<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period ________________ to ______________
Commission File number 1-10799
ADDVANTAGE MEDIA GROUP, INC.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 73-1351610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 East Skelly Drive
Meridian Tower, Suite 1080
Tulsa, Oklahoma 74135-6552
(Address of principal executive office) (Zip Code)
(918) 665-8414
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
--- ---
Shares outstanding of the issuer's $.01 par value common stock as of November
12, 1998, is 1,476,646.
Transitional Small Business Issuer Disclosure Format (Check one): Yes No x
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 710,943 $2,003,165
Accounts receivable 143,477 1,548,961
Deferred income taxes -- 1,432,000
Other current assets 51,016 36,086
---------- ----------
Total current assets 905,436 5,020,212
Property and equipment, at cost:
Calculators 2,123,243 2,585,693
Office and production equipment 931,684 891,743
Transportation equipment 383,580 --
Furniture and fixtures 100,851 97,879
---------- ----------
3,539,358 3,575,315
Accumulated depreciation 1,259,054 981,186
---------- ----------
2,280,304 2,594,129
Deferred income taxes -- 41,000
Patent, net of accumulated amortization of
$695,262 and $627,150 at September 30,
1998 and December 31, 1997, respectively 212,848 280,960
Investment in Ventures Education Systems
Corporation 968,201 --
Other assets 219,726 186,184
---------- ----------
Total assets $4,586,515 $8,122,485
========== ==========
</TABLE>
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<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
Current liabilities:
Notes payable $ 276,819 $ --
Accounts payable 77,080 834,115
Income taxes payable 40,000 22,326
Other accrued liabilities 268,002 449,944
Unearned advertising revenue -- 810,001
----------- -----------
Total current liabilities 661,901 2,116,386
Long-term obligations 326,640 228,072
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized; Series A preferred
stock--227,750 shares issued and
outstanding at December 31, 1997;
liquidation preference, $911,000 -- 760,260
Common stock, $.01 par value, 10,000,000
shares authorized, 5,906,584 issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 59,066 59,066
Capital in excess of par value 8,711,894 8,862,634
Accumulated deficit (5,172,986) (3,903,933)
----------- -----------
Total stockholders' equity 3,597,974 5,778,027
----------- -----------
Total liabilities and stockholders' equity $ 4,586,515 $ 8,122,485
=========== ===========
</TABLE>
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<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues:
Advertising sales $ 47,850 $2,900,958
Other 28,226 15,579
----------- ----------
76,076 2,916,537
Costs and expenses:
Cost of advertising services 848,311 1,115,217
Selling expenses 107,024 167,572
General and administrative expenses 403,590 402,448
----------- ----------
1,358,925 1,685,237
----------- ----------
Operating income (loss) (1,282,849) 1,231,300
Equity in loss of affiliated company 21,799 --
Interest expense 3,575 8,924
----------- ----------
Income (loss) before provision for income taxes (1,308,223) 1,222,376
Provision for income taxes -- 473,220
----------- ----------
Net income (loss) (1,308,223) 749,156
Preferred stock dividends -- (22,899)
----------- ----------
Net income (loss) applicable to common stock $(1,308,223) $ 726,257
=========== ==========
Net income (loss) per common share:
Basic $ (0.22) $ 0.13
=========== ==========
Diluted $ (0.22) $ 0.11
=========== ==========
</TABLE>
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<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues:
Advertising sales $ 4,911,331 $8,608,274
Other 110,509 24,401
----------- ----------
5,021,840 8,632,675
Costs and expenses:
Cost of advertising services 2,587,424 3,022,259
Selling expenses 387,436 435,324
General and administrative expenses 1,238,596 1,214,421
----------- ----------
4,213,456 4,672,004
----------- ----------
Operating income 808,384 3,960,671
Calculator writedown 364,822 --
Equity in loss of affiliated company 21,799 --
Interest expense 11,512 72,738
----------- ----------
Income before provision for income taxes 410,251 3,887,933
Provision for income taxes 1,640,972 1,502,371
----------- ----------
Net income (loss) (1,230,721) 2,385,562
Preferred stock dividends (38,332) (68,201)
----------- ----------
