $1.02
Granted 20,000 3.25 - -
Exercised - - (10,000) 0.20
Canceled - - (10,000) 4.00
------------- ------------
Outstanding at end of year 120,000 1.21 100,000 0.80
============= ============
Exercisable at end of year 120,000 1.21 100,000 0.80
============= ============
Weighted average fair value of options granted $ 1.81 $ -
============= ============
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Exercise Prices at 12/31/97 Contractual Life Ex. Price at 12/31/97 Ex. Price
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EMPLOYEES:
$0.20 - $1.00 440,000 6.49 years $0.53 430,000 $0.52
$2.63 - $4.75 77,750 8.93 years $3.89 - $ -
--------- ---------
517,750 430,000
========= =========
DIRECTORS AND
CONSULTANTS:
$0.20 - $1.00 100,000 7.17 years $0.80 100,000 $0.80
$2.63 - $4.75 20,000 9.51 years $3.25 20,000 $3.25
--------- ---------
120,000 120,000
========= =========
</TABLE>
F-14
<PAGE>
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 1997 and 1996, respectively: risk-free interest
rates of 6.07% and 5.42%; expected dividend yields of 0.0; expected lives of 5
years; and expected volatility of 57% and 120%.
At December 31, 1997 and 1996, respectively, 575,163 and 570,809 shares of
common stock were reserved for the exercise of stock awards of which 57,413 and
73,809 shares were available for future grants.
NOTE 6 - EMPLOYEE BENEFIT PLANS
In November 1991, the stockholders adopted the ADDvantage Media Group, Inc.
401(k) Plan. The Plan has a calendar year end. Employees working at least
1,000 hours during a consecutive twelve month period and at least 21 years of
age are eligible to participate. Employees may contribute 1% to 15% of the
compensation. The Company may make a discretionary match not to exceed 6% of
the participants' compensation. Employer contributions are fully vested after
six years of service. Employer contributions for 1997 and 1996 were $39,408 and
$0, respectively.
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.
Deferred compensation expense of $119,471 and $108,600 was accrued for 1997 and
1996, respectively. The deferred compensation liability is included in the
balance sheet in long-term obligations payable. For 1997 and 1996, the cost of
the related life insurance, net of increase in cash surrender value, is $88,613
and $165,648, respectively. The cash surrender value of the policies at
December 31, 1997, was $112,779.
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 Supercenters to parties other than Wal-Mart. This arrangement was
formalized in an amendment to the Wal-Mart contract dated August 25, 1997.
Amounts billed for these sales have been deferred in accounts payable.
Through December 31, 1997, inception-to-date advertising sales (full system and
test program) by the Company's sales staff have totaled $1,395,863. The total
advertising sales amount, less cost recovery of $277,259 for packaged goods
manufacturing cost, is due to Wal-Mart, of which $477,000 has been paid through
December 31, 1997. The amount due Wal-Mart at December 31, 1996, was $192,000.
At December 31, 1997, the Company had outstanding commitments to purchase
calculator and installation components in the amount of $194,970. An open
letter of credit for $116,000 has been obtained to support future payment of the
outstanding commitments.
F-15
<PAGE>
Commitments at December 31, 1997, under noncancellable operating leases for
office, warehouse space and vehicles are as follows: 1998 - $229,043; 1999 -
$104,378 and 2000 - $29,256.
Total rent expense for the years ended December 31, 1997, and 1996, was $109,712
and $78,265, respectively.
NOTE 8 - EARNINGS PER SHARE
Basic and diluted EPS for the years ended December 31, 1997 and 1996, were
computed as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Basic EPS Computation:
Net income $2,722,103 $1,824,320
Less preferred stock dividends 91,100 101,045
----------------------------
Net income available to common stockholders $2,631,003 $1,723,275
============================
Weighted average shares outstanding 5,852,299 5,095,434
----------------------------
Basic EPS $ 0.45 $ 0.34
============================
Diluted EPS Computation:
Net income available to common stockholders $2,631,003 $1,723,275
============================
Weighted average shares outstanding 5,852,299 5,095,434
Incremental shares for assumed exercise
of securities:
Warrants 1,203 263,253
Options 463,123 458,282
----------------------------
6,316,625 5,816,969
============================
Diluted EPS $ 0.42 $ 0.30
============================
</TABLE>
The 227,750 shares of convertible preferred stock were not included in the
computation of diluted EPS as their effect is anti-dilutive. Outstanding
warrant and stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted EPS. The balance of such warrants and options was 91,500
in 1997 and none in 1996.
