-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TFAdUiLyqAVdwa1TIR+6NvXBZpgIgkA5UM6/3yV+YLgeXYxgOLzLraVWUk36KpaP gGgc2hcv8owQuilo+YXDDA== 0000930661-96-000596.txt : 19960613 0000930661-96-000596.hdr.sgml : 19960613 ACCESSION NUMBER: 0000930661-96-000596 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADDVANTAGE MEDIA GROUP INC /OK CENTRAL INDEX KEY: 0000874292 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 731351610 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-39902-FW FILM NUMBER: 96579472 BUSINESS ADDRESS: STREET 1: 5100 E SKELLY DR STREET 2: MERIDIAN TOWER SUITE 1080 CITY: TULSA STATE: OK ZIP: 74135-6552 BUSINESS PHONE: 9186658414 MAIL ADDRESS: STREET 1: 5100 EAST SKELLY DRIVE STREET 2: MERIDIAN TOWER SUITE 1080 CITY: TULSA STATE: OK ZIP: 74135 POS AM 1 POST-EFFECTIVE AMENDMENT #3 TO FORM SB-2 As filed with the Securities and Exchange Commission on June 11, 1996 Registration No. 33-39902-FW ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________ POST-EFFECTIVE AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ____________________ ADDvantage Media Group, Inc. (Name of small business issuer in its charter) ____________________ Oklahoma 7310 73-1351610 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification No.) incorporation or organization) 5100 East Skelly Drive Meridian Tower, Suite 1080 Tulsa, Oklahoma 74135 (918) 665-8414 (Address and telephone number of principal executive offices and principal place of business) ____________________ Gary W. Young ADDvantage Media Group, Inc. 5100 East Skelly Drive Meridian Tower, Suite 1080 Tulsa, Oklahoma 74135 (918) 665-8414 (Name, address and telephone number of agent for service) Copies to: Lynnwood R. Moore, Jr., Esq. Conner & Winters, A Professional Corporation 2400 First National Tower 15 East 5th Street Tulsa, Oklahoma 74103-4391 ____________________ Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ================================================================================ The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. SUBJECT TO COMPLETION, DATED JUNE 11, 1996. PROSPECTUS - ---------- ADDvantage Media Group, Inc. 660,000 Shares of Common Stock and 60,000 Units, Each Consisting of Two Shares of Common Stock and One Redeemable Common Stock Purchase Warrant ______________________ This Prospectus relates to (i) 600,000 shares of the common stock, par value $.01 per share (the "Common Stock"), of ADDvantage Media Group, Inc., an Oklahoma corporation (the "Company"), which may be issued by the Company upon the exercise of outstanding Redeemable Common Stock Purchase Warrants of the Company (the "Warrants"); (ii) 60,000 units (the "Units") which may be acquired by Culverwell & Co., Inc. ("Culverwell"), each Unit consisting of two shares of Common Stock and one Warrant to purchase one share of Common Stock; and (iii) 60,000 shares of Common Stock which will be issued by the Company upon the exercise of the Warrants included in the Units. The Warrants and Units were issued in connection with the Company's initial public offering which terminated during July 1991. See "Redeemable Common Stock Purchase Warrants." The Company will receive the proceeds from any exercise of Warrants or Units, less the commissions as set forth in the following table. The Common Stock and Warrants are currently quoted on the OTC Bulletin Board under the symbol "ADDM" and "ADDMW," respectively. On June 7, 1996, the last reported sales price of the Common Stock on the OTC Bulletin Board was $8.00 per share.
================================================================================ Underwriting No. of Price to discounts and Proceeds to shares(1) public commissions (2) the Company (3) - -------------------------------------------------------------------------------- Per share.. -- $ 4.00 $ .20 $ 3.80 - -------------------------------------------------------------------------------- Total...... 600,000 $2,400,000 $120,000 $2,280,000 ================================================================================
(1) Reflects shares of Common Stock issuable upon any exercise of Warrants other than the 60,000 Warrants which may be acquired by Culverwell. (2) Reflects commissions in the amount of 5% of the exercise price of the Warrants to be paid to Culverwell as the exclusive agent for the solicitation of the exercise of Warrants (other than the Warrants which may be acquired by Culverwell). (3) Before deducting expenses related to the exercise of the Warrants payable by the Company and estimated to be $50,000. ______________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS. THIS PROSPECTUS AMENDS AND SUPERSEDES THE PROSPECTUS DATED JUNE 26, 1991 AND COMBINED PROSPECTUS DATED DECEMBER 31, 1992. ______________________ The date of this Prospectus is _______, 1996. In order for a holder of Warrants (a "Warrantholder") to exercise his Warrants and as required by the Warrant Agreement (the "Warrant Agreement") entered into between the Company and North American Transfer Co. ("the Warrant Agent"), there must (i) be a current registration statement on file with the Securities and Exchange Commission (the "Commission") at the time of the exercise of the Warrants and (ii) the shares of Common Stock to be acquired in connection with any such exercise must be the subject of an effective registration statement under the state securities laws where the Warrantholder resides or such exercise must be exempt from registration or qualification in such state. This Prospectus is a part of a current and effective registration statement on file with the Commission. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. -2- SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. The Company ADDvantage Media Group, Inc. (the "Company") was organized under the laws of the State of Oklahoma in September 1989. The Company markets solar-powered calculators which are attached to the handles of shopping carts. These calculators contain an advertising space available for sale to advertisers for presenting an advertising message to consumers. The calculators are known by the registered trademark of "Shoppers Calculators(R)." The Company's business plan calls for marketing the Shoppers Calculator(R) program to retail chains, principally mass merchandisers, and selling or assisting in the sale of the advertising space available on the units to advertisers and sharing the advertising revenues with the retail chains. The Company has entered into an agreement with Wal-Mart Stores, Inc. ("Wal-Mart") for the installation of its calculators in all of Wal-Mart's "Supercenter" stores ("Supercenters") throughout the continental United States. The addition of the Supercenters into the Shoppers Calculator(R) program currently constitutes the Company's principal business operations. At April 30, 1996, the Company had installed its calculators at 116 Supercenters. On June 3, 1996, the Company entered into an agreement with Kmart Corporation ("Kmart") for the installation of its calculators in designated Kmart and Super Kmart Center Stores. See "Business--Wal-Mart Supercenters" and "Business--Kmart Stores." The Company's principal executive offices are located at 5100 East Skelly Drive, Meridian Tower, Suite 1080, Tulsa, Oklahoma 74135 and its telephone number is (918) 665-8414. The Warrants
Exercisability of Warrants. Each Warrant may be exercised to purchase one share of Common Stock at any time prior to September 26, 1996, unless the Warrants are redeemed or extended by the Company prior to that time. See "Redeemable Common Stock Purchase Warrants." Exercise Price............. The exercise price of the Warrants is $4.00 per share. Use of Proceeds............ The net cash proceeds received by the Company upon any exercise of the Warrants will be used to reduce certain debt obligations. See "Use of Proceeds." Warrant Trading Symbol..... "ADDMW" Shares of Common Stock Outstanding(1)............ 4,942,620 Shares of Common Stock to Be Outstanding(2).......... 5,722,620 - ----------------------
(1) Represents issued and outstanding shares of Common Stock as of April 30, 1996, which number excludes (i) 492,762 shares of Common Stock currently reserved for issuance under the Company's 1991 Employee Stock Plan, of which 340,000 shares are subject to currently exercisable options which had been granted -3- under such plan as of April 30, 1996; (ii) 75,000 shares issuable upon exercise of stock options granted to certain directors to the Company, all of which are currently exercisable; (iii) 600,000 shares issuable upon exercise of the Warrants; (iv) 120,000 shares issuable upon the acquisition by Culverwell of the Units; (v) 60,000 shares issuable upon exercise of the warrants included in the Units; (vi) 75,000 shares issuable upon exercise of warrants purchased by investors in a private placement in 1995; (vii) 50,000 shares issuable upon exercise of warrants granted to Culverwell in consideration for services rendered in 1995; (viii) 50,000 shares issuable upon exercise of warrants granted to the Company's public relations consultant in consideration for services; and (ix) 277,750 shares reserved for issuance upon the conversion of shares of the Series A 10% Cumulative Convertible Preferred Stock, par value $1.00 per share, of the Company (the "Series A Preferred Stock"). (2) Assumes the issuance of all shares issuable upon exercise of the Warrants (including the exercise of the Warrants included in the Units) and upon acquisition of the Units. Risk Factors Ownership of shares of Common Stock involves a number of significant risks, including, among other factors, the Company's dependence on a single mass merchandiser, losses from operations and negative net worth, dependence on a single product, dependence on key personnel, future capital requirements, competition and the commercial acceptance of the Shoppers Calculator(R) program by advertisers. Purchasers of shares of Common Stock should carefully consider the information presented under "Risk Factors." -4- RISK FACTORS An investment in the Common Stock involves a high degree of risk and should not be made by persons who cannot afford the loss of their entire investment. The following factors, in addition to those discussed elsewhere in this Combined Prospectus, should be considered carefully in evaluating the Company and its business. Dependence on Wal-Wart. Virtually all of the Company's current revenues are generated from its contract with Wal-Mart for the installation of the Shoppers Calculator(R) in all of Wal-Mart's Supercenters. As a result, the Company is substantially dependent on its relationship with Wal-Mart for both its current operations and its future growth in the near term. While the Company recently obtained a contract for the installation of the Shoppers Calculator(R) program in certain Kmart Stores, their is no assurance at this time that the Company will be successful in generating revenues from the sale of advertising under the Kmart contract. Accordingly, any adverse development affecting Wal-Mart, any decision by Wal-Mart to reduce the number of Supercenters it plans to open, or any decision by Wal-Mart to close existing Supercenter locations could have a material adverse effect on the Company's operations and future prospects. The Company's relationship with Wal-Mart is governed by an agreement between Wal-Mart and the Company, pursuant to which Wal-Mart has agreed to pay the Company, before October 7, 1998, revenues totaling $23,554,800. These revenues are payable to the Company at a rate of $2,700 per four-week advertising cycle for each Supercenter in which the Company has completed the installation of its calculators, at no cost to Wal-Mart, until the Company has received a total of $23,554,800; provided, however, if the Company has not received revenues of $23,554,800 prior to October 7, 1998, Wal-Mart is obligated to pay the difference between such amount and the amount actually paid to the Company under the agreement prior to such date. Upon the receipt by the Company of payments totaling $23,554,800, the Company has the option to continue the agreement through October 6, 1999. If the Company elects to continue the agreement, the Company will be responsible for generating revenues from the sale of advertising on the calculators installed in the Supercenter chain and is obligated to pay Wal-Mart 10% of such advertising gross revenues. Upon expiration of the agreement, the parties would be required to enter into a new agreement for the relationship to continue. The agreement is subject to termination prior to its expiration upon any breach of any covenant, agreement, representation or warranty under the agreement by any party, including the Company's obligation to fulfill its installation obligations, that is not cured within 30 days' written notice of such breach. If the Company became unable to fulfill its installation and service obligations under the agreement for any reason and, as a result, the agreement were terminated, such termination would have a material adverse effect on the Company and could result in termination of its operations. Pursuant to the agreement, Wal-Mart guaranteed the Company's additional bank financing in the amount of $700,000. Wal-Mart's guarantee is secured by the Company's patents on the Shoppers Calculator(R). See "Business-- Wal-Mart Supercenters." Limited Operating History; Negative Net Worth; Losses from Operations. The Company was formed in September 1989 but did not commence any significant operations until 1990. The Company was a development stage company from inception throughout a substantial portion of 1991 and generated only limited revenues through its original business plan of selling the advertising space on its calculators installed in its grocery chain network. Beginning in 1992, the Company changed its marketing emphasis to the sale of the calculators to the grocery chains, giving such chains a higher share of any advertising revenues generated by the Company, in an effort to generate greater cash flow while continuing to add grocery chains to its network. In addition, the Company found it necessary to implement a cost reduction program commencing in 1992. In 1993, the Company made a strategic decision to re-direct its marketing program to the mass merchandising industry and removed its calculators from the grocery chain network. From 1993 through most of 1995, the Company did not generate any revenues from the mass merchandising industry. The Company began receiving revenues under its contract with Wal-Mart in November of 1995 and, as of the date of this Prospectus, had not commenced its Shoppers Calculator(R) program under the Kmart contract. As a result, the Company has only a limited operating history under its current business plan. -5- At March 31, 1996, the Company had negative net worth, calculated in accordance with generally accepted accounting principles. The Company has yet to earn revenues which are sufficient to cover its costs of sales and other expenses during any year of operations. The Company's activities and related costs and expenses, along with interest expense, have resulted in losses being incurred in all periods and on a cumulative basis since the Company's inception. There can be no assurance that the Company will be able to achieve or sustain profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Requirements for Capital. The Company's agreement with Wal-Mart contemplates the expansion of the number of calculators to be installed to approximately 519,600 calculators in 433 Supercenters by 1998. The Company anticipates that the revenues generated under the Wal-Mart agreement and its new bank financing have provided the Company with sufficient working capital to fund the manufacturing and service costs anticipated to meet the Company's commitments under the Wal-Mart agreement. In addition, the Company anticipates that these sources, together with any proceeds received by the Company from the acquisition of the Units by Culverwell, and upon the exercise of the Warrants included in the Units, will be sufficient to fund the proposed installation of the Company's calculators under the Kmart agreement. The Company will continue to market its mass merchandising program to other mass merchandising retail chains. If the Company is successful in obtaining contracts with such chains, it is possible the Company would require additional funds to finance future operations under those contracts. The amount of working capital which the Company may have to obtain through additional third-party financing will depend on the level of cash flow generated under the Wal-Mart agreement and the specific terms of any contract entered into with additional retailers. The Company currently has no commitments for any additional third-party financing, and there can be no assurance that the Company will be able to obtain such financing if it becomes necessary to do so or that, if such financing is obtained, such financing will be on terms and conditions that are favorable to the Company. Dependence on Single Product. The Company's financial condition and prospects are substantially dependent on the successful marketing of its solar- powered calculator program (marketed under the registered trademark "Shoppers Calculator(R)") to mass merchandising chains and the sale of advertising space thereon. Although the Company intends to develop other in-store advertising products in the future, the Company has no other products or services in the planning stages at this time and the Shoppers Calculator(R) is its only product currently available for commercial exploitation. Accordingly, the Company's financial success may be substantially dependent on the commercial acceptance of the Shoppers Calculator(R) by advertisers. See "Business--Shoppers Calculator(R)." Commercial Acceptance by Advertisers. The Company believes that the commercial success of the Shoppers Calculator(R) is ultimately dependent on its commercial acceptance by advertisers. The Company's previous efforts to establish its Shoppers Calculator(R) program in the grocery chain industry failed to achieve the desired level of acceptability by national advertisers due, in the Company's belief, to the limited size and geographic scope of its grocery chain network. See "Business--Development of the Business." While the Company received favorable results and responses in its test marketing of the Shoppers Calculator(R) in mass merchandising retail stores, no advertising