Net income (loss) applicable to common stock $(1,269,053) $2,317,361
=========== ==========
Net income (loss) per common share:
Basic $ (0.21) $ 0.40
=========== ==========
Diluted $ (0.21) $ 0.36
=========== ==========
</TABLE>
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<PAGE>
ADDVANTAGE MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,230,721) $ 2,385,562
Adjustments to reconcile net income to net cash used
in operating activities:
Deferred income tax 1,473,000 1,393,878
Depreciation and amortization 543,626 379,607
Calculator writedown 364,822 --
Equity in loss of affiliated company 21,799 --
Accrual of long-term obligations 98,568 89,604
Changes in assets and liabilities:
Accounts receivable 1,405,484 881,513
Other current assets (14,930) (25,565)
Other assets (33,542) (82,574)
Accounts payable (757,035) (219,294)
Income taxes payable 17,674 --
Accrued settlement obligation -- (427,383)
Other accrued liabilities (181,942) (370,168)
Unearned advertising revenue (810,001) (662,174)
----------- -----------
Net cash provided by operating activities 896,802 3,343,006
INVESTING ACTIVITIES
Purchases of property and equipment (526,511) (1,235,192)
Purchase of Ventures Education Systems Corporation
common stock (990,000) --
----------- -----------
Net cash used in investing activities (1,516,511) (1,235,192)
FINANCING ACTIVITIES
Proceeds from notes payable 383,680 --
Payments on bank note -- (1,156,656)
Payments on notes payable (106,861) --
Payment of preferred stock dividends (38,332) (501,051)
Redemption of preferred stock (911,000) --
Exercise of options and warrants -- 78,799
----------- -----------
Net cash provided by (used in) financing activities (672,513) (1,578,908)
----------- -----------
Increase (decrease) in cash (1,292,222) 528,906
Cash at beginning of period 2,003,165 739,140
----------- -----------
Cash at end of period $ 710,943 $ 1,268,046
=========== ===========
Supplemental disclosures of cash flow information:
Interest Paid $ 11,512 $ 280,304
=========== ===========
Income Taxes Paid $ 127,972 $ 108,576
=========== ===========
Non cash investing and financing activities:
Warrants issued for services $ -- $ 31,720
=========== ===========
</TABLE>
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<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the information furnished reflects all adjustments, consisting only of
normal recurring adjustments which are, in the opinion of management, necessary
in order to make the financial statements not misleading.
NOTE 2 - DESCRIPTION OF BUSINESS
ADDvantage 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 Calculator/(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. Under the contract, the Company has the right to retain
90% of the advertising revenue. 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 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. In May 1998, the Company
received the final revenue guarantee payment. The Company had the option to
continue the contract to October 6, 1999, however, Wal-Mart notified the Company
that it would not agree to a new contract or an extension of the current
contract past its present term. Based on Wal-Mart's decision not to renew the
present contract, the Company made the decision to commence de-installation of
the Shopper Calculator/(R)/ program beginning June 15, 1998. Such
de-installation was completed by September 15, 1998.
On September 2, 1998 the Company filed a civil complaint against Wal-Mart in the
United States District Court for the Western District of Arkansas, Fayetteville
Division, seeking both compensatory and punitive damages based on various
allegations of wrongdoing by Wal-Mart. The lawsuit generally alleges that, at
the direction of Wal-Mart's President and CEO, David Glass, Wal-Mart breached
contracts with the Company, including a September 1, 1995 contract which was
executed in connection with the settlement of claims which the Company had
asserted against Wal-Mart in previous litigation. The lawsuit also alleges that
based on a course of conduct
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<PAGE>
approved by Mr. Glass, Wal-Mart is liable to the Company for misrepresentation,
deceptive trade practices, injurious falsehood, and intentional interference
with contractual relationships and business expectancies. The lawsuit also
includes a claim for damages under the doctrine of "promissory estoppel."