F-16
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
On January 21, 1998, the Company entered into a letter of intent to acquire
Sports Display, Inc. of Rancho Santa Margarita, California, and its affiliated
company, Sports Display of Canada, Inc. Sports Display owns and services
advertising-supported activity boards in more than 3,000 health clubs, golf
clubs, and grocery stores throughout the U. S. and Canada. The principal
revenues of Sports Display are from the sale of local/regional advertising for
display on the activity boards. The Company sold ads to over 24,000 different
advertisers and reported unaudited revenues during its fiscal year ended August
31, 1997, of approximately $12.1 million.
The purchase price of $16.75 million is payable in cash, seller financed notes
of $5.25 million and convertible Preferred Stock of $3 million. An additional
$1.5 million will be paid at closing for non-compete and employment contracts.
Closing of the transaction is conditioned upon a number of factors, including
the negotiation of a definitive agreement and obtaining a commitment for the
needed financing.
In January 1998, the stockholders adopted the 1998 Incentive Stock Plan which
provides for the award to officers, directors, key employees and consultants of
stock options and restricted stock. When issued, option prices will be set by
the Board of Directors and may be greater than, equal to or less than the fair
market value on the grant date. The provisions included in this plan have no
effect on the provisions of the 1991 Employee Stock Plan discussed in Note 5.
NOTE 10 - CHANGE IN ACCOUNTING ESTIMATE
During the fourth quarter of 1997, the Company changed its accounting estimate
related to the remaining useful lives of existing Shoppers Calculators(
installed in Wal-Mart Supercenters and recorded additional depreciation of
$396,375. This change in estimate of the remaining useful life was made in
anticipation of the replacement of the currently installed calculators with the
Company's latest model Shoppers Calculator/(R)/ unit. The Company expects to
commence installation of the new units by the end of 1998, after receipt of a
new Shoppers Calculator/(R)/ contract as discussed in Note 1.
F-17
<PAGE>
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected comparative fourth quarter data are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Revenues $2,974,988 $2,818,830
Costs and expenses 2,434,795 1,498,030
--------------------------------
Operating income 540,193 1,320,800
Interest expense 8,206 89,897
--------------------------------
Income before income taxes 531,987 1,230,903
Provision for income taxes 195,446 357,219
--------------------------------
Net income 336,541 873,684
Preferred stock dividends (22,899) (22,899)
--------------------------------
Net income applicable to common stock $ 313,642 $ 850,785
================================
Net income per common share:
Basic $ .05 $ 0.16
================================
Diluted $ .05 $ 0.14
================================
</TABLE>
F-18
<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, 1998 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, 1998
- - ----------------------- (Principal Executive Officer)
Charles H. Hood
/s/ Gary W. Young Executive Vice President- March 20, 1998
- - ----------------------- Finance and Administration,
Gary W. Young Treasurer and Director
(Principal Financial Officer and
Principal Accounting Officer)
March 20, 1998
/s/ J. Larre Barrett Director
- - -----------------------
J. Larre Barrett
/s/ John W. Condon Director March 20, 1998
- - -----------------------
John W. Condon
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated March 3, 1998 on the
financial statements of ADDvantage Media Group, Inc. (the "Company") at
December 31, 1997 and 1996, included in this Annual Report on Form 10-KSB for
the year ended December 31, 1997, into the Company's previously filed
Registration Statement on Form S-8 (File No. 333-12461).
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
March 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,003,15
<SECURITIES> 0
<RECEIVABLES> 1,548,961
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,266,212
<PP&E> 3,575,315
<DEPRECIATION> 998,009
<TOTAL-ASSETS> 8,310,662
<CURRENT-LIABILITIES> 2,317,320
<BONDS> 0
0
760,260
<COMMON> 59,066
<OTHER-SE> 4,740,944
<TOTAL-LIABILITY-AND-EQUITY> 8,310,662
<SALES> 11,555,035
<TOTAL-REVENUES> 11,607,663
<CGS> 0
<TOTAL-COSTS> 4,848,220
<OTHER-EXPENSES> 2,275,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,944
<INCOME-PRETAX> 4,484,041
<INCOME-TAX> 1,898,751
<INCOME-CONTINUING> 2,504,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,504,346
<EPS-PRIMARY> 0.41<F1>
<EPS-DILUTED> 0.38<F2>
<FN>
<F1> EPS-Basic per SFAS No. 128.
<F2> EPS-Diluted per SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 8,344 972,952 1,138,479 739,140
<SECURITIES> 0 0 0 0
<RECEIVABLES> 316,563 2,742 12,096 991,544
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 997,398 1,683,333 3,375,635 5,039,850
<PP&E> 1,451,314 1,886,799 2,469,362 2,715,604
<DEPRECIATION> 364,544 408,907 431,650 482,179
<TOTAL-ASSETS> 5,812,888 6,730,017 7,049,436 7,682,535
<CURRENT-LIABILITIES> 3,182,067 3,370,135 5,136,554 4,219,431
<BONDS> 0 0 0 0
0 0 0 0
927,167 927,167 760,260 760,260
<COMMON> 49,426 50,626 51,382 57,311
<OTHER-SE> (2,307,366) (1,619,588) (690,985) 2,218,933
<TOTAL-LIABILITY-AND-EQUITY> 5,812,888 6,730,017 7,049,436 7,682,535
<SALES> 606,833 1,986,653 4,221,125 7,012,864
<TOTAL-REVENUES> 607,068 1,986,889 4,225,185 7,044,015
<CGS> 0 0 0 0
<TOTAL-COSTS> 220,802 620,609 1,204,939 2,118,966
<OTHER-EXPENSES> 272,277 668,675 1,088,318 1,672,321
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 131,111 266,227 398,511 488,408
<INCOME-PRETAX> (17,122) 431,378 1,553,417 2,764,320
<INCOME-TAX> 0 163,899 582,781 940,000
<INCOME-CONTINUING> (17,122) 267,479 950,636 1,824,320
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (17,122) 267,479 950,636 1,824,320
<EPS-PRIMARY> (0.01)<F1> 0.04<F1> 0.18<F1> 0.34<F1>
<EPS-DILUTED> (0.01)<F2> 0.04<F2> 0.16<F2> 0.30<F2>
<FN>
<F1>EPS-Basic per SFAS No. 128
<F2>EPS-Diluted per SFAS No. 128
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 798,464 1,254,362 1,268,046
<SECURITIES> 0 0 0
<RECEIVABLES> 903,027 117,314 110,030
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 4,536,196 3,715,341 3,359,930
<PP&E> 2,854,968 3,212,364 3,713,014
<DEPRECIATION> 503,710 522,447 555,893
<TOTAL-ASSETS> 7,310,678 6,832,835 6,972,494
<CURRENT-LIABILITIES> 2,948,102 1,649,092 950,906
<BONDS> 0 0 0
0 0 0
760,260 760,260 760,260
<COMMON> 58,566 58,566 59,066
<OTHER-SE> 3,046,282 4,656,407 5,464,384
<TOTAL-LIABILITY-AND-EQUITY> 7,310,678 6,832,835 6,972,494
<SALES> 2,837,892 5,707,316 8,608,274
<TOTAL-REVENUES> 2,840,248 5,716,137 8,632,675
<CGS> 0 0 0
<TOTAL-COSTS> 928,740 1,907,042 3,022,259
<OTHER-EXPENSES> 529,495 1,079,724 1,649,745
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 43,338 63,815 72,738
<INCOME-PRETAX> 1,338,675 2,665,556 3,887,933
<INCOME-TAX> 516,219 1,029,151 1,502,371
<INCOME-CONTINUING> 822,456 1,636,405 2,385,562
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 822,456 1,636,405 2,385,562
<EPS-PRIMARY> 0.14<F1> 0.27<F1> 0.40<F1>
<EPS-DILUTED> 0.12<F2> 0.25<F2> 0.36<F2>
<FN>
<F1>EPS-Basic per SFAS No. 128
<F2>EPS-Diluted per SFAS No. 128
</FN>
</TABLE>