has been sold with respect to the units installed in the stores during such test marketing and no advertising has been sold through April 30, 1996, with respect to the units installed in the Wal-Mart Supercenters. Accordingly, there can be no assurance at this time that the Company's Shoppers Calculator(R) program in the mass merchandising industry will be commercially accepted by advertisers. See "Business--Shoppers Calculator(R)." No Assurance of Public Market; Possible Volatility of Stock Price. The Company's Common Stock and Warrants are currently quoted on the OTC Bulletin Board. Because the Company's securities are not traded on a securities exchange or qualified for quotation on the Nasdaq National Market System or Nasdaq Small Cap Market, public trading of the Company's securities may be significantly more limited than would otherwise be the case and its securities may, from time to time, be subject to the "penny stock restrictions" discussed below under "Penny Stock Regulations." The market price of the Company's securities may be highly volatile. There have been periods of extreme fluctuation in the stock market that, in many cases, are unrelated to the operating performance of the issuers of the -6- affected securities. Securities of issuers having relatively limited capitalization as the Company are particularly susceptible to significant fluctuations in response to variations in operating results. Penny Stock Regulations. The Company's Common Stock and Warrants may, from time to time, be subject to certain restrictions pursuant to the "penny stock" regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Stocks selling for less than $5.00 per share may be designated as "penny stocks" and may be subject to certain requirements imposed by Rules 15g-1 through 15g-9 under the Exchange Act. Among other things, Rule 15g-3 requires a broker or dealer to advise potential purchasers of a penny stock of the lowest offer and highest bid quotations for such stock, and Rule 15g-4 requires a broker or dealer to disclose to the potential purchaser its compensation in connection with such transaction. Under Rule 15g-9, a broker or dealer who recommends such securities to persons other than established customers must make a special written suitability determination for the purchaser and receive the purchaser's prior agreement to such a transaction. The effect of these regulations may be to delay transactions in stocks that are deemed to be penny stocks. Rule 3a51-1 under the Exchange Act provides an exemption from the "penny stock restrictions" for any security trading at a price less than $5.00 if (i) such securities are approved for registration on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") or (ii) the issuer has tangible net assets in excess of $2,000,000. This exemption is not currently available for the Company's Common Stock and Warrants. Accordingly, sales of the Company's securities by brokers or dealers and resales by investors may be adversely affected. Competition. The Company will primarily be competing with various other companies to obtain in-store or on-site advertising from various clients. Many of these companies which the Company will compete against have substantially greater marketing, financial and human resources than the Company. See "Business--Marketing." Dependence on Third-Party Manufacturers. The Company presently has no manufacturing facilities. As a result, it must rely upon third parties to manufacture all components necessary to assemble the calculators, thus giving the Company less control over the prices, quality and timing of its products than it might otherwise have if it had sufficient resources to manufacture such products itself. In addition, the manufacturer of a major component of the Company's calculator units is located in Hong Kong which is scheduled to come under the government of the People's Republic of China on June 30, 1997. Accordingly, there is a risk that such relationship may be interrupted or terminated requiring the Company to locate alternative manufacturers which may result in increased costs to the Company. See "Business--Manufacturing." Dependence on Key Personnel. The Company's ability to develop and market its product and to achieve and maintain a competitive position depends, in large part, on its ability to attract and retain qualified personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain such personnel. The Company is dependent in particular upon the services of its executive officers. The loss of one or more of its executive officers could have a materially adverse effect on the Company. The Company currently maintains life insurance on each of Charles H. Hood, its Chairman and President, and Gary W. Young, its Executive Vice President-Finance and Administration and Treasurer, in an amount of $1,900,000 and $1,800,000, respectively, for the benefit of the Company. See "Management." Government Regulation. The furnishing of advertising allowances, credits or compensation to retail establishments by manufacturers or distributors must comply with certain federal laws and with regulations promulgated by the Federal Trade Commission (the "FTC"). Advertisers may require that the programs in which they participate comply with such laws and FTC regulations, which may affect the timing and terms under which the Company's programs may be provided and may make such programs more costly. In addition, the laws and FTC regulations are very technical and may be subject to differing interpretations. The Company will attempt to maintain compliance with such laws and regulations, however, there can be no assurance that it will be able to do so. -7- Patent Risks. The Company has acquired all rights in a design patent issued on the Shoppers Calculator(R) described as a "Calculator for a Shopping Cart." In addition, the Company has been issued a design patent on the Shoppers Calculator(R) described as a "Calculator with Advertising Space for a Shopping Cart Handle" and additional design patents on package concept calculators. There can be no assurance, however, that the design patents will provide adequate protection against competing products. See "Business--Patents." The Company's interests in its patent rights have been pledged by the Company to Wal-Mart in consideration of Wal-Mart's guaranty of a $700,000 bank note incurred by the Company to provide working capital necessary to fund the start- up of the Supercenter program. If the Company should default on the note it could lose such patent rights. See "Business--Wal-Mart Supercenters." Limitation on Director Liability under Oklahoma Law. Pursuant to the Company's Certificate of Incorporation and under Oklahoma law, directors of the Company are not liable to the Company or its shareholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases that are illegal under Oklahoma law or for any transaction in which a director has derived an improper personal benefit. No Dividends on Common Stock; Priority of Preferred Stock Dividends. The Company has paid no dividends to holders of its Common Stock since its inception and is prohibited under the terms of its current bank loan from paying dividends on its shares of Common Stock during the term of such loan (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Financial Condition and Liquidity"). Following the termination of such restrictions, the Company currently intends to retain any earnings in excess of the dividends payable on its outstanding shares of Series A Preferred Stock to finance future growth. The Company has 277,750 shares of Series A Preferred Stock outstanding on which all accrued dividends must be paid to the holders thereof before dividends may be declared and paid on the Company's Common Stock. Dividends accrue on the Preferred Stock at the rate of $.40 per share per year, payable quarterly. See "Description of Securities." At March 31, 1996, there were accrued but unpaid dividends of $444,400 and accrued interest thereon in the amount of $84,435 payable with respect to the Preferred Stock. Exercisability of Warrants. In order for a Warrantholder to exercise his Warrants and as required in the Warrant Agreement, there must be a current registration statement relating to the Common Stock underlying the Warrants then in effect with the Commission and such shares of Common Stock must be qualified for sale or exempt from qualification under the state securities laws where the Warrantholder resides. The Company will be required to file post-effective amendments to the registration statement when events require such amendments. There can be no assurance that the registration statement can be kept current. If the registration statement is not kept current for any reason or if the Common Stock underlying the Warrants is not qualified or exempt from qualification in the states in which the holders of Warrants reside, the Warrants will not be exercisable and will have no value. Under the terms of the Warrant Agreement, the Company has agreed to use its best efforts to maintain a current registration statement to permit the issuance of the Common Stock upon exercise of the Warrants. Potential Adverse Effects of Redemption of Warrants. The Warrants may be redeemed by the Company, at any time prior to the expiration, at a price of $0.05 per Warrant upon at least 30 days' prior written notice mailed after the market value of the Common Stock has equalled or exceeded $5.00 per share for a period of 10 consecutive trading days ending within 15 days of such notice. The Company may only redeem the Warrants if at the time of redemption the Company has a current registration statement effective with the Commission covering the shares of Common Stock issuable upon exercise of such Warrants and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder. Redemption of the Warrants could force the holders to exercise the Warrants and to pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then-current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities--Warrants." -8- Anti-takeover Effects of Issuance of Preferred Stock. The Board of Directors has the authority to issue shares of preferred stock in one or more series, to fix the number of shares constituting any such series, and to fix the rights and preferences of the shares constituting any series, without any further vote or action by the stockholders. The issuance of preferred stock by the Board of Directors could adversely affect the rights of the holders of Common Stock. For example, such issuance could result in a class of securities outstanding that would have preferences with respect to voting rights and dividends and in liquidation over the Common Stock, and could (upon conversion or otherwise) enjoy all of the rights appurtenant to Common Stock. The Board's authority to issue preferred stock could discourage potential takeover attempts and could delay or prevent a change in control of the Company through merger, tender offer, proxy contest or otherwise by making such attempts more difficult to achieve or more costly. There are 1,000,000 shares of preferred stock authorized, of which 300,000 have been designated as Series A Preferred Stock, and of which 277,750 shares are currently outstanding. The Board of Directors has no present intention to issue any additional shares of preferred stock. See "Description of Securities." USE OF PROCEEDS There are currently outstanding 600,000 Warrants, exercisable to purchase one share of Common Stock at $4.00 per share at any time prior to September 26, 1996, unless extended by the Company. If the Warrants are exercised in their entirety, the Company would realize approximately $2,230,000 in additional capital after deduction of the commission in the amount of 5% of the exercise price of the Warrants which may be paid to Culverwell and other expenses related to the exercise of the Warrants. Under the terms of the Company's loan agreement with its bank, until the outstanding principal balance of the Company's indebtedness to the bank is repaid, the net proceeds realized by the Company upon the exercise of the Warrants must be utilized for the repayment of the loan. Accordingly, the Company will utilize any net proceeds realized on the exercise of the Warrants to reduce its outstanding bank indebtedness. The Company and its primary bank lender entered into a new loan arrangement on March 6, 1996. The Company's loan, in the principal amount of $3,404,656, represented a consolidation and renewal of the Company's existing indebtedness to the bank. The loan matures on May 1, 1998, and interest on the outstanding principal balance of the loan accrues at a rate equal to the Chase Manhattan Bank prime rate plus 1%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity." In addition, the Company will realize $432,000 if all of the Units are acquired by Culverwell and an additional $288,000 if the Warrants included in the Units are exercised in their entirety. The proceeds realized by the Company from the purchase of any Units or the exercise of the Warrants included in the Units are not committed to repayment of the Company's existing bank loan and will be utilized for general working capital purposes. PLAN OF DISTRIBUTION In connection with the public offering of the units described under "Redeemable Common Stock Purchase Warrants," the Company agreed to pay Culverwell & Co., Inc. ("Culverwell") a commission, as the exclusive agent for the solicitation of exercises of the outstanding Warrants, in the amount of 5% of the exercise price of such Warrants ($4.00 per Warrant) for each Warrant exercised provided, among other things, that (i) the market price for the Common Stock is greater than the exercise price of the Warrant; (ii) the Warrant was not held in a discretionary account; and (iii) the solicitation or exercise of the Warrants is not in violation of Rule 10b-6 promulgated under the Exchange Act. Culverwell will act as solicitation agent in connection with the possible exercise of Warrants during their exercise period (through September 25, 1996). The solicitation agent must disclose to the holders of the Warrants the agent's compensation arrangement with the Company, which disclosure must be confirmed in writing by the holders. Under applicable state securities laws, Culverwell will be prohibited from soliciting holders of Warrants residing in states in which Culverwell is not registered as a broker-dealer and from receiving commissions with respect to the exercise of Warrants by such holders. In such event, Culverwell may utilize the services of broker-dealers registered in such states and, in such case, reallow commissions to such broker-dealers. -9- Holders of Warrants electing to exercise their Warrants must deliver to the Warrant Agent (i) their warrant certificates, or agree to deliver such certificates if such later delivery is guaranteed by a commercial bank or trust company, a member of a national securities exchange or a member of the National Association of Securities Dealers, Inc., and (ii) a cashier's check or money order payable to the Company for the full amount of the exercise price of $4.00 per Warrant. REDEEMABLE COMMON STOCK PURCHASE WARRANTS 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 entitles the holder, upon exercise, to purchase one share of Common Stock at a price of $4.00 per share. The Warrants expire at 5:00 p.m., New York time, on September 25, 1996, unless redeemed or extended again by the Company prior to that time. The Warrants may be redeemed by the Company at a price of $.05 per Warrant on 30 days prior written notice if the closing bid price of the Common Stock for 10 consecutive trading days ending within 15 days of the date of notice of redemption equals or exceeds $5.00 per share. In connection with the public offering, the Company sold to Culverwell warrants (the "Unit Warrants") to purchase up to 60,000 units (the "Units"), at a price of $.001 per Unit Warrant, which are exercisable in whole or in part at $7.20 per Unit. The Unit Warrants are exercisable at any time through June 25, 1996. Each Unit consists of two shares of Common Stock and one Warrant to purchase one share of Common Stock at a price of $4.80 per share exercisable at any time through June 25, 1996. The Company has agreed to extend the Unit Warrants and Warrants through November 30, 1996, subject to the approval of the National Association of Securities Dealers, Inc. In order for a Warrantholder to exercise his Warrants and as required by the Warrant Agreement, there must be a current registration statement on file with the Commission at the time of the exercise of the Warrants and the shares of Common Stock to be acquired in connection with any such exercise must be the subject of an effective registration statement under the state securities laws where the Warrantholder resides, or such exercise must be exempt from registration in such state. This Prospectus is a part of a current and effective registration statement on file with the Commission. The Company currently intends to register the sale of the shares of Common Stock underlying the Warrants in the States where the beneficial owners of the Warrants reside where required under applicable state securities laws; however, there can be no assurance that registration will be obtained in every such State. The Company will be required to file post-effective amendments to its registration statement when events require such amendments. There can be no assurance that the registration statement can be kept current. If it is not kept current, the Warrants will not be exercisable and will have no value. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company for the periods indicated. The selected statement of operations data for the years ended December 31, 1995 and 1994, and selected balance sheet data as of December 31, 1995 and 1994, have been derived from the Company's audited financial statements. The selected statement of operations data for each of the three months ended March 31, 1996 and 1995, and the selected balance sheet data as of March 31, 1996, have been derived from the Company's unaudited financial statements. In the opinion of management of the Company, such unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The results for the three months ended March 31, 1996 are not necessarily indicative of the results to be achieved for the entire year. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus. -10-