The civil complaint alleges that the Company has suffered substantial damages as
a consequence of the conduct of Wal-Mart, as alleged in the lawsuit. The civil
complaint does not, however, refer to a specific dollar amount of damages which
the Company seeks to recover from Wal-Mart in the lawsuit.
In response to the lawsuit, on October 6, 1998, Wal-Mart filed a counterclaim
against the Company and a third-party complaint against Charles H. Hood, Gary
Young, and unidentified "John Doe" defendants. In the counterclaim, Wal-Mart
alleged that the Company was liable to Wal-Mart for unspecified compensatory and
punitive damages on theories of promissory estoppel, breach of contract,
defamation and deceptive trade practices. In the third-party complaint, Wal-
Mart further alleged that Mr. Hood and Mr. Young were liable to Wal-Mart for
unspecified compensatory and punitive damages for defamation.
The Company believes that the allegations made by Wal-Mart in its counterclaim
and third-party complaint are without merit and that the allegations were made
for the specific purpose of encouraging the Company to dismiss its lawsuit
against Wal-Mart. While the Company is not presently in a position to predict
the outcome of this litigation, the Company believes that the litigation brought
by Wal-Mart will not materially affect the Company's overall financial
condition.
At the present time, the Company is negotiating contracts with Hechinger
Company/Builders Square, divisions of Kroger, and other retail chains. The
Kmart contract has been amended for the Super Kmart stores (approximately 105
stores) and Big K stores (approximately 670 stores) has approved a partnership
pending Super Kmart's results. New developments with consumer goods companies,
such as Coca-Cola and Pepsi, are being discussed utilizing a new proprietary
extension of the Shoppers Calculator/(R)/.
The Company doesn't know if, or when, any contracts will be implemented or if
they will be implemented at all, or whether the Company will enter into similar
agreements with any other retailers.
The Company expects to incur losses for the foreseeable future. Presently,
business activity is being limited to selling units, which provides
unpredictable cash flow, and contacting other retailers about the Shoppers
Calculator program. The Company has continued to downsize its staff and
overhead requirements in order to continue with limited operational activity
while the lawsuit against Wal-Mart is being processed. The Company believes
that the outcome of the litigation which it has filed against Wal-Mart will
likely have a material impact on its future and the future of the Shoppers
Calculator program.
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<PAGE>
The Company is currently evaluating a number of options and opportunities which
could include a merger, the sale of the Shoppers Calculator/(R)/ assets or some
other business alliance.
NOTE 3 - INVESTMENT IN VENTURES EDUCATION SYSTEMS CORPORATION
On September 1, 1998 the Company acquired a 28% interest in Ventures Education
Systems Corporation, a private company engaged in the commercial development and
marketing of proprietary teaching techniques, services, products and materials,
principally to public primary and secondary schools. The Company paid $990,000
cash for the interest, which consists of 550,000 shares of common stock. Under
the terms of the investment, the Company was able to designate one member of the
Ventures Board of Directors. It is also contemplated that the Company may
provide certain assistance in connection with the development of Ventures'
future marketing and sales efforts and financial planning.
Ventures is a development stage company formed in May of 1997 and is
headquartered in New York, New York. Its innovative teaching methods, based on
cognitive science precepts, focus on student-centered learning and are designed
to improve student motivation. The products and services were developed from
the methods and techniques developed by its not-for-profit affiliate, Ventures
in Education, Inc., over a period of approximately 17 years. Its methods and
techniques strived for improved literacy, logical and quantitative reasoning and
problem solving skills. The company's principal customer base is comprised of
those public schools which are eligible for Federal "Title I" funds.