Three Months Ended March 31, Year Ended December 31, ------------------------- ---------------------------- 1996 1995 1995 1994 ----------- ------------ ------------- ------------- Statement of Operations Data: Revenues.............................. $ 607,068 $ 13,784 $ 249,552 $ 407,676 Cost of sales and services............ 220,802 49,782 265,374 455,637 Write-off of calculators.............. -- 132,025 -- Selling expense....................... 5,957 12,067 32,785 125,104 General and administrative expense.... 266,320 120,999 890,228 529,501 Litigation expense.................... -- 50,607 636,310 -- ---------- ----------- ----------- ----------- Operating income (loss)............... 113,989 (219,671) (1,707,170) (702,566) Interest expense...................... 131,111 115,565 503,897 308,820 ---------- ----------- ----------- ----------- Net loss before income taxes.......... (17,122) (335,236) (2,211,067) (1,011,386) Provision (benefit) for income taxes.. -- -- (3,910,000) -- ---------- ----------- ----------- ----------- Net income (loss)..................... (17,122) (335,236) 1,698,933 (1,011,386) Preferred stock dividends............. (27,623) (27,623) (111,100) (111,100) ---------- ----------- ----------- ----------- Net income (loss) applicable to Common Stock..................... $ (44,745) $ (362,859) $ 1,587,833 $(1,122,486) ========== =========== =========== =========== Net income (loss) per common share: Primary............................ $(.01) $(.09) $0.35 $(.30) ========== =========== =========== =========== Fully diluted...................... $(.01) $(.09) $0.31 $(.30) ========== =========== =========== =========== Weighted average number of shares outstanding: Primary............................ 5,515,644 3,908,620 4,600,078 3,744,236 ========== =========== =========== =========== Fully diluted...................... 5,681,035 3,908,620 5,108,433 3,744,236 ========== =========== =========== =========== March 31, December 31, ----------- -------------------------- Balance Sheet Data: 1996 1995 1994 ----------- ----------- ----------- Working capital (deficit)....................... $(2,184,669) $(1,909,876) $(4,549,700) Total assets.................................... $ 5,812,888 $ 5,244,239 $ 1,254,740 Long-term obligations........................... $ 3,961,594 $ 3,921,819 $ -- Total liabilities............................... $ 7,143,661 $ 6,534,579 $ 4,576,468 Stockholders' equity (net capital deficiency)... $(1,330,773) $(1,290,340) $(3,321,728)
-11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended March 31, 1996 compared to Three Months Ended March 31, 1995 Business activity was primarily related to managing a Shoppers Calculator program in Wal-Mart Supercenters and developing programs with other mass merchants. Advertising revenues totaled $604,800 during the first three months of 1996. The Company's first revenue period under the Wal-Mart contract began on November 6, 1995, and there were no advertising revenues for the comparable period last year. Revenues from sales of calculators declined from $13,700 for the three months ended March 31, 1995 to $2,000 for the three months ended March 31, 1996. Approximately 921 units were sold during the first quarter of fiscal 1995, in the domestic market compared to approximately 116 units sold in the first quarter of fiscal 1996. Cost of services representing primarily labor to supervise, service and clean the installed units and to change advertising messages, and depreciation of installed units, increased approximately $174,100 (387%) in 1996, compared to 1995 as a result of higher labor costs 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 $3,100 (65%) in 1996 as compared to 1995. This was due to the decreased number of units sold during the first quarter of 1996 as compared to 1995. Selling expense decreased approximately $6,100 (51%) in the first quarter of 1996. This was primarily due to reductions during 1996 in payroll, and payroll related expenses. General and administrative expenses increased $145,300 (120%) for the first quarter of 1996 as compared to the same period in 1995. During 1996, payroll and payroll related expenses increased $36,600 as the Company began to increase staff to handle the increased work load required from the Wal-Mart Supercenter contract. Executive retirement plan accruals, including insurance cost to fund future payments totaled $68,600 during the 1996 first quarter. Expenses related to broker and analyst meetings and other shareholder expenses increased $15,300 over 1995. Increases amounting to $33,300 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 the first quarter of 1995. Litigation expenses in the amount of $50,600 were incurred during the first quarter of 1995 in connection with the Company's lawsuit against Wal-Mart. Interest expenses increased approximately $7,600 (7%) in the first quarter of 1996 due primarily to high levels of borrowing. Also during 1996, interest has been accrued on amounts due investors which has been recorded in the financial statements as long-term obligation payable. Year Ended December 31, 1995 compared to Year Ended December 31, 1994 In early 1993, the Company implemented a strategic change in its business plan by redirecting its managed in-store Shoppers Calculator program away from the retail grocery industry into the mass merchandising segment. This strategic change resulted in significant declines in revenues during 1993, 1994 and 1995. Through September 30, 1995 business activity had been severely curtailed and was limited to selling Shoppers Calculators while the lawsuit filed against Wal-Mart on January 18, 1995 was being processed. In September, 1995 the lawsuit was -12- settled with a new contract and operating plan. Future business activity will be primarily related to managing a Shoppers Calculator program in Wal-Mart Supercenters and developing programs with other mass merchants. As a result of implementation of the new Wal-Mart contract, fourth quarter 1995 earnings were increased by $3,910,000 from the accounting recognition of the future tax benefits of the Company's net operating losses and temporary differences aggregating $10,290,000 at December 31, 1995. Revenue from sales of calculators decreased from $402,000 for the year ended December 31, 1994 to $114,900 for the year ended December 31, 1995. Approximately 30,900 units were sold during 1994, of which 4,000 units were sold in the domestic market and 26,900 units were sold in the international market. This compares to approximately 8,300 units being sold in 1995, including sales of 8,000 units in the domestic market and 300 units in the international market. The average selling price per unit during 1995 was $13.84 as compared to $13.01 per unit during 1994. Cost of sales of calculators representing the manufacturing costs of units sold, decreased approximately $123,000 (72%) in 1995 as compared to 1994. This was due to the decreased number of units sold in 1995 as compared to 1994. Cost of services, representing primarily labor to supervise, service and clean the installed units and to change advertising messages, and depreciation of installed units, decreased approximately $67,300 (23.7%) in 1995, compared to 1994 as a result of lower labor costs due to a reduction in the number of calculators installed and serviced during the respective periods. The complete inventory of calculators, some of which was classified with property and equipment in 1994 was inspected in preparation for installation in Wal-Mart Supercenters. Calculators not suitable for installation costing $132,000 were written off. Selling expense decreased approximately $92,300 (74%) in 1995 as compared to the same period in 1994. This was primarily due to reductions during 1995 in payroll, payroll related expenses, marketing materials costs and travel expense. General and administrative expenses increased $360,700 (68%) in 1995 as compared to the same period in 1994. During 1995, payroll and payroll related expenses increased $73,500 as the company began to increase staff to handle the increased work load required from the Wal-Mart Supercenter contract. In June, 1995 officer bonuses amounting to $187,500 were paid by issuing common stock and in December $100,000 of additional officer bonuses were accrued. Expenses related to broker and analyst meetings increased $21,800 over 1994. Also, investment banking fees of $8,500 were incurred for financial consulting during the first quarter of 1995. Reductions amounting to $38,900 occurred in insurance, legal and audit fees, and occupancy costs while other miscellaneous expenses increased $8,300. Litigation expense in the amount of $636,300 was incurred during 1995 which consisted of legal expenses and amounts due to investors who provided funding to process the lawsuit against Wal-Mart. See "--Financial Condition and Liquidity" below. Interest expenses increased approximately $195,100 (63%) in 1995 as compared to 1994 due primarily to high levels of borrowing and higher interest rates. Also during 1995, interest has been accrued on certain past due accounts payable and accrued preferred stock dividends. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 In early 1993, the Company implemented a strategic change in its business plan by redirecting its managed in-store Shoppers Calculator program away from the retail grocery industry into the mass merchandising segment. This strategic change resulted in significant declines in advertising revenue during 1993 and 1994. Although unit -13- sales revenues have increased during 1994 as compared to 1993, the Company does not expect significant revenue increases unless it is successful in implementing the mass merchant programs discussed above. The net loss for the year ended December 31, 1994 was $1,122,500 compared to a net loss of $2,334,200 for the comparable period in 1993. The Company's 1993 net loss was substantially greater than the net loss for 1994 due to the costs associated with the removal of the units from the retail grocery network which were charged to expense during 1993. Revenue from sales of calculators and components increased from $334,400 for the year ended December 31, 1993 to $402,000 for the year ended December 31, 1994. Approximately 24,400 units were sold during 1993, of which 5,800 units were sold in the domestic market and 18,600 units were sold in the international market, compared to approximately 30,900 units sold in 1994, including sales of 4,000 units in the domestic market and 26,900 units in the international market. The average selling price per unit during 1994 was $13.01 as compared to $13.73 per unit during 1993. Costs of sales of calculators, representing the manufacturing cost of units sold, increased approximately $19,900 in 1994 as compared to 1993 due to the increased number of units sold in 1994 as compared in 1993. Cost of services decreased approximately $568,700 in 1994 compared to 1993 as a result of lower labor costs, auto expense and depreciation expense due to the removal of all of the Company's calculators from the retail grocery chain network by the end of fiscal 1993. Selling expenses increased approximately $9,400 (8%) in 1994 as compared to the same period in fiscal 1993. Sales commissions, marketing materials and travel increased by $28,000, however, reductions of $18,600 occurred in payroll costs, contract services and other miscellaneous sales expenses. General and administrative expenses decreased approximately $194,900 (27%) in 1994 as compared to the same period in fiscal 1993. Reductions amounting to $223,000 occurred in payroll costs and expenses, travel expense, consulting fees, business taxes, printing expenses, financing expenses, and occupancy costs. Cost increases amounting to $28,000 occurred in legal, audit and insurance expenses. Interest expense increased $104,300 during 1994 as compared to the same period last year as a result of higher short-term borrowings and increased interest rates in 1994. Financial Condition and Liquidity During the first quarter of 1995, the Company completed an offering of promissory notes and warrants for an aggregate consideration of $200,000. The offering included (a) a total of 500,000 warrants, each of which, upon exercise, entitled the holder to acquire one share of the Company's Common Stock at a price of $.20 per share, and were exercisable within 24 months from the date of issuance; (b) a total of 10% of the net recovery from the Wal-Mart lawsuit described elsewhere herein; and (c) promissory notes in an aggregate principal amount of $200,000 and bearing interest at the rate of 10% per annum due on or before 20 days after the final resolution, by settlement, final judgment or otherwise, of the Wal-Mart litigation. On November 30, 1995, investors holding warrants to purchase 425,000 shares of Common Stock exercised such warrants by converting promissory notes in the principal amount of $85,000 to acquire the shares. At the same date, new promissory notes totaling $130,808 (representing $115,000 principal and $15,808 accrued interest on the original notes) were issued. These notes mature on June 30, 1997. During the second quarter of 1995, the Company issued 200,000 shares of Common Stock as a partial settlement of a past due account. As a result of this transaction, accounts payable and accrued interest were reduced by $75,000 and $14,800 respectively. -14- The Company entered into separate agreements with Wal-Mart Stores, Inc. 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 in settlement of the lawsuit. Under the terms of the new four-year contract, the Company will install the Shoppers Calculators in all of Wal-Mart's Supercenters in the continental United States and Wal-Mart will be responsible for selling the advertising for the calculators during the initial phase of the contract. During the term of the contract in which Wal-Mart is responsible for the advertising sales, Wal-Mart has agreed to guarantee advertising revenues to the Company in excess of $23.5 million subject to the Company's obligation to install and service the Shoppers Calculators during the revenue guaranty period. After the Company has received payment of the guaranteed revenues, it has the option to continue the contract through October 6, 1999, by assuming the advertising sales responsibilities for the program. Upon conclusion of the contract, the program is subject to re-evaluation by both parties. The present value of the amount payable to the participants in the Company's private placement (including Messrs. Hood and Young who provided the initial funding for the lawsuit), who have the right to receive an aggregate of 12% of the net recovery resulting from the Wal-Mart contract entered into in settlement of the litigation, has been calculated by the Company to be $527,787 including accrued interest through March 31, 1996, and has been recorded as long-term obligation payable in the financial statements. In compliance with the terms of the new contract, on October 17, 1995, the Company furnished Wal-Mart with a detailed "operating plan" which projects advertising revenues, capital costs and operating expenses based on the new contract. The purpose of this operating plan was to determine the financial impact of the new contract to the Company, its bank and creditors. The operating plan in its final form covered years 1995, 1996, 1997 and 1998. The key assumptions used to develop the operating plan were provided to the Company by Wal-Mart and were as follows: Supercenter Installations
Year Stores Shopping Carts ---- ------ -------------- 1995 33 39,600 1996 200 240,000 1997 100 120,000 1998 100 120,000 --- ------- Total Installations 433 519,600 === =======
The Wal-Mart contract provided the Company with additional bank financing, which has been guaranteed by Wal-Mart, in the amount of $700,000. On March 6, 1996, the Company completed a restructuring of all past due bank debt effective as of October 1, 1995. The $1,800,000 revolving line of credit, other notes totaling $1,132,622 and accrued interest through September 30, 1995 of $474,034 were combined into a new note in the amount of $3,406,656. This new loan bears interest at the Chase Manhattan Bank prime rate (8.5% on December 31, 1995) plus 1%. The loan has a maturity date of May 31, 1998 with payment terms tied to the Company's projected revenues under the Wal-Mart contract. Payments of interest and principal on the $3,406,656 note will commence after the $700,000 note guaranteed by Wal-Mart has been paid, which is anticipated to be in January 1997. Based on projected revenues under the Wal- Mart contract, the Company anticipates that payments on the restructured bank debt will commence in February 1997. -15- The Company's first revenue period under the new contract began on November 6, 1995. Through March 31, 1996, cumulative revenues received from Wal-Mart totalled $731,700, reducing the guaranteed revenues to be received in future periods to $22,802,100. The cash flow from the Wal-Mart contract should allow the Company to meet its anticipated cash requirements for the foreseeable future, including repayment of all past due obligations. The Company's total stockholders' equity as reflected on its balance sheet at December 31, 1992, fell below the minimum capital and surplus requirements necessary to maintain the listing of the Common Stock and Warrants on the Nasdaq Small Cap Market. Consequently, the Common Stock and Warrants were delisted from the Nasdaq system on April 23, 1993 and from the Boston Stock Exchange on January 14, 1994. Because the Common Stock and Warrants have been delisted from the Nasdaq Small Cap Market and the Boston Stock Exchange, holders of such securities may encounter greater difficulty in selling them should they desire to do so, and it may prove to be more difficult for the Company to raise future capital to meet its obligations. The Company's securities are now trading on the OTC Bulletin Board with approximately eight market makers. All statements other than statements of historical facts, including, without limitation, statements concerning the projected installations of Shoppers Calculators(R) in the Supercenters and the anticipated dates of repayment of certain indebtedness of the Company, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. Although the Company believes that such forward-looking statements are reasonable, such statements are subject to various risks and uncertainties which could cause actual results to differ from the Company's expectations, including, but not limited to, general economic conditions and conditions affecting the mass merchandising industry in general and Wal-Mart specifically, the availability of 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 Wal-Mart contract, including risks discussed elsewhere in this Prospectus. See "Business--Wal-Mart Supercenters. BUSINESS General The Company, ADDvantage Media Group, Inc., is in the business of marketing Shoppers Calculators(R) which are solar-powered calculators which attach to the handles of shopping carts. The calculators are marketed under the registered trademark "Shoppers Calculator(R)" and are designed with the three-fold purpose of increasing the retailer's sales, assisting shoppers while they are in the store and presenting an advertising message targeted to that consumer (in the space provided on the calculator unit). Principal operating revenues of the Company have historically been generated by the sales of the calculators and of the advertising placed on the calculators. The Company is currently installing its Shoppers Calculator(R) program in all the Supercenter stores operated by Wal-Mart Stores, Inc. See "--Wal-Mart Supercenters" below. Development of Business The Shoppers Calculator(R) was originally designed by Michael G. Brennan, a former officer and director of the Company, who obtained a design patent on the product in 1986. Mr. Brennan then granted an exclusive license to manufacture, market and sublicense the product to Michael Brennan and Associates, Inc. ("Brennan & Associates"), a company formed by him. The original business plan of Brennan & Associates was to sell the calculators, without an advertising concept, to retail chains for use by their customers. Approximately 10,000 calculators were test marketed by Brennan & Associates during the period from 1986 to 1990, however, Brennan & Associates did not fully execute its business plan.. -16- Charles H. Hood, whose experience is in the area of advertising (having been chairman and principal owner of a major national advertising agency), believed that the real potential for the calculator was in its use as an in- store advertising medium. The calculator was redesigned slightly to include a space for the insertion of advertising material on its face. In September 1989, Mr. Hood formed the Company for the purpose of producing the Shoppers Calculator(R) and marketing them as in-store advertising vehicles. The Company then obtained the exclusive license to produce and market the Shoppers Calculator(R) from Brennan & Associates. In December 1990, the Company acquired all of the patent and trademark rights in the Shoppers Calculator(R) from Mr. Brennan and Brennan & Associates. 