Ventures Education Systems Corporation's operating results for the three months
ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Three Months ended
September 30, 1998
(Unaudited)
-------------------
<S> <C>
Total Revenues $ 112,055
Cost and Expenses 350,807
---------
Net Loss $(238,752)
=========
ADDvantage Media Group, Inc.
equity in the net loss for the period $ (21,799)
=========
</TABLE>
NOTE 4 - INCOME TAXES
As a result of Wal-Mart's decision to terminate its contract with the Company,
management has reevaluated the likelihood of realizing the deferred tax assets
resulting from its net operating loss
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<PAGE>
and tax credit carryforwards. Management has determined that the Company no
longer meets the criteria to continue to recognize these tax carryforwards as
assets. Consequently, the tax provision was increased to reverse the deferred
tax asset in the second quarter. The tax provision for the nine months ended
September 30, 1998 is as follows:
<TABLE>
<S> <C>
Current federal and state income taxes, after reduction for
use of net operating loss in the current period $ 85,000
Deferred taxes, including provision for reversal of deferred
tax assets 1,556,000
----------
Total tax provision $1,641,000
==========
</TABLE>
NOTE 5 - REVERSE STOCK SPLIT
On October 7, 1998, the Company's shareholders approved an amendment to the
Company's Certificate of Incorporation to effect a one for four reverse stock
split. The amendment became effective at the close of business on October 8,
1998.
As a result of the reverse stock split, the total number of issued and
outstanding shares of the Company were reduced from 5,906,584 to 1,476,646. The
number of shares held by each shareholder was reduced to an amount equal to 25%
of the number owned prior to the effectiveness of the reverse split. The number
of shares subject to outstanding options and warrants was reduced accordingly.
The earnings per share and the shares outstanding have been reported herein on a
pre split basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997
The Company entered into a contract with Wal-Mart effective as of September 1,
1995, whereby the Company 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 guaranteed that the Company's share of
advertising revenues would be $2,700 per installed store, per four-week
advertising cycle, until a total of approximately $23,500,000 had been received
by the Company. At June 30, 1998 the total amount of the revenue guarantee had
been received, so therefore, the quarter ended September 30, 1998 did not
include any revenue guarantee payments from Wal-Mart. The Company commenced de-
installation of the Wal-Mart Supercenter Program on June 15, 1998 and completed
such de-installation approximately September 15, 1998.
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<PAGE>
Advertising revenues decreased approximately $2,853,100 (98%) for the three
months ended September 30, 1998, as compared to the three months ended September
30, 1997. During the second fiscal quarter of 1998, the Wal-Mart revenue
guarantee was concluded with a final billing of $360,900 ($1,074 per store) for
advertising cycle number six which ended on June 14, 1998. There were no
significant advertising revenues earned after that date. Since the Wal-Mart
Supercenter program has been de-installed, the Company is projecting no
advertising revenues for the remainder of 1998.
Operating income (loss) decreased $2,514,100 during the three months ended
September 30, 1998, as compared to the three months ended September 30, 1997.
The Company's net loss applicable to common stock was $1,308,200 for 1998 third
quarter, as compared to net income of $726,300 for the same period last year.
Based on the Company's decision to de-install the Wal-Mart supercenter program
in June 1998, it is anticipated that operating losses will continue for the
foreseeable future.
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) decreased approximately $266,900 (24%) in the
third quarter of 1998 as compared to the same period in 1997 as a result of
reduced labor costs and depreciation expense. On March 1, 1998, the Company
significantly reduced the size of its field service staff. Labor costs and
related expenses for the third quarter of 1998 related entirely to the de-
installation of the Wal-Mart Supercenter program which was completed
approximately September 15, 1998.
Selling expense decreased approximately $60,500(36%) in the third quarter of
1998 compared to the same period in 1997. During 1998, marketing materials
costs and advertising expenses decreased $40,000. Payroll, payroll related
expenses and sales representative retainer expenses decreased $20,500 in 1998 as
compared to 1997. Sales efforts for the third quarter of 1998 were shifted from
advertising sales for the Wal-Mart Supercenter program to contacting other
retailers regarding the Shoppers Calculator program.
General and administrative expenses increased $1,100 (0%) during the third
quarter of 1998 as compared to the third quarter of 1997. During 1998, payroll
and payroll related expenses increased $14,300. Officer and management bonus
accruals decreased $87,500 in 1998 as compared to 1997. Executive retirement
plan accruals, including insurance cost to fund future payments, increased
$3,000 during 1998. Expenses related to broker and analyst meetings and other
shareholder expenses increased $6,200 over 1997. Deferred acquisition expenses
amounting to $75,700 were charged to expense during the third quarter of 1998.
Decreases amounting to $10,600 occurred in professional fees, occupancy costs
and other expenses.
Interest expenses decreased approximately $5,300 (60%) during the third quarter
of 1998 as compared to the same period in 1997. Interest accrued on amounts due
investors, including the accretion of discount for the litigation settlement,
decreased $8,900 in 1998 as compared to 1997,
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<PAGE>
all because of the reduction of amounts due and past due. Vendor interest
increased during the current quarter by $3,600.
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
The Company entered into a contract with Wal-Mart effective as of September 1,
1995, whereby the Company 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 guaranteed that the Company's share of
advertising revenues will be $2,700 per installed store, per four-week
advertising cycle, until a total of approximately $23,500,000 had been received
by the Company. At June 30, 1998, the total amount of the revenue guarantee had
been received, so therefore, the quarter ended September 30, 1998 did not
include any revenue guarantee payments from Wal-Mart. The Company commenced de-
installation of the Wal-Mart Supercenter program on June 15, 1998 and completed
such de-installation approximately September 15, 1998.
Advertising revenues decreased approximately $3,696,900 (43%) for the nine
months ended September 30, 1998, as compared to the nine months ended September
30, 1997. During the second fiscal quarter of 1998 the Wal-Mart revenue
guarantee was concluded with a final billing of $360,900 ($1,074 per store) for
advertising cycle number six which ended on June 14, 1998. There were no
significant advertising revenues earned after that date. Since the Wal-Mart
Supercenter program has been de-installed, the Company is projecting no
advertising revenues for the remainder of 1998.
Operating income decreased $3,152,300 (80%) during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997.
The Company's net loss applicable to common stock was $1,269,100 for the nine
months of 1998, as compared to net income of $2,317,400 for the same period last
year. 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. The nine months of 1997 tax
expense of $1,502,400 reflects the amortization of the deferred tax asset
recognized in 1995. As a result of Wal-Mart's decision to terminate its
contract with the Company, management has reevaluated the likelihood of
realizing the deferred tax assets resulting from its net operating loss and tax
credit carryforwards. Management has determined that the Company no longer meets
the criteria to continue to recognize these tax carryforwards as assets.
Consequently, the tax provision for the nine months ended September 30, 1998 has
been increased by $1,556,000.
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) decreased approximately $434,800 (14%) in the
first nine months of 1998 as compared to the same period in 1997 as a result of
reduced labor costs and depreciation expense. On March 1, 1998 the Company
significantly reduced the size of its field service staff. Labor costs and
related expenses
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<PAGE>
for the third quarter of 1998 related entirely to the de-installation of the
Wal-Mart Supercenter program which was completed approximately September 15,
1998.
Selling expense decreased approximately $47,900 (11%) in the first nine months
of 1998 compared to the same period in 1997. During 1998, payroll, payroll
related expenses and sales representative retainer expenses increased $22,300.
Marketing materials cost and advertising expenses decreased $70,200 in 1998 as
compared to 1997. Sales efforts for the third quarter of 1998 were shifted from
advertising sales for the Wal-Mart Supercenter program to contacting other
retailers regarding the Shoppers Calculator program.
General and administrative expenses increased $24,200 (2%) during the first nine
months of 1998 as compared to the first nine months of 1997. During 1998,
payroll and payroll related expenses increased $5,800. Officer and management
bonus accruals decreased $117,500 in 1998 as compared to 1997. Executive
retirement plan accruals, including insurance cost to fund future payments,
increased $12,100 during 1998. Expenses related to broker and analyst meetings
and other shareholder expenses increased $21,200 over 1997. Deferred
acquisition expenses amounting to $75,700 were charged to expense during the
third quarter of 1998. Increases amounting to $26,900 occurred in professional
fees, occupancy costs and other expenses.