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. The Company entered into contractual agreements with the grocery chains, whereby the Company would install the calculators in each chain's stores at no cost to the chain and agree to pay the chain a percentage (generally 10%) of the advertising revenue generated from the calculators installed in that chain's shores. During 1991, the Company entered into such agreements with 19 grocery chains, representing approximately 1,555 stores, and was able to complete the installation in 13 of those chains, representing 794 stores. A total of 163,000 Shoppers Calculators(R) were installed in those chains. However, in an effort to develop a national advertising network, the Company's overhead increased significantly during 1991. The Company opened six regional sales offices which dramatically increased selling expenses. The Company incurred a substantial increase in general and administrative expenses due to an overall increase in the size and scope of the Company's operations. Further, the costs to service the installed units became a substantial burden on the Company. The Company generated advertising revenues of approximately $617,000 in 1991, which was far less than the Company anticipated under its 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 the Company lacked having calculators installed in the required number of stores in the top market areas to be considered a national advertising network. Because of the capital investment necessary to manufacture and install the units in additional stores, the disappointing advertising revenues and the substantial increase in expenses in 1991, 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. The Company offered grocery chains the choice of either purchasing the calculators (and receiving a higher percentage of advertising revenues, generally 30%) or obtaining the units at no cost on the condition that the Company was not obligated to install the units until it received commitments for placing advertisements on such units. In addition, the Company found it necessary to implement a cost reduction program. 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. -17- . 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. During the fourth quarter of 1993, the Company recognized an expense of $563,637 for the write-down of the value of its calculator inventory due to depreciation and shrinkage and to accrue future costs of refurbishment. 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, whereby the Company will install and maintain its Shoppers Calculator(R) in all of Wal-Mart's Supercenters in the continental United States. See "--Wal-Mart Supercenters" below. The Company had continuing negotiations with Kmart Corporation ("Kmart") since the Company discontinued its test marketing in Kmart stores in 1993, and eventually entered into an agreement with Kmart on June 3, 1996. Under the Kmart agreement, the Company will install and maintain its Shoppers Calculators in certain Kmart and Super Kmart Centers stores and will be responsible for generating revenues, which will be shared with Kmart, from the sale of the advertising messages. See "--Kmart Stores." Shoppers Calculator(R) Shoppers Calculator(R) is a 3" x 7 1/2" calculator which mounts on the handles of retail shopping carts and includes an advertising image area of 2 9/16" x 2 1/8" within which advertising messages are positioned. The units themselves are molded from high impact plastic and are constructed to be both water and shock resistant. The units are attached to the handle of each shopping cart with stainless steel clamps, brackets and headless screws. The calculator performs the basic mathematical functions (add, subtract, multiply and divide) and has an expected life of approximately five years based on the life of the solar cell. The Company began test marketing the Shoppers Calculator(R) in several Wal- Mart stores in late 1991 and in several Kmart stores in 1992. The Company continued this test marketing in nine Wal-Mart stores and ten Kmart stores throughout 1993. The Company did not receive any revenues from this testing and was obligated to service the units during such testing. The Company discontinued the test marketing in the Kmart stores and de-installed all calculators from such stores during the latter part of 1993. The Company continued its test marketing in the nine Wal-Mart stores until mid-1994 when all stores were de-installed except the Bentonville, Arkansas store. Other than the costs to service the calculators installed at the various test sites, the Company has not incurred costs in connection with research and development activities during fiscal 1994 or 1995. Based on the Company's research and its test marketing conducted in Wal-Mart and Kmart stores, the Company believes that budget-minded shoppers will utilize the calculators to monitor more precisely the total cost of the items being purchased and, in doing so, often spend more money with the retailer. The Company's research also indicates that the calculator is also used to determine which quantities or product sizes provide the best value. 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, whereby the Company will install and maintain its Shoppers Calculator(R) in all of Wal- Mart's Supercenter stores in the continental United States. Initially under the contract, the Company will be responsible for installing its calculators in Wal- Mart's Supercenters in accordance with the anticipated schedule set forth below and Wal-Mart will be responsible for selling the advertising to be placed on the calculators. -18- The Company will assist Wal-Mart and potential advertisers with respect to developing advertising messages and will be responsible for coordinating and obtaining the necessary camera-ready art work, printing and producing the advertising messages, placing and changing the messages on the installed calculators, and servicing and maintaining the calculators. Under the contract, Wal-Mart is obligated to pay the Company $2,700 per installed store, per four week advertising cycle, during the term of the contract in which Wal-Mart is responsible for selling the advertising and to pay the Company the amount of any shortfall if the advertising revenues paid to the Company by October 6, 1998 are less than $23,554,800. After the Company has received a total of $23,554,800 from Wal-Mart under the agreement, the Company will have the option to continue the agreement and assume all of the advertising sales responsibilities through October 6, 1999, the expiration date of the agreement. During this period, Wal-Mart has no obligation to guarantee advertising revenues and all advertising revenues will be split 90% to the Company and 10% to Wal-Mart. Upon expiration of the contract, the Shoppers Calculator(R) program will be subject to re-evaluation by both parties. Accordingly, there can be no assurance that the Shoppers Calculator(R) program will be continued in the Supercenter network upon the agreement's expiration. Certain terms of the contract were determined based on the following assumed schedule with respect to the number of Supercenter stores to be participating in the Company's program. The following table sets forth the assumed schedule of Supercenter installations pursuant to the Wal-Mart contract's operating plan and the actual installations in Supercenters to date.
Operating Plan Actual Installations ------------------------- -------------------------------- Stores to Shopping Carts Stores Shopping Year be Added to be Added Installed Carts Installed ---- --------- -------------- ------------ ------------------ 1995 33 39,600 41 31,925 1996 200 240,000 116(1) 87,297(1) 1997 100 120,000 N/A N/A 1998 100 120,000 N/A N/A --- ------- --- --- Totals 433 519,600 === ======= - -----------
(1) Through April 30, 1996. The Company currently plans to complete installations in 278 Supercenters during 1996. Also under the contract, Wal-Mart guaranteed the Company's additional bank financing in the amount of $700,000 which has been utilized primarily to fund the acquisition of component parts and injection molding equipment for completing calculator units, 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. See "-- Manufacturing" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity". Upon receipt by the Company of total payments of $23,554,800 under the Wal- Mart agreement (which would occur no later than October 6, 1998), the Company has the option to continue the agreement and assume all advertising responsibilities or allow the agreement to terminate. If the Company elects to maintain the Shoppers Calculator(R) program in the Supercenters, the agreement will be continued through October 6, 1999. The agreement may be terminated upon the breach of any covenant, agreement, representation or warranty under the agreement which is not cured within 30 days after receipt of written notice of such default. Under the agreement, the Company -19- has agreed to reasonably adhere to the operating plan's 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 agreement or upon its expiration (unless extended by the parties), the Company will be solely responsible for de- installing all the calculators from the Supercenters. Under the agreement, the Company is responsible for submitting a bill to Wal-Mart in the amount of $2,700 for each installed Supercenter at the beginning of each four week advertising cycle. Wal-Mart is obligated to pay the Company within ten business days of Wal-Mart's receipt of any advertising revenues from third parties, but in no event later than 30 days from the beginning of an advertising cycle. Through April 30, 1996, Wal-Mart has utilized the Shoppers Calculator(R) program for advertising its private label products and had not sold advertising to any national advertisers. Kmart Stores On June 3, 1996, the Company and Kmart entered into an agreement whereby the Company will install and maintain its Shoppers Calculator(R) in designated Kmart and Super Kmart Centers stores at no cost to Kmart. Under the agreement, the Company will be responsible for selling the advertising to be placed on the calculators and has agreed to pay Kmart a fee equal to 15% of the gross advertising revenues generated. The agreement is for an initial term of one year and continues thereafter on a month to month basis until terminated by either party on 60 days' prior written notice. The agreement is subject to earlier termination by a party in the event of (i) a material breach of the agreement by the other party, (ii) a material failure of any covenant, representation or warranty set forth in the agreement, (iii) the insolvency or certain events of bankruptcy of the other party, or (iv) the cessation of operations of the other party. The number of Kmart stores to initially be included in the Shoppers Calculator program have not yet been determined by the parties; however, the Company currently anticipates that the agreement will 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 has received sufficient advertising commitments necessary to cover the manufacturing and installation costs of the calculators to be installed in such stores. 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. Under the Company's current business plan, it will offer to install the Shoppers Calculator(R) in a mass merchandiser's retail store chain at no cost to the merchandiser. In consideration therefor, the Company will agree to pay each chain a percentage of the advertising revenues generated from the units in that chain's stores after the Company recovers its capital costs and operating expenses. As previously discussed in more detail under "--Wal-Mart Supercenters," the Company has entered into an agreement with Wal-Mart for the installation of the Company's calculators in Wal-Mart Supercenter stores throughout the continental United States. Revenues generated from the Wal-Mart agreement accounted for approximately 51% of the Company's total revenues in 1995 and are anticipated to account for a significantly greater portion of the Company's revenues in 1996. In addition, as discussed above under "--Kmart Stores," the Company recently entered into an agreement with Kmart for the installation of its calculators in designated Kmart stores at no cost to Kmart. The Company has agreed to pay Kmart 15% of the gross advertising revenues generated from the calculators installed in the Kmart stores. -20- The Company anticipates that it may be necessary to modify and tailor the specific terms of its program to meet the specific requirements of each of the potential mass merchandisers. 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. Advertising. Advertising contracts will be 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. It is currently anticipated that the advertisers will generally be responsible for submitting the proposed ad inserts in camera-ready art form and that the Company will then reproduce the ads onto custom cut advertising inserts for installation on the calculators. Under the Company's Shoppers Calculator(R) program with Wal-Mart, Wal-Mart will initially be responsible for obtaining advertising contracts from national advertisers. Wal-Mart has the option to advertise its own private label products or to sell advertising space on the calculators to the national advertisers. After the expiration of the period in which Wal-Mart is responsible for obtaining advertising contracts, the Company will be responsible for obtaining advertising contracts for the calculators installed in the Supercenters. Under the Kmart agreement, and under the program initially being offered to other mass merchandising retail chains, the Company will be responsible for obtaining advertising contracts covering the calculator units to be installed in each merchandiser's chain. The Company anticipates that it will offer 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 estimates that the tooling costs necessary to commence manufacturing the package concept calculators would approximate $50,000. The Company intends to offer the availability of the package concept calculator to national advertisers contracting with the Company for advertising in any mass merchandising network; however, the Company would need substantial commitments from such advertisers before it would proceed to incur the significant expenditure necessary to manufacture the package concept calculators. The Company will initially use a combination of an in-house marketing staff and independent sales representatives to obtain advertising commitments for the Company's Shopper Calculator(R) program. The Company believes it would generally be obligated to pay a sales commission of approximately 15% to 25% on the advertising revenues generated by any independent sales representatives utilized. Whether utilizing its own marketing force and/or independent representatives, it is probable 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 that the Company will be able to sell all or any available advertising slots during any advertising cycle in the future or that it will be able to sell such advertising at prices that are comparable with that received currently under the Wal-Mart agreement. Domestic Sales. During the period from 1993 through 1995, the majority of the Company revenues were generated from the sales of the Shoppers Calculator(R) to domestic retail grocery chains. During fiscal years 1995, 1994, and 1993, the Company sold approximately 8,000, 4,000 and 5,800 units, respectively, to domestic retail grocery chains, generating revenues of approximately $111,600, $64,400 and $83,700, respectively. The Company -21- currently anticipates that, for the first two to three quarters of 1996, all of its calculator units will be utilized for installation in the Supercenter network. Accordingly, the Company does not intend to actively market the Shoppers Calculator(R) to retail grocery chains in the immediate future. Depending on the availability of the calculators and the demand therefor from grocery or other retailers, the Company may resume efforts to sell the units to such retailers from time to time in the future. International Sales. In addition to the sale of the Shoppers Calculators(R) domestically, the Company has sold the calculators in the international marketplace through the use of international licensees and the Company's own sales force. The Company has entered into license agreements with several companies to market the Company's calculators in countries located in the British Isles, South America and in the Middle East. Pursuant to these agreements, these companies have been granted the exclusive rights to purchase the calculators in the specified territories and have agreed to utilize their best efforts to promote the sale and distribution of the calculators within those territories. During 1995, the Company terminated its license agreement with respect to its licensee for the British Isles due to the failure of the licensee to meet certain minimum purchase requirements. Because the Company has directed its efforts toward establishing operations in the mass merchandising industry and had depleted its inventory of new units for resale, the Company did not actively market the sale of calculators in the international market in 1995. While the Company intends to pursue marketing the Shoppers Calculator(R) program internationally, the Company anticipates that international sales will continue to be nominal in the near future as the Company continues its efforts to complete the installation of the Supercenter network and to establish programs with other mass merchandising retailers. A total of approximately 300, 26,900 and 18,600 units were sold primarily through international licensees during fiscal 1995, 1994 and 1993, respectively, generating revenues of approximately $3,300, $310,000 and $231,000, respectively. 