Interest expenses decreased approximately $61,200 (84%) during the first nine
months of 1998 as compared to the same period in 1997. Interest on bank
borrowings decreased $19,900 due primarily to the repayment of all bank debt
during 1997. Vendor interest was $9,100 higher and interest accrued on amounts
due investors, including the accretion of discount for the litigation
settlement, was $50,400 lower for 1998 as compared to 1997, all because of the
reduction of amounts due and past due.
FINANCIAL CONDITION AND LIQUIDITY
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 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
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. In May 1998, the Company
received the final revenue guarantee payment.
-12-
<PAGE>
During August of 1997, the Company 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. During May of 1998, the Company received notification from Wal-Mart
that it would not enter into a new agreement or agree to an extension of the
current contract. Based on Wal-Mart's decision not to renew the present
contract, the Company commenced de-installation of the Shoppers Calculator
program on June 15, 1998 and completed such de-installation approximately
September 15, 1998.
The Company expects to incur losses for the foreseeable future. Presently,
business activity is being limited to selling units, which provides
unpredictable cash flow, and contacting other retailers about the Shoppers
Calculator program. The Company has continued to downsize its staff and
overhead requirements in order to continue with limited operational activity
while the lawsuit against Wal-Mart is being processed. The Company believes
that the outcome of the Wal-Mart litigation will have a material impact on its
future and the future of the Shoppers Calculator program.
On January 28, 1998, the Company entered into a letter of intent to acquire
Sports Display, Inc. and its affiliated company Sports Display of Canada, Inc.
at a purchase price of $16.75 million, 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 would also be obligated to pay an additional $1.5
million at closing for certain non-compete and employment contracts. The parties
extended this letter of intent to May 31, 1998. However, the termination of the
Wal-Mart contract caused the efforts to agree upon a definitive agreement to be
put on hold. While the parties have continued to maintain contact and there is
the possibility that a transaction will be consummated on some basis (which
would most likely vary significantly from the terms and structure contemplated
by the letter of intent), there can be no assurance at this time that the
acquisition will be consummated.
FORWARD-LOOKING STATEMENTS
Certain statements included in this report which are not historical facts are
forward-looking statements. These forward-looking statements are based on
current expectations, estimates, assumptions and beliefs of management; and
words such as "expects," "anticipates," "intends," "plans," "believes,"
"projects," "estimates" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including, but not limited to, the Company's ability to obtain
new users of the Shoppers Calculator/(R)/ program and to sell advertising for
that program, 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, 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.
-13-
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 2, 1998 the Company filed a civil complaint against Wal-Mart
Stores, Inc. ("Wal-Mart") in the United States District Court for the Western
District of Arkansas, Fayetteville Division, seeking both compensatory and
punitive damages based on various allegations of wrongdoing by Wal-Mart. The
lawsuit generally alleges that, at the direction of Wal-Mart's President and
CEO, David Glass, Wal-Mart breached contracts with the Company, including a
September 1, 1995, contract which was executed in connection with the settlement
of claims which the Company had asserted against Wal-Mart in previous
litigation. The lawsuit also alleges that based on a course of conduct approved
by Mr. Glass, Wal-Mart is liable to the Company for misrepresentation, deceptive
trade practices, injurious falsehood and intentional interference with
contractual relationships and business expectancies. The lawsuit also includes
a claim for damages under the doctrine of "promissory estoppel."
The civil complaint alleges that the Company has suffered substantial
damages as a consequence of the conduct of Wal-Mart, as alleged in the lawsuit.
The civil complaint does not, however, refer to a specific dollar amount of
damages which the Company seeks to recover from Wal-Mart in the lawsuit. The
Company believes that the outcome of the litigation against Wal-Mart will have a
material impact on its future and the future of the Shoppers Calculator program.
In response to the lawsuit, on October 6,1998, Wal-Mart filed a
counterclaim against the Company and a third-party complaint against Charles H.
Hood, Gary Young, and unidentified "John Doe" defendants. In the counterclaim,
Wal-Mart alleged that the Company was liable to Wal-Mart for unspecified
compensatory and punitive damages on theories of promissory estoppel, breach of
contract, defamation and deceptive trade practices. In the third-party
complaint, Wal-Mart further alleged that Mr. Hood and Mr. Young were liable to
Wal-Mart for unspecified compensatory and punitive damages for defamation.
The Company believes that the allegations made by Wal-Mart in its
counterclaim and third-party complaint are without merit and that the
allegations were made for the specific purpose of encouraging the Company to
dismiss its lawsuit against Wal-Mart. While the Company is not presently in a
position to predict the outcome of this litigation, the Company believes that
the litigation brought by Wal-Mart will not have a material adverse effect on
the Company's overall financial condition or results of operations.
ITEM 5. OTHER INFORMATION
As set forth in the Company's Proxy Statement for the 1998 Annual Meeting,
stockholder proposals submitted pursuant to Rule 14a-8 for inclusion in the
Company's proxy statement for the 1999 Annual Meeting of Stockholders must be
received no later than December 29, 1998. Any stockholder who intends to present
a proposal at the 1999 Annual Meeting and has not sought
-14-
<PAGE>
inclusion of the proposal in the Company's proxy materials pursuant to Rule
14a-8 must provide notice of such proposal to the Company no later than
March 14, 1999. Failure to provide timely notice of such proposal will mean that
the persons named as proxies will be able to vote the shares for which they have
received proxies on such proposal in their discretion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
2 Stock Purchase Agreement dated as of August 31, 1998 by
and between ADDvantage Media Group, Inc. and Ventures
Education Systems Corporation incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission by the
Company on September 14, 1998
4 Voting Agreement dated as of August 31, 1998 by and among
ADDvantage Media Group, Inc.; Maxine E. Bleich; Richard
P. Kamenitzer and Marc J. Sokol incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission by the
Company on September 14, 1998
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
A current report on Form 8-K was filed by the Company on September 14,
1998 reporting under Item 2 its acquisition of 550,000 shares of the common
stock of Education Ventures System Corporation. No financial statements were
filed with that report.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADDVANTAGE MEDIA GROUP, INC.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ CHARLES H. HOOD President November 12, 1998
- ------------------- (Principal Executive Officer)
Charles H. Hood
/s/ GARY W. YOUNG Executive Vice President - November 12, 1998
- ------------------- Finance and Administration and
Gary W. Young Treasurer (Principal Financial Officer)
-16-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2 Stock Purchase Agreement dated as of August 31, 1998 by
and between ADDvantage Media Group, Inc. and Ventures
Education Systems Corporation incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission by the
Company on September 14, 1998
4 Voting Agreement dated as of August 31, 1998 by and
among ADDvantage Media Group, Inc.; Maxine E. Bleich;
Richard P. Kamenitzer and Marc J. Sokol incorporated by
reference to Exhibit 4.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission
by the Company on September 14, 1998
11 Statement re: Computation of Per Share
Earnings
27 Financial Data Schedule
-17-
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," during 1997. SFAS No.
128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. All prior period weighted average and
per share information has been restated in accordance with SFAS No. 128.