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. Operations The Company currently has two operating crews. Each crew consists of four or five employees and/or independent contractors and is responsible for installing the calculators on the shopping carts at the Wal-Mart Supercenter locations. In addition, the Company is in the process of building and developing its field service operations which will be responsible for maintaining and servicing the installed units and for replacing the advertising inserts on each calculator at the end of each advertising cycle. The Company currently anticipates that it will employ one field service employee to cover approximately five Supercenter locations. The Company also intends to employ area supervisors who will have the responsibility for overseeing the field service operations for approximately 40 to 50 Supercenter locations, the exact number of such locations to be dependent primarily on the geographic concentration of the stores. Manufacturing All of the calculators previously installed in the Company's grocery chain network were manufactured by Texas Instruments pursuant to a manufacturing services agreement between the parties entered into in 1991. The -22- Company purchased approximately 259,000 units from Texas Instruments under the agreement. The agreement with Texas Instruments was terminated in 1992 when the Company ceased manufacturing units due to the significant decline in advertising revenues experienced. Texas Instruments recently ceased providing custom manufacturing services and the Company has begun ordering components of the Shoppers Calculator(R) from several manufacturers and intends to complete the final assembly at its warehouse facility. The Company has engaged the services of a purchasing agent to source the needed components for assembling the complete calculator units. In consideration for such services, the Company is paying the agent a consulting fee equal to 15% of the costs of the components purchased by the Company. The Company salvaged the internal assemblies (the primary internal calculator components) from approximately 70,000 of the calculators previously installed in the Company's grocery chain network. These assemblies have been utilized to complete the calculator units initially installed in the Supercenter network. The Company currently utilizes Gavco Plastics Incorporated ("Gavco"), a manufacturing company located in Broken Arrow, Oklahoma, to manufacture the plastic cases constituting the shell of the calculators. The Company was able to acquire the injection molding tools for the calculator units from Texas Instruments and provide such tools to Gavco for its manufacturing of the shells. Gavco is currently manufacturing the calculator shells at a rate of approximately 30,000 per month. The Company was able to purchase 140,000 pcb boards (a part of the internal assembly) from Texas Instruments' inventory and Texas Instruments was responsible for obtaining the remaining internal assembly components from outside sources necessary for assembling 140,000 complete internal assemblies. The Company reached an agreement with OAI Electronics, Inc., a manufacturing company located in Tulsa, Oklahoma, to have one of its plants assemble the internal assembly components received from Texas Instruments' inventory and sourcing services. The completed internal assemblies will then be returned to the Company for final assembly of the calculator units. The Company has entered into an agreement with Nam Tai, a manufacturing company located in Hong Kong, for the manufacture of the internal assemblies which will be needed to complete installation of the Supercenter network. Nam Tai has completed its tooling and test production runs for manufacturing the internal assembly component. The manufacture of the internal assemblies will undergo further testing through a production qualification period before commercial production will commence. The Company is currently scheduled to receive its first shipment of internal assemblies from Nam Tai in July 1996. The Company has verbally committed to accept shipment of 25,000 assemblies a month during the last six months of 1996 (a total of 150,000) and will be required to post a letter of credit in advance of Nam Tai commencing commercial production. While the Company is currently dependent on its existing suppliers for component parts needed to complete the calculators for installation in the Supercenter network, it believes that there are a number of available suppliers for its component parts. Other components for installation of the units (brackets, clamps, screws and washers) are purchased from various manufacturers in the United States. Design Patents and Trademarks A design patent was issued to Michael G. Brennan on the Shoppers Calculator(R) in December 1986 for a device described as a "Calculator for a Shopping Cart." A design patent was issued in August 1992 for the Shoppers Calculator(R) design which includes the advertising space. The Company acquired all rights to the design patents in December 1990. Registration by the Company of the trademark "Shoppers Calculator(R)" was granted in July 1992 for a 10 year term. In December 1995, the Company filed an application for registration of the trademark "Shoppers Calculator(R)" and design with respect to its new logo. This application is still pending and the registration has not yet been granted. -23- In 1992, the Company filed seven applications for design patents for additional "package concept" designs for the Shoppers Calculator(R). Patents for these designs were granted in late 1994. The design patents issued expire 14 years after the date of their issuance. In February 1996, the Company filed a U.S. application for a design patent for a calculator design in the form of certain rectangular packaged goods. This application is pending. The Company has filed the necessary documentation to seek design patents or registered designs in Australia, Canada, France, Germany, the United Kingdom and Venezuela. 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 is material and important to its business because of (i) the protection it should provide against competitors using this precise design of advertising medium, and (ii) the revenues it believes it will be able to generate through leasing and sales of the Shoppers Calculators(R) and licensing their use. However, the Company does not believe that the design patent is essential to its success. Because of its development and marketing activities to date and the size of the potential market, the Company believes that it could operate profitably even if it did not have the protection of the design patent. The granting of a patent by the U.S. Patent Office is not determinative of the validity of a patent; such validity can be disputed by third parties in legal proceedings or the Company may be forced to institute legal proceedings to enforce validity. If any such legal proceedings were commenced, the costs thereof could be substantial and have a material adverse effect on the Company. The Company will benefit from the design patent and pending design patent only if it is successful in its efforts to market the advertising space to advertisers, however, there is no assurance that such advertising will be commercially accepted. Additionally, substitutes for successfully patented items are frequently developed and there can be no assurance that a substitute for the Shoppers Calculator(R) will not be successfully developed and marketed, which could have a material adverse effect on the future operations of the Company. Properties The Company maintains its corporate offices at 5100 East Skelly Drive, Meridian Tower, Suite 1080, Tulsa, Oklahoma 74135. The offices, which consist of 3,087 rentable square feet, are leased from a third party under a lease which expires on August 30, 1996. The lease provides for monthly rental payments of $3,069. The Company also leases approximately 3,000 square feet of warehouse space in Tulsa, Oklahoma from a third party. The lease for the warehouse space expires November 30, 1997, and requires monthly rental payments of $900. Employees At April 30, 1996, the Company had 51 full-time employees, nine of which were employed in the Company's corporate offices, 29 of which were employed in field service operations and 13 of which were employed in the Company's warehouse and installation operations. Management considers its relationships with its employees to be excellent. Litigation There are no material legal proceedings to which the Company is, or may become, a party. -24- MANAGEMENT Directors, Executive Officers and Key Employees The directors, executive officers and key employees of the Company, their ages and their positions held in the Company are as follows:
Name Age Position ---- --- -------- Charles H. Hood 57 Chairman, President and Director Gary W. Young 55 Executive Vice President - Finance and Administration, Treasurer and Director Steve C. Oden 44 Vice President, Sales and Marketing Robert B. Davis, Jr. 41 Director of Field Services J. Larre Barrett 56 Director John W. Condon 59 Director
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 ------------- 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. Robert B. Davis, Jr. Mr. Davis joined the Company in January 1996 as -------------------- Director of Field Services. From January 1995 to December 1995, he owned and managed Management & Business Consulting, a business management consulting firm, Tulsa, Oklahoma. From January 1993 to December 1994, he served as Chairman of -25- Global Pipeline Equipment, Inc., a manufacturer of high and low pressure pipeline fittings for the hydrocarbon industry located in Tulsa, Oklahoma. From May 1989 to January 1993, Mr. Davis served as Manager of Domestic and International Customer Service for T. D. Williamson, Inc., an international manufacturer of pipeline maintenance products for the hydrocarbon industry headquartered in Tulsa, Oklahoma. Mr. Davis received a Bachelor of Science degree in Business Administration from Oklahoma State University. J. Larre Barrett. Mr. Barrett was elected a director of the Company in ---------------- January, 1992. He has served as Vice President of Decker Communications, Inc., a consulting firm dealing with communication and skills building, since December 1994. From March 1993 to December 1994, Mr. Barrett served as Vice President of Sales for Dorna USA. From 1989 to February 1993, he served as Vice President - Olympic Marketing Sales of CBS, Inc. Prior to this position, Mr. Barrett spent 24 years with the ABC Television Network, most recently serving as its Vice President of Sports Sales and Vice President of Olympic Marketing and Sales. Mr. Barrett received Bachelor of Journalism and Master of Arts in Radio/Television Sales & Management degrees from the University of Missouri. John W. Condon. Mr. Condon has been a director of the Company since -------------- September 1989. He has been employed by United Graphics, Inc., a company specializing in pre-printing negatives and color separation, since 1964 and has served as its Executive Vice President since that time. Mr. Condon received a Bachelor of Science degree in Commerce with a major in Marketing from the University of Notre Dame. Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until his successor is duly elected by the stockholders. Directors of the Company received no cash compensation for their services as a director for the year ended December 31, 1995, other than reimbursement for expenses. Officers are elected by and serve at the will of the Board of Directors. Summary Compensation Table The following table sets forth certain information for each of the fiscal years ended December 31, 1995, 1994 and 1993, with respect to the compensation paid for services rendered in all capacities to the Company by the Company's chief executive officer and each executive officer whose total compensation exceeded $100,000 during fiscal 1995. No other executive officer received salary and bonus of greater than $100,000. -26-
Summary Compensation Table Annual Compensation Long-Term Compensation -------------------------------------------- ------------------------------------------ Number of Other Shares Annual Restricted Under- Long-Term Compen- Stock lying Incentive Name and Salary Bonus sation Awards Options Payouts Principal Position Year ($) ($) ($)(4) ($) Granted ($) - -------------------- ---- -------- -------- ------- ---------- --------- ----------------- Charles H. Hood, 1995 $106,250(1) $143,750(3) $16,000 -0- 50,000 -0- President and 1994 100,000(1) -0- -0- -0- -0- -0- Chairman 1993 100,000(1) -0- -0- -0- 95,000(5) -0- Gary W. Young, 1995 $106,250(2) $143,750(3) $16,000 -0- 50,000 -0- Executive Vice 1994 80,000(2) -0- -0- -0- -0- -0- President 1993 80,000(2) -0- -0- -0- 145,000(6) -0-
________________ (1) Commencing October 1, 1995, Mr. Hood was entitled to receive an annual base salary of $125,000, and for the first nine months of 1995 and for each of the fiscal years 1994 and 1993, he was entitled to receive an annual base salary of $100,000. However, Mr. Hood elected to forego receiving any salary until such time as the Company's working capital position improves or conditions otherwise warrant the payment thereof. The salary has been recorded as an expense during each of these years and a liability has been accrued for the salary payable to Mr. Hood. During 1995, Mr. Hood received payments of $30,000 with respect to his accrued salary. (2) Commencing October 1, 1995, Mr. Young became entitled to receive an annual base salary of $125,000. Mr. Young was entitled to receive an annual base salary of $100,000 for the first nine months of fiscal year 1995, and $80,000 for each of fiscal years 1994 and 1993. However, Mr. Young elected to forego receiving any salary until such time as the Company's working capital position improves or conditions otherwise warrant the payment thereof. The salary has been recorded as an expense during each of these years and a liability has been accrued for the salary payable to Mr. Young. During 1995, Mr. Young received payments of $30,000 with respect to his accrued salary. (3) Represents a cash bonus in the amount of $50,000 to each of Mr. Hood and Mr. Young and the fair market value at the date of award ($.625 per share) of 150,000 shares of Common Stock awarded to each of Mr. Hood and Mr. Young as bonus compensation in 1995. Neither Mr. Hood nor Mr. Young received payment of the cash bonus in 1995 and payment of such amount was deferred until the Company's working capital improves or conditions otherwise warrant payment thereof. The bonuses have been recorded as an expense for 1995 and a corresponding liability has been accrued for the bonuses payable. (4) Other annual compensation represents payment of a non-accountable expense allowance in 1995. Amounts do not include the value of perquisites or other personal benefits because the amount of such compensation, if any, does not exceed the lesser of $50,000 or 10% of the total amount of annual salary and bonus. (5) Mr. Hood was granted options to acquire 95,000 shares of Common Stock at an exercise price of $0.375 per share in May of 1993 which replaced options for 95,000 shares having an exercise price of $1.00 per share which had been granted in November 1992. -27- (6) Mr. Young was granted options to acquire 145,000 shares of Common Stock at an exercise price of $0.375 per share in May of 1993 which replaced options for 145,000 shares having an exercise price of $1.00 per share which had been granted in November 1992. Option Grants The following table sets forth information with respect to stock options granted by the Company to each of the named executive officers during the year ended December 31, 1995.
Percent of Number of Total Shares Options Exercise Underlying Granted to Price Options Employees Per Share Expiration Name Granted in 1995 ($) Date - ---- ------- ------- ---------- ----------- Charles H. Hood 50,000 46.5% $0.20 1/15/2005 Gary W. Young 50,000 46.5% $0.20 1/15/2005
Fiscal Year End Option Values There were no stock options exercised by the named executive officers during the year ended December 31, 1995. The following table sets forth information regarding the value of unexercised stock options held by each of the named executive officers as of the year ended December 31, 1995.
Number of Shares of Common Value of Unexercised Stock Underlying Unexercised In-The-Money Options at Options at December 31, 1995(#) December 31, 1995($)(1) ------------------------------- ----------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------------- ---------------- ----------- ------------- Charles H. Hood 145,000 -0- $357,475 $-0- Gary W. Young 195,000(2) -0- $477,725 $-0-
____________ (1) Calculated by determining the difference between the fair market value of the Company's Common Stock as of December 31, 1995 ($2.78 per share based on the average of the high and low bid price on such date) and the exercise price of the underlying options. (2) Does not include an option granted by Mr. Hood to Mr. Young to purchase 60,000 shares at an exercise price of $1.00 per share. Executive Retirement Plan In December 1995, the Company adopted the ADDvantage Media Group, Inc. Supplemental Executive Retirement Plan, a nonqualified deferred compensation plan (the "Retirement Plan"). The Retirement Plan is an unfunded plan maintained to provide deferred compensation to certain highly compensated employees of the Company. Participation in the Retirement Plan is limited to senior management employees of the Company designated by the Company's Board of Directors. Mr. Hood and Mr. Young have been designated by the Board of Directors as eligible participants under the Retirement Plan. -28- Under the Retirement Plan, a participant terminating employment upon reaching age 62 (the "early retirement date") will be entitled to receive monthly benefits of approximately $6,770 a month for a period of ten years. Upon reaching age 65 (the "normal retirement date") or such later date coinciding with the executive's termination of or retirement from employment, each executive will be entitled to receive monthly payments of $10,416.67 (the "normal retirement benefits") for a period of ten years. In the event of a long-term disability (as determined by the Board of Directors), the executive will be entitled to the normal retirement benefits under the Retirement Plan commencing on the early retirement date. In the event of the death of an executive participant prior to the termination of employment, such executive's spouse or designated beneficiary will be entitled to the normal retirement benefits under the Retirement Plan. If the executive participant's employment with the Company is terminated prior to the early retirement date, no benefits are payable under the Retirement Plan. Limitation of Liability and Indemnification Matters The Amended Certificate of Incorporation of the Company (the "Certificate of Incorporation") provides that, to the fullest extent permitted by the General Corporation Act of the state of Oklahoma, Directors of the Company shall not be liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a Director. The Bylaws of the Company provides for the indemnification of Directors, officers, employees or agents of the Company against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or certain other capacities if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company and had no reason to believe that their conduct was unlawful, except in ------ connection with a proceeding brought by or in the right of the Company in which such person was adjudged liable to the Company, unless a court, in light of all of the circumstances, rules that such person remains entitled to indemnification (only expenses, including attorneys' fees, are subject to indemnification with respect to such proceedings). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. PRINCIPAL STOCKHOLDERS As of April 30, 1996, the Company had issued and outstanding 4,942,620 shares of Common Stock and 277,750 shares of Series A Preferred Stock. The following table sets forth, as of February 29, 1996, the number and percentage of shares of Common Stock and Series A Preferred Stock of the Company owned beneficially, by class and on a combined basis, by (i) each of the directors of the Company and executive officers named in the "Summary Compensation Table" above, (ii) all officers and directors as a group, and (iii) each person owning more than 5% of the Common Stock or Series A Preferred Stock. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares. -29-
Common Stock Series A Preferred Stock(8) ------------------------------------ ----------------------------- Percentage of Name and Address Number of Shares Percent of Number of Shares Percent Total Combined of Beneficial Owner Beneficially Owned Class(1) Beneficially Owned of Class Voting Power(8) ------------------- ------------------ -------- ------------------ -------- --------------- Charles H. Hood............. 551,650(2) 10.8% 65,000 23.4% 11.8% 3254 East 75th Street Tulsa, OK 74136 Gary W. Young............... 417,930(3) 8.1% 58,750 21.2% 9.1% 7417 South Florence Tulsa, OK 74136 J. Larre Barrett............ 118,680(4) 2.4% -0- - - 2.2% 1055 Hardscrabble Road Chappaqua, New York 10514 John W. Condon.............. 129,580(5) 2.6% 12,750 4.6% 2.8% 1748 E. 30th Place Tulsa, OK 74114 Robert W. Davis............. 170,150 3.4% 56,875 20.5% 4.8% 3129 S. Columbia Circle Tulsa, OK 74105 William S. Atherton......... 290,000(6) 5.9% 12,500 4.5% 5.8% 759 Cal Cove Dr. Fort Meyers, FL 33919 R. Frank Jerd............... 17,000 * 50,000 18.0% 1.7% 3105 E. 75th Place Tulsa, OK 74136 All officers and directors 1,217,840(7) 22.6% 136,500 49.1% 24.5% as a group (4 persons) - --------------------
* Less than one percent. (1) Shares of Common Stock which an individual has the right to acquire within 60 days pursuant to the exercise of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table or the percentage ownership of all officers and directors as a group. (2) Includes 145,000 shares subject to options which are currently exercisable and 12,500 shares subject to warrants which are currently exercisable. (3) Includes 195,000 shares subject to stock options which are currently exercisable and 12,500 shares subject to warrants which are currently exercisable. -30- (4) Includes 50,000 shares subject to stock options which are currently exercisable. (5) Includes 25,000 shares subject to stock options which are currently exercisable. (6) Includes 70,000 shares owned by Atherton & Murphy Investment Company, of which Mr. Atherton is a partner and 50% owner. (7) Includes an aggregate of 415,000 shares subject to stock options which are currently exercisable and 25,000 shares subject to warrants which are currently exercisable. (8) Each share of Series A Preferred Stock is convertible into that number of shares of Common Stock determined by dividing the sum of $4.00 plus the amount of accrued but unpaid dividends by $4.00. Holders of Series A Preferred Stock are entitled to vote on all matters together with the holders of Common Stock and each share of Series A Preferred Stock is entitled to the number of votes equal to the number of shares then issuable to the holder upon its conversion. For purposes of this table, it has been calculated that each share of Series A Preferred Stock is entitled to approximately 1.48 votes. See "Description of Securities--Preferred Stock." CERTAIN TRANSACTIONS On January 18, 1995, the Company filed suit against Wal-Mart Stores, Inc. in the United States District Court for the Western District of Arkansas stemming from the contractual relationship between the Company and Wal-Mart with respect to the use of the Shoppers Calculator(R) in certain Wal-Mart stores. In order to fund the initial filing of the Wal-Mart litigation, Charles H. Hood and Gary W. Young, each an officer and director of the Company, each loaned the Company $10,000 for which they received an unsecured promissory note from the Company payable within 20 days after final resolution of the Wal-Mart litigation. In addition, the Company has agreed to pay to each of Messrs. Hood and Young one percent of any recovery (net of legal fees and costs related to the litigation) received as a result of the Wal-Mart litigation. Pursuant to the Company's calculation of the net recovery from the Wal-Mart contract entered into in settlement of the litigation, each of Messrs. Hood and Young are entitled to receive approximately $50,056. During the first quarter of 1995, the Company completed a private placement of notes and warrants for an aggregate consideration of $200,000. The notes issued in the offering bear interest at a rate of 10% per annum and principal and interest on the notes were due and payable on or before 20 days after the final resolution, by settlement, judgment or otherwise, of the Wal-Mart litigation. Each warrant issued entitled the holder thereof to purchase one share of Common Stock at an exercise price of $0.20 per share at any time within two years of the date of issuance. In addition, the Company agreed to pay to the investors a total of 10% of the net recovery from the Wal-Mart lawsuit or any settlement thereof. Investors in the private placement included Messrs. Hood, Young and Barrett, directors of the Company, and Robert W. Davis and William S. Atherton, each an owner of more than five percent of a class of the Company's outstanding securities. The following table sets forth certain information with respect to the securities acquired by such purchasers in the private placement: -31-
Number of Shares Principal Net Aggregate Cash Underlying Amount Recovery Name Consideration Warrants of Notes Amount(1) - ---- -------------- -------- --------- ----------- Chuck H. Hood $ 5,000 12,500 $ 5,000 $12,514 Gary W. Young 5,000 12,500 5,000 12,514 J. Larre Barrett 20,000 50,000 20,000 50,056 Robert W. Davis 10,000 25,000 10,000 25,028 William S. Atherton 20,000 50,000 20,000 50,056 - --------------
(1) Represents each investor's interest in the net after tax cash flow estimated to be received under the Wal-Mart contract which was entered into in settlement of the litigation. The Company has calculated the total net after tax cash flow recovery from such contract to equal $5,005,000. On November 30, 1995, Messrs. Barrett, Davis and Atherton exercised their warrants to purchase the underlying shares of Common Stock in exchange for one- half of the outstanding principal balance of the notes covered in the private placement. At such date, the Company issued replacement notes to Messrs. Barrett, Davis and Atherton in the amounts of approximately $11,468, $5,835 and $11,671, respectively, representing the remaining outstanding principal balance on the original notes and accrued interest on the original notes through such date. Principal and interest are due and payable on such notes on or before June 30, 1997. In addition, on such date Mr. Hood and Mr. Young exchanged the notes purchased in the offering for new notes each in the principal amount of $5,347 (representing the outstanding principal balance of the original notes and accrued interest thereon through such date), which notes mature as to principal and interest on June 30, 1997. DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 11,000,000 shares, including (a) 10,000,000 shares of Common Stock, par value $.01 per share, of which (i) 4,942,620 shares were issued and outstanding as of April 30, 1996, and (ii) 1,647,750 were reserved for issuance upon the exercise of currently outstanding options and Warrants, the acquisition of the Units, the exercise of the Warrants included in the Units and the conversion of shares of Series A Preferred Stock and (b) 1,000,000 shares of serial preferred stock, par value $1.00 per share, of which 300,000 have been designated as Series A 10% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), of which 277,750 shares were issued and outstanding as of April 30, 1996. Common Stock The holders of shares of Common Stock are entitled to one vote for each share held of record on each matter submitted to shareholders. Shares of Common Stock do not have cumulative voting rights for the election of directors. The holders of shares of Common Stock are entitled to receive such dividends as the Board of Directors may from time to time declare out of funds of the Company legally available for the payment of dividends, subject to any prior rights of holders of Series A Preferred Stock and any other outstanding preferred stock. The holders of shares of Common Stock do not have any pre-emptive rights to subscribe for or purchase any stock, obligations or other securities of the Company and have no rights to convert their Common Stock into any other securities. Upon any liquidation, dissolution or winding up of the Company, holders of shares of Common Stock are entitled to receive pro rata all of the assets of the Company available for distribution to shareholders, subject to any prior rights of holders of Series A Preferred Stock and any other outstanding preferred stock. -32- Preferred Stock The Board of Directors of the Company has the authority at any time and from time to time to establish and designate one or more series of preferred stock, to fix the number of shares of any series (which number may vary between series) and to fix the dividend rights and preferences, the redemption price and terms, liquidation rights, sinking fund provisions (if any), conversion provisions (if any) and the voting powers (if any). This type of preferred stock is sometimes referred to as "blank check" preferred stock. The Board of Directors, without shareholder approval, could issue preferred stock with voting and conversion rights that could adversely affect the voting power of holders of Common Stock. Certain companies have used the issuance of preferred stock as an anti-takeover device and the Board of Directors of the Company could, without shareholder approval, issue preferred stock with certain voting, conversion and/or redemption rights that could discourage any attempt to obtain control of the Company in a transaction not approved by its Board of Directors. Currently, there are 277,750 shares of Series A Preferred Stock issued and outstanding, with a stated value of $4.00 per share. Holders of Series A Preferred Stock are entitled to receive, when and as declared by the Company's Board of Directors, cumulative cash dividends at the annual rate of $.40 per share. Dividends are payable quarterly on the last day of March, June, September and December of each year. The Series A Preferred Stock is redeemable by the Company, at its sole option, at any time at a redemption price of $4.00 per share plus accrued and unpaid dividends and accrued and unpaid interest thereon. The Series A Preferred Stock may, at the option of the holder at any time, be converted into shares of Common Stock at the conversion rate. The conversion rate will be equal to (a) the sum of (i) $4.00 multiplied by the number of shares of Series A Preferred Stock surrendered plus (ii) the dollar amount of any accrued and unpaid dividends and any accrued and unpaid interest thereon, (b) divided by $4.00. The holders of Series A Preferred Stock are entitled to vote on all matters to be voted on by the shareholders of the Company. Each holder of Series A Preferred Stock is entitled to that number of votes equal to the number of whole shares of Common Stock into which all of his or her shares of Series A Preferred Stock are then convertible. Warrants On July 17, 1991, the Company completed a public offering of the Units, each Unit consisting of two shares of Common Stock and one Warrant to purchase one share of Common Stock, and, in connection therewith, issued 600,000 Warrants. Each Warrant entitles the holder, upon exercise, to purchase one share of Common Stock at a price of $4.00 per share. The Warrants expire automatically at 5:00 p.m., New York time, on September 25, 1996, unless redeemed by the Company prior to that time. The Warrants may be redeemed by the Company at a price of $.05 per Warrant on 30 days prior written notice if the closing bid price of the Company's Common Stock for 10 consecutive trading days ending within 15 days of the date of notice of redemption equals or exceeds $5.00 per share. Transfer and Warrant Agent North American Transfer Co. is the transfer agent and warrant agent for the Company's Common Stock and Warrants. -33- MARKET FOR SECURITIES The Common Stock and Warrants are currently quoted on the OTC Bulletin Board (symbols "ADDM" and "ADDMW," respectively). The Common Stock and Warrants were listed on the Boston Stock Exchange from August 27, 1991 through January 14, 1994, when registration for trading of the Common Stock and Warrants was terminated because of the Company's noncompliance with certain capital and surplus maintenance requirements of the Exchange. The following table sets forth, for the periods indicated, the range of high and low closing bid quotations for the Common Stock and Warrants as quoted on the OTC Bulletin Board. On June 7, 1996, the last sales price "as reported" on the OTC Bulletin Board was $8.00 per share.