Outstanding stock options and warrants issued by the Company represent the only
dilutive effect on weighted average shares. A reconciliation between basic and
diluted weighted average shares outstanding and the related earnings per share
calculation is presented below:
Basic and diluted EPS for the three months ended September 30, 1998 and 1997,
were computed as follows. Earnings per share data has not been restated to
reflect the one for four reverse stock split to holders of record at the close
of business on September 15, 1998, effective October 8, 1998.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
-----------------------------
1998 1997
---------------- -----------
<S> <C> <C>
Basic EPS Computation:
Net income (loss) $(1,308,223) $ 749,156
Less preferred stock dividends -- 22,899
----------- ----------
Net income (loss) available to common
stockholders $(1,308,223) $ 726,257
=========== ==========
Weighted average shares outstanding 5,906,584 5,864,736
=========== ==========
Basic EPS $ (0.22) $ 0.12
=========== ==========
Diluted EPS Computation:
Net income (loss) available to common
stockholders $(1,308,223) $ 726,257
=========== ==========
Weighted average shares outstanding 5,906,584 5,864,736
Incremental shares for assumed exercise
of securities
Warrants -- 30,320
Options -- 470,256
----------- ----------
5,906,584 6,365,312
=========== ==========
Diluted EPS (note) $ (0.22) $ 0.11
=========== ==========
</TABLE>
<PAGE>
The 227,750 shares of convertible preferred stock were not included in the
computation of diluted EPS as their effect is anti-dilutive. The diluted EPS
computation for the three months ended September 30, 1998, is not presented
since its effect is anti-dilutive.
Basic and diluted EPS for the nine months ended September 30, 1998 and 1997,
were computed as follows. Earnings per share data has not been restated to
reflect the one for four reverse stock split to holders of record at the close
of business on September 15, 1998, effective October 8, 1998.
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Basic EPS Computation:
Net income (loss) $(1,230,721) $2,385,562
Less preferred stock dividends 38,332 68,201
----------- ----------
Net income available to common stockholders $(1,269,053) $2,317,361
=========== ==========
Weighted average shares outstanding 5,906,584 5,834,004
=========== ==========
Basic EPS $ (0.21) $ 0.40
=========== ==========
Diluted EPS Computation:
Net income available to common stockholders $(1,269,053) $2,317,361
=========== ==========
Weighted average shares outstanding 5,906,584 5,834,004
Incremental shares for assumed exercise
of securities
Warrants -- 61,576
Options -- 477,948
----------- ----------
5,906,584 6,373,528
=========== ==========
Diluted EPS (note) $ (0.21) $ 0.36
=========== ==========
</TABLE>
The 227,750 shares of convertible preferred stock were not included in the
computation of diluted EPS as their effect is anti-dilutive. The diluted EPS
computation for the nine months ended September 30, 1998, is not presented since
its effect is anti-dilutive.
<PAGE>
Basic and diluted EPS on a post one for four reverse stock split effective
October 8, 1998, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Basic EPS
Weighted average shares outstanding 1,476,646 1,466,184
========== ==========
Basic EPS $ (0.89) $ 0.50
========== ==========
Diluted EPS
Diluted shares outstanding 1,476,646 1,591,328
========== ==========
Diluted EPS $ (0.89) $ 0.46
========== ==========
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Basic EPS
Weighted average shares outstanding 1,476,646 1,458,501
========== ==========
Basic EPS $ (0.86) $ 1.59
========== ==========
Diluted EPS
Diluted shares outstanding 1,476,646 1,593,382
========== ==========
Diluted EPS $ (0.86) $ 1.45
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 710,943
<SECURITIES> 0
<RECEIVABLES> 143,477
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 905,436
<PP&E> 3,539,358
<DEPRECIATION> 1,259,054
<TOTAL-ASSETS> 4,586,515
<CURRENT-LIABILITIES> 661,901
<BONDS> 0
0
0
<COMMON> 59,066
<OTHER-SE> 3,538,908
<TOTAL-LIABILITY-AND-EQUITY> 4,586,515
<SALES> 4,911,331
<TOTAL-REVENUES> 5,021,840
<CGS> 0
<TOTAL-COSTS> 2,974,860
<OTHER-EXPENSES> 1,238,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,512
<INCOME-PRETAX> 410,251
<INCOME-TAX> 1,640,972
<INCOME-CONTINUING> (1,230,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,230,721)
<EPS-PRIMARY> (0.21)<F1>
<EPS-DILUTED> (0.21)<F2>
<FN>
<F1>EPS-Basic per SFAS No. 128.
<F2>EPS-Diluted per SFAS No. 128.
</FN>
</TABLE>