Common Stock Warrants ------------ ------------ Period High Low High Low ------ ----- ----- ----- ----- Fiscal Year 1996: First Quarter............ $6.50 $2.25 $2.38 $0.25 Second Quarter (through April 30, 1996)........ 6.25 5.00 2.13 1.13 Fiscal Year 1995: First Quarter............ $0.91 $0.13 $0.03 $0.03 Second Quarter........... $1.07 $0.28 $0.05 $0.03 Third Quarter............ $3.00 $0.63 $0.13 $0.13 Fourth Quarter........... $3.38 $1.63 $0.50 $0.19 Fiscal Year 1994: First Quarter............ $0.94 $0.25 $0.00 $0.00 Second Quarter........... $0.81 $0.13 $0.06 $0.03 Third Quarter............ $0.69 $0.44 $0.04 $0.04 Fourth Quarter........... $0.50 $0.09 $0.03 $0.03
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 April 30, 1996, there were approximately 115 holders of record of Common Stock. However, the Company believes there are in excess of 800 beneficial owners of Common Stock. Dividends. The Company has not paid cash dividends with respect to the Common Stock in the past and has no present plans to pay dividends on the Common Stock in the foreseeable future. Pursuant to the terms of the Series A Preferred Stock, the Company may not declare or pay dividends on the Common Stock unless cumulative dividends on the Series A Preferred Stock have been paid. At December 31, 1995, Series A Preferred Stock dividends in arrears were $444,400 and accrued interest on such dividends was $84,435. Also, during the term of the agreement for the Company's revolving line of credit, no dividends may be paid on the Common Stock. -34- LEGAL OPINIONS Certain legal matters with respect to the securities covered hereby will be passed upon for the Company by Conner & Winters, A Professional Corporation, 2400 First Place Tower, 15 East 5th Street, Tulsa, Oklahoma. At April 30, 1996, the Company owed Conner & Winters approximately $208,000 for prior legal services. EXPERTS The financial statements of the Company at December 31, 1995 and 1994 and for the years ended December 31, 1995 and 1994, appearing herein have been audited by Tullius Taylor Sartain & Sartain, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act with respect to the registration of the securities covered hereby. This Prospectus, which constitutes a part of the registration statement, omits certain of the information contained in the registration statement in accordance with the Rules and Regulations of the Commission, and reference is hereby made to the registration statement and the exhibits thereto for further information with respect to the Company and the securities to which this Prospectus relates. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is hereby made to the copy of such document filed as an exhibit to the registration statement. Each such statement is qualified in its entirety by such reference. Items of information omitted from this Prospectus but contained in the registration statement can be obtained from the Commission upon payment of the fees prescribed by the Rules and Regulations of the Commission. -35- INDEX TO FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS OF ADDVANTAGE MEDIA GROUP, INC.: Report of Independent Auditors.......................................... F-2 Balance Sheets as of December 31, 1995 and 1994......................... F-3 Statements of Operations for the Years ended December 31, 1995 and 1994. F-5 Statements of Changes in Stockholders' Equity for the Years ended December 31, 1995 and 1994............................................ F-6 Statements of Cash Flows for the Years ended December 31, 1995 and 1994. F-7 Notes to Financial Statements........................................... F-9 INTERIM FINANCIAL STATEMENTS OF ADDVANTAGE MEDIA GROUP, INC. (UNAUDITED): Balance Sheet as of March 31, 1996...................................... F-15 Statements of Operations for the Three Months Ended March 31, 1996 and 1995................................................................... F-17 Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995................................................................... F-18 Notes to Condensed Financial Statements for the Three Months Ended March 31, 1996 and 1995................................................ F-20 F-1 Report of Independent Auditors The Board of Directors ADDvantage Media Group, Inc. We have audited the accompanying balance sheets of ADDvantage Media Group, Inc. as of December 31, 1995 and 1994, and the related statements of operations, changes in stockholders' equity (net capital deficiency), 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, 1995 and 1994, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. TULLIUS TAYLOR SARTAIN & SARTAIN Tulsa, Oklahoma March 6, 1996 F-2 ADDVANTAGE MEDIA GROUP, INC. BALANCE SHEETS
December 31, 1995 1994 ------------------------ Assets Current assets: Cash and cash equivalents $ 20,444 $ 169 Accounts receivable 6,926 10,226 Calculator inventory, at lower of average cost or market - 10,576 Deferred income taxes 667,000 - Other current assets 8,514 5,797 ------------------------ Total current assets 702,884 26,768 Property and equipment, at cost: Calculators 749,107 803,229 Office and production equipment 341,575 333,727 Furniture and fixtures 64,417 64,417 ------------------------ 1,155,099 1,201,373 Accumulated depreciation 331,385 550,632 ------------------------ 823,714 650,741 Deferred income taxes 3,243,000 - Patent, net of accumulated amortization of $445,533 and $354,717 at December 31, 1995 and 1994, respectively 462,577 553,393 Deferred charges 12,064 23,838 ------------------------ Total assets $5,244,239 $1,254,740 ========================
See notes to financial statements. F-3 ADDVANTAGE MEDIA GROUP, INC. BALANCE SHEETS
December 31, 1995 1994 --------------------------- Liabilities and Stockholders' Equity (Net Capital Deficiency) Current liabilities: Note payable to bank $ 519,968 $ 1,132,622 Notes payable to shareholders and directors 176,808 26,000 Accounts payable 558,748 457,849 Accrued interest 252,677 312,610 Other accrued liabilities 687,782 438,045 Accrued preferred stock dividends 416,777 305,677 Current portion of long-term debt - 1,800,000 Current portion of patent note payable - 103,665 --------------------------- Total current liabilities 2,612,760 4,576,468 Long-term obligation 515,163 - Long-term bank debt 3,406,656 - Stockholders' equity (net capital deficiency): Preferred stock, $1.00 par value, 1,000,000 shares authorized; Series A, 10% cumulative convertible, preferred stock - 277,750 shares issued and outstanding at December 31, 1995 and 1994; liquidation preference, $1,111,000 927,167 927,167 Common stock, $.01 par value, 10,000,000 shares authorized; 4,927,620 and 3,908,620 shares issued and outstanding at December 31, 1995 and 1994, respectively 49,276 39,086 Capital in excess of par value 5,991,428 5,558,063 Accumulated deficit (8,258,211) (9,846,044) --------------------------- Net capital deficiency (1,290,340) (3,321,728) --------------------------- Total liabilities and net capital deficiency $ 5,244,239 $ 1,254,740 ===========================
See notes to financial statements. F-4 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF OPERATIONS
Year ended December 31, 1995 1994 --------------------------- Revenues: Advertising $ 126,900 $ - Sales of calculators 114,862 401,976 Other 7,790 5,700 --------------------------- 249,552 407,676 Costs and expenses: Cost of advertising services 216,660 283,947 Cost of sales of calculators 48,714 171,690 Write-off of calculators 132,025 - Selling expenses 32,785 125,104 General and administrative expenses 890,228 529,501 Litigation expense 636,310 - 1,956,722 1,110,242 --------------------------- Operating loss (1,707,170) (702,566) Interest expense 503,897 308,820 --------------------------- Income (loss) before provision (benefit) for income taxes (2,211,067) (1,011,386) Provision (benefit) for income taxes (3,910,000) - --------------------------- Net income (loss) 1,698,933 (1,011,386) Preferred stock dividends (111,100) (111,100) --------------------------- Net income (loss) applicable to common stock $ 1,587,833 $(1,122,486) =========================== Net income (loss) per share: Primary $0.35 $(0.30) =========================== Fully diluted $0.31 $(0.30) ===========================
See notes to financial statements. F-5 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Capital in Preferred Stock Common Stock Excess of Accumulated Shares Amount Shares Amount Par Value Deficit Total ------------------------------------------------------------------------------ Balance at December 31, 1993 277,750 $927,167 3,708,620 $37,086 $5,513,563 $(8,723,558) $(2,245,742) Issuance of shares for cash - - 200,000 2,000 44,500 - 46,500 Preferred stock dividends ($.40 per share) - - - - - (111,100) (111,100) Net loss - - - - - (1,011,386) (1,011,386) ------------------------------------------------------------------------------ Balance at December 31, 1994 277,750 927,167 3,908,620 39,086 5,558,063 (9,846,044) (3,321,728) Issuance of shares to settle past due accounts payable - - 209,000 2,090 94,465 - 96,555 Issuance of shares for officer bonuses - - 300,000 3,000 184,500 - 187,500 Issuance of shares for legal fees - - 25,000 250 62,250 - 62,500 Issuance of shares on exercise of options - - 60,000 600 11,400 - 12,000 Issuance of shares on exercise of warrants - - 425,000 4,250 80,750 - 85,000 Preferred stock dividends ($.40 per share) - - - - - (111,100) (111,100) Net income - - - - - 1,698,933 1,698,933 ------------------------------------------------------------------------------ Balance at December 31, 1995 277,750 $927,167 4,927,620 $49,276 $5,991,428 $(8,258,211) $(1,290,340) ==============================================================================
See notes to financial statements. F-6 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF CASH FLOWS
Year ended December 31, 1995 1994 --------------------------- Operating activities Net income (loss) $ 1,698,933 $(1,011,386) Adjustments to reconcile net income (loss) to net cash used in operating activities: Deferred income tax (3,910,000) - Depreciation and amortization 154,043 172,440 Write-off of calculators 132,025 6,174 Amortization of discount on shareholder notes payable 13,935 17,730 Stock compensation 187,500 - Obligation in settlement of lawsuit 515,163 - Changes in assets and liabilities: Accounts receivable 3,299 24,736 Inventory 32,944 138,917 Other current assets (2,717) 2,772 Deferred charges 11,775 14,787 Accounts payable 177,027 63,997 Accrued interest 444,714 - Other accrued liabilities 249,736 485,811 --------------------------- Net cash used in operating activities (291,623) (84,022) Investing activities Purchases of property and equipment (322,470) (70,005) Patent expenditures and related costs - (12,330) --------------------------- Net cash used in investing activities (322,470) (82,335)
See notes to financial statements. F-7 ADVANTAGE MEDIA GROUP, INC. STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31, 1995 1994 -------------------------- Financing Activities Sale of common stock $ - $ 46,500 Exercise of stock options and warrants 12,000 - Proceeds from issuance of investor notes 220,000 - Proceeds from issuance of bank notes 519,968 145,000 Payments on patent note (117,600) (87,500) Payments on capital lease obligations - (4,142) -------------------------- Net cash provided by financing activities 634,368 99,858 -------------------------- Increase (decrease) in cash 20,275 (66,499) Cash and cash equivalents, beginning of year 169 66,668 -------------------------- Cash and cash equivalents, end of year $ 20,444 $ 169 ========================== Cash paid during the year for interest $ 18,466 $ 13,256 ==========================
See notes to financial statements. F-8 ADDVANTAGE MEDIA GROUP, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1995 and 1994 Note 1 - Description of the Business The Company markets and sells in-store advertising to national advertisers. This advertising is positioned on the Company's solar powered calculators attached to the handles of mass merchants' shopping carts. The calculators are patented and registered under the trademark "Shoppers Calculator(R)." The Company also sells Shoppers Calculators(R) to third parties, including independent retailers and international licensees. The Company entered into an agreement with Wal-Mart Stores, Inc. 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 breach of the terms of those contracts. On September 1, 1995, the Company and Wal-Mart entered into a new contract in settlement of the lawsuit. Under the terms of the new four-year contract, the Company will install and maintain Shoppers Calculators(R) in all of Wal-Mart's Supercenters in the continental United States and Wal-Mart will be responsible for selling the advertising for the calculators during the initial phase of the contract. During the term of the contract in which Wal-Mart is responsible for the advertising sales, Wal-Mart has agreed to guarantee advertising revenues to the Company in excess of $23.5 million subject to the Company's obligation to install and service the Shoppers Calculators(R) during the revenue guaranty period. After the Company has received payment of the guaranteed revenues, it has the option to continue the contract through October 6, 1999, by assuming advertising sales responsibilities for the program. Upon conclusion of the contract, the program will be subject to re-evaluation by both parties. In compliance with the terms of the new contract, on October 17, 1995, the Company furnished Wal-Mart with a detailed operating plan which projects advertising revenues, capital costs and operating expenses based on the new contract. The purpose of this operating plan was to determine the financial impact of the new contract to the Company, its bank and creditors. The operating plan in its final form covered years 1995, 1996, 1997 and 1998. The key assumptions used to develop the operating plan were provided to the Company by Wal-Mart and were as follows: Supercenter Installations
Year Stores Shopping Carts ---- ------ -------------- 1995 33 39,600 1996 200 240,000 1997 100 120,000 1998 100 120,000 --- ------- Total Installations 433 519,600 === =======
F-9 The Company's first revenue period under the new contract began on November 6, 1995. The cash flow from the Wal-Mart contract should allow the Company to meet its anticipated cash requirements for the foreseeable future, including repayment of all past due obligations. 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 includes 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. The vast majority of Shoppers Calculator(R) hardware and components not yet installed ($516,581 at December 31, 1995) will be installed for advertising use by the Company rather than sold and is reported in property and equipment. Shoppers Calculators(R) installed on shopping carts in the Company's advertising programs are capitalized and depreciated over a five-year straight-line life. Calculator replacements are charged to accumulated depreciation. Loss is recognized upon complete de- installation of a customer's store or similar service unit to the extent that the estimated fair value of the calculators is less than their carrying value. Other property and equipment is depreciated on the straight-line method over estimated useful lives ranging from three to ten years. Revenue recognition ------------------- The Company recognizes revenues from advertising sales ratably over the advertising cycle. Sales of Shoppers Calculators(R) are recognized in the period such units are shipped to the customer. Net income (loss) per common share ---------------------------------- Net income (loss) per common share is based on the sum of the weighted average number of common and common equivalent shares outstanding. The number of common and common equivalent shares utilized in the per share computations are 4,600,078 for primary and 5,108,433 for fully diluted in 1995, and 3,744,236 for 1994. For 1995, conversion of preferred stock and related dividend and interest accruals into common stock is not considered in the computations of fully diluted earnings per share since the effect would not provide further dilution. For 1994, the effects of the options, warrants and preferred stock would be antidilutive and therefore are not considered in the computations. Patent ------ The Company's Shoppers Calculators(R) patent was acquired from a person who, at the time, was a director of the Company, and a company in which he was 50% owner. It is carried at acquisition cost, net of accumulated amortization which is computed on a straight-line basis over the life (five years remaining at December 31, 1995) of such design patent. The Company periodically assesses its ability to realize its investment in the patent based on undiscounted cash flows from the Company's current business plans and strategies. If it becomes necessary to F-10 recognize an impairment loss, it would be measured as the amount by which the net book value of the patent exceeds its estimated fair value. Note 3 - Bank Borrowings On September 5, 1995 the Company completed a new working capital loan with a bank which provides for a maximum line of credit of $700,000 of which $519,968 was outstanding at December 31, 1995. The loan, which has been guaranteed by Wal-Mart, bears interest at Chase Manhattan Bank prime plus 1% (9.5% on December 31, 1995) and has a maturity date of March 5, 1997. Payment terms are tied into the operating plan which is an exhibit to the Wal-Mart Contract, dated September 1, 1995. Based on the plan, the loan is anticipated to be repaid by January 1997. Wal-Mart's guarantee is secured by the Company's patents on the Shoppers Calculators(R) On March 6, 1996, the Company completed a restructuring of all past due bank debt effective as of October 1, 1995. A $1,800,000 revolving line of credit, other notes totaling $1,132,622 and accrued interest through September 30, 1995 of $474,034 were combined into a new note in the amount of $3,406,656. This new loan bears interest at Chase Manhattan Bank prime rate plus 1% (9.5% on December 31, 1995). The loan has a maturity date of May 31, 1998 with payment terms tied into the operating plan which is an exhibit to the Wal-Mart Contract. Payments of interest and principal on the $3,406,656 note will commence after the $700,000 note guaranteed by Wal-Mart has been paid; however, interest payments must begin no later than February 28, 1997, and principal payments must begin no later than May 31, 1997. The new loan is secured by essentially all corporate assets and the agreement prohibits the payment of common stock dividends, requires consent for the payment of preferred stock dividends prior to December 1, 1997, and limits the amount of additional borrowings to $50,000 and capital expenditures to $15,000 exclusive of calculator purchases. The agreement also requires that net proceeds realized from the exercise of the common stock purchase warrants discussed in Note 5 be used to pay down the amount outstanding under the agreement. Officers, directors and a stockholder have guaranteed $270,000 of the note. An officer and shareholder of the bank with which the Company has the loan agreements owns 4% of the Company's common stock and 20% of the Company's preferred stock outstanding. Note 4 - Income Taxes As a result of the Wal-Mart contract, the Company has concluded that it is more likely than not that the tax benefits of its net operating losses and temporary differences will be realized and, accordingly, recorded the tax benefit in the fourth quarter of 1995. The net operating loss carryforward and temporary differences aggregate $10,290,000 at December 31, 1995, resulting in a deferred tax asset of $3,910,000. These losses expire in 2008. The tax effects of temporary differences and tax loss carryforwards that give rise to the deferred tax assets and liabilities at December 31, 1995, are as follows: F-11 Current deferred tax: Net operating loss carryforward $ 408,000 Accrued expenses 259,000 ------------ 667,000 Noncurrent deferred tax: Net operating loss carryforward 3,311,000 Long-term obligation 190,000 Financial basis in excess of tax basis of fixed assets (258,000) ------------ 3,243,000 ------------ Net deferred tax asset $3,910,000 ============
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 entitles the holder, upon exercise, to purchase one share of common stock at a price of $4.00 per share. The expiration date of the Warrants has been extended by the Company to September 26, 1996, unless redeemed or extended again by the Company prior to that time. The Warrants may be redeemed by the Company at a price of $0.05 per Warrant on 30 days prior written notice if the closing bid price of the common stock for ten consecutive trading days ending within 15 days of the date of notice of redemption equals or exceeds $5.00 per share. 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 are exercisable in whole or in part at $7.20 per unit commencing June 26, 1992 and expiring October 25, 1996. Each unit consists of two shares of common stock and one warrant to purchase one share of common stock for $4.80 per share exercisable through October 25, 1996. The warrants provide for adjustment of the exercise price upon the occurrence of certain events. The 277,750 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 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 terms; (b) a total of 10% of the net recovery from the Wal-Mart lawsuit described elsewhere herein; and (c) Promissory Notes totaling an indebtedness of $200,000 and bearing interest at the rate of 10% per annum. On November 30, 1995, investors holding warrants to purchase 425,000 shares of common stock exercised their option by converting promissory notes in the amount of $85,000 to acquire the shares. In order to fund the initial filing of the Wal-Mart litigation, 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 F-12 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, has been calculated by the Company to be $498,711 and has been recorded as litigation expense in the financial statements. The amounts due are payable from the cash flow from the Wal-Mart contract and are reported in the financial statements as long-term obligation payable. At December 31, 1995, 1,232,750 shares of common stock are reserved for the exercise of warrants and conversions of the Series A preferred stock. In April 1991, the stockholders adopted the 1991 Employee Stock Plan which provides for the award to key employees of stock options, stock appreciation rights and shares of restricted stock. The Plan provides that upon any issuances of additional shares of common stock by the Company, other than pursuant to the Plan, the number of shares covered by the Plan will increase to an amount equal to 10% of the then outstanding shares of common stock. The purchase price per share for stock options may not be less than the fair market value of the stock on the date of grant. At December 31, 1995, options for 355,000 shares are outstanding under the Plan, all of which are exercisable. At December 31, 1995, directors and consultants held options outside the Employee Stock Plan for 120,000 shares of which options for 95,000 shares were exercisable. At December 31, 1995, 492,762 shares of common stock were reserved for the exercise of stock awards of which 137,762 shares were available for future grants. The following summary reflects option transactions during the two years ended December 31, 1995:
Shares Per Share Total ------------------------------- Common shares under option: December 31, 1993 427,500 $.38-$3.63 $461,563 Granted - - - Canceled - - - Exercised - - - --------- ---------- December 31, 1994 427,500 $.38-$3.63 461,563 Granted 277,500 $.20-$1.00 115,500 Canceled 170,000 $.38-$3.63 328,750 Exercised 60,000 $.20 12,000 --------- ---------- December 31, 1995 475,000 $.20-$1.00 $236,313 ========= ========== Options exercisable: December 31, 1995 450,000 $231,313 ========= ==========
Note 6 - Executive Retirement Plan Effective December 7, 1995, the Company adopted the Supplemental Executive Retirement Plan (Plan), a nonqualified plan. Two of the Company's executive officers are the initial participants. Generally, the Plan provides for retirement benefits for participants who remain employed with the Company until age 65, with a reduced benefit available for early retirement at age 62. Benefits will be funded by life insurance policies of F-13 $1,900,000 and $1,800,000 on the lives of the participants, for which the Company is the beneficiary. The insurance policies replace a $1,000,000 key man insurance policy on the life of the Company's chief executive officer. No expense was accrued under the Plan in 1995; the cost of the related life insurance is $13,805. Note 7 - Commitments At December 31, 1995, the Company had outstanding commitments to purchase calculator and installation components in the amount of $164,000. Commitments at December 31, 1995 under a noncancellable operating lease for office space and warehouse space are as follows: 1996 - $40,661 and 1997 - $9,900. . Total rent expense for the years ended December 31, 1995 and 1994 was $47,470 and $45,956, respectively. Note 8 - Other Financial Information One customer accounted for 51% and 75% of the Company's total revenues for the years ended December 31, 1995 and 1994 respectively. Export sales were $3,300 and $310,388 for the years ended December 31, 1995 and 1994, respectively. The carrying amounts of the Company's borrowings under its short and long-term variable rate bank debt obligations approximate their fair values. Note 9 - Quarterly Financial Data (Unaudited) Selected comparative fourth quarter data are as follows:
1995 1994 -------------------------- Revenues $ 139,186 $ 39,737 Costs and expenses 563,450 233,294 -------------------------- Operating loss (424,264) (193,557) Interest expense 156,945 126,761 -------------------------- Income (loss) before provision for income taxes (581,209) (320,318) Provision (benefit) for income taxes (3,910,000) - -------------------------- Net income (loss) 3,328,791 (320,318) Preferred stock dividends 27,927 27,927 -------------------------- Net income (loss) applicable to common stock $ 3,300,864 $(348,245) ========================== Net income (loss) per common share: Primary $ .63 $ (.09) ==========================
F-14 Fully diluted $ .60 $ (.09) ==========================
ADDVANTAGE MEDIA GROUP, INC. BALANCE SHEETS
March 31, December 31, 1996 1995 --------------------------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 8,344 $ 20,444 Accounts receivable 316,563 6,926 Deferred income taxes 667,000 667,000 Other current assets 5,491 8,514 --------------------------- Total current assets 997,398 702,884 Property and equipment, at cost: Calculators 1,035,755 749,107 Office and production equipment 351,142 341,575 Furniture and fixtures 64, 417 64,417 --------------------------- 1,451,314 1,155,099 Accumulated depreciation 364,544 331,385 --------------------------- 1,086,770 823,714 Deferred income taxes 3,243,000 3,243,000 Patent, net of accumulated amortization of $468,237 and $445,533 at March 31, 1996 and December 31, 1995, respectively 439,873 462,577 Deferred charges 45,847 12,064 --------------------------- Total assets $5,812,888 $5,244,239 ===========================
F-15 ADDVANTAGE MEDIA GROUP, INC. BALANCE SHEETS
March 31, December 31, 1996 1995 ---------------------------- Liabilities and Stockholders' Equity (Unaudited) (Net Capital Deficiency) Current liabilities: Note payable to bank $ 700,000 $ 519,968 Notes payable to shareholders and directors 176,808 176,808 Accounts payable 589,842 558,748 Accrued interest 368,837 252,677 Other accrued liabilities 667,280 687,782 Accrued preferred stock dividends 444,400 416,777 Unearned advertising revenue 234,900 - Total current liabilities 3,182,067 2,612,760 Long-term obligations 554,938 515,163 Long-term bank debt 3,406,656 3,406,656 Stockholders' equity (net capital deficiency) Preferred stock, $1.00 par value, 1,000,000 shares authorized; Series A, 10% cumulative convertible, preferred stock - 277,750 shares issued and outstanding at March 31, 1996 and December 31, 1995; liquidation preference, 927,167 927,167 $1,111,000 Common stock, $.01 par value, 10,000,000 shares authorized; 4,942,620 and 4,927,620 shares issued and outstanding at March 31, 1996 and December 31, 1995, respectively 49,426 49,276 Capital in excess of par value 5,995,590 5,991,428 Accumulated deficit (8,302,956) (8,258,211) ---------------------------- Net capital deficiency (1,330,773) (1,290,340) ---------------------------- Total liabilities and net capital deficiency $ 5,812,888 $ 5,244,239 ============================
F-16 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 1996 1995 ------------------------------- Revenues: Advertising $ 604,800 $ - Sales of calculators 2,033 13,728 Other 235 56 ------------------------------- 607,068 13,784 Costs and expenses: Cost of advertising services 219,140 45,034 Cost of sales of calculators 1,662 4,748 Selling expenses 5,957 12,067 General and administrative expenses 266,320 120,999 Litigation expense - 50,607 ------------------------------- 493,079 233,455 ------------------------------- Operating income (loss) 113,989 (219,671) Interest expense 131,111 115,565 ------------------------------- Net loss (17,122) (335,236) Preferred stock dividends (27,623) (27,623) ------------------------------- Net loss applicable to common stock $ (44,745) $ (362,859) =============================== Net loss per common share $(0.01) $(0.09) =============================== Shares used in computing net loss per common share 5,515,644 3,908,620 ===============================
F-17 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1996 1995 ------------------------------- Operating Activities Net loss $ (17,122) $(335,236) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 55,863 37,842 Long-term obligation accrual 39,775 2,241 Changes in assets and liabilities: Accounts receivable (309,638) (663) Inventory - 4,482 Other current assets 3,023 2,588 Deferred charges (33,783) 3,251 Accounts payable 31,095 17,818 Accrued interest 116,160 112,060 Other accrued liabilities (20,502) 37,963 Unearned advertising revenue 234,900 - ------------------------------- Net cash provided by (used in) operating 99,771 (117,654) activities Investing Activities Purchases of property and equipment (296,215) - ------------------------------- Net cash used in investing activities (296,215) -
F-18 ADDVANTAGE MEDIA GROUP, INC. STATEMENTS OF CASH FLOWS (continued) (UNAUDITED)
Three Months Ended March 31, 1996 1995 ------------------------------- Financing Activities Proceeds from issuance of bank notes $180,032 $ - Proceeds from issuance of investor notes - 220,000 Exercise of stock options 4,312 - ------------------------------- Net cash provided by financing activities 184,344 220,000 ------------------------------- Increase (decrease) in cash (12,100) 102,346 Cash and cash equivalents, beginning of period 20,444 169 ------------------------------- Cash and cash equivalents, end of period $ 8,344 $102,515 ===============================
F-19 NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - 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 B - DESCRIPTION OF THE BUSINESS The Company markets and sells in-store advertising to national advertisers. The advertising is positioned on the Company's solar powered calculators attached to the handles of mass merchants' shopping carts. The calculators are patented and registered under the trademark "Shoppers Calculators". The Company also sells Shoppers Calculators(R) to third parties, including independent retailers and international licensees. The Company entered into separate agreements with Wal-Mart Stores, Inc. ("Wal-Mart") in July 1993 and June 1994 which provided for the installation of the Company's calculators in certain Wal-Mart stores. These contracts were never implemented, and in January 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 in settlement of the lawsuit. Under the terms of a new four-year contract, the Company will install and maintain Shoppers Calculators(R) in all of Wal-Mart's Supercenters in the continental United States and Wal-Mart is responsible for selling the advertising for the calculators during the initial phase of the contract. During the term of the contract in which Wal-Mart is responsible for selling the advertising, Wal-Mart has agreed to guarantee advertising revenues to the Company in excess of $23.5 million, subject to the Company's obligation to install and service the Shoppers Calculators(R) during the revenue guaranty period. After the Company has received payment of the total guaranteed advertising revenues, the Company has the option to continue the contract and assume the advertising sales responsibilities for the program. 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 March 31, 1996, cumulative advertising revenues have totaled $731,700 reducing the guaranteed advertising revenues to be received in future periods to $22,823,100. Certain terms of the contract were determined based on the following assumed schedule with respect to the number of Supercenter stores to be participating in the Company's program. The following table sets forth the assumed schedule of Supercenter installations pursuant to the Wal-Mart contract's operating plan and the actual installations in Supercenters to date. F-20
Operating Plan Actual Installations ------------------------- -------------------------- Stores to Shopping Carts Stores Shopping Year be Added to be added Installed Carts Installed - ------- --------- -------------- --------- --------------- 1995 33 39,600 41 31,925 1996 200 240,000 116/(1)/ 87,297/(1)/ 1997 100 120,000 N/A N/A 1998 100 120,000 N/A N/A --- ------- --------- --------------- Total 433 519,600 === =======
- ------------ /(1)/ Through April 30, 1996. The Company currently plans to complete installations in 278 Supercenters during 1996. The cost of Shoppers Calculator components and installation hardware not yet installed was $223,789 at March 31, 1996, and is included in the balance sheet under property and equipment. F-21 ================================================================================ No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any securities other than those to which it relates or an offer to any person in any jurisdiction where such offer or solicitation would be lawful. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. __________________________ TABLE OF CONTENTS
Page ---- Summary............................... 1 Risk Factors.......................... 5 Use of Proceeds....................... 9 Plan of Distribution.................. 9 Redeemable Common Stock Purchase Warrants................... 10 Selected Financial Data............... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 Business.............................. 16 Management............................ 25 Principal Stockholders................ 29 Certain Transactions.................. 31 Description of Securities............. 32 Market for Securities................. 34 Legal Opinions........................ 35 Experts............................... 35 Additional Information................ 35 Financial Statements.................. F-1
_______________________________ ================================================================================ ================================================================================ ADDvantage Media Group, Inc. 660,000 Shares of Common Stock and 60,000 Units, Each Consisting of Two Shares of Common Stock and One Redeemable Common Stock Purchase Warrant _______________________________ PROSPECTUS _______________________________ ________, 1996 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers The Registrant's Amended Certificate of Incorporation ("Certificate of Incorporation") and Bylaws provide that each person who was or is made a party to, or is involved in, any action, suit or proceeding by reason of the fact that he or she was a director or officer of the Registrant (or was serving at the request of the Registrant as a director, officer, employee or agent for another entity) will be indemnified and held harmless by the Registrant, to the fullest extent not prohibited by the Oklahoma General Corporation Act. Under Section 1031 of the Oklahoma General Corporation Act, a corporation may indemnify a director, officer, employee or agent of the corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In the case of an action brought by or in the right of a corporation, the corporation may indemnify a director, officer, employee or agent of the corporation against expenses (including attorneys' fees) actually and reasonably incurred by him or her if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless a court finds that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. The Registrant's Certificate of Incorporation ("Certificate of Incorporation") provides that to the maximum extent permitted by the Oklahoma General Corporation Act, a director of the Registrant shall not be liable to the Registrant or its shareholders for monetary damages for breach of fiduciary duty as a director. The Oklahoma General Corporation Act permits Oklahoma corporations to include in their certificates of incorporation a provision eliminating or limiting director liability for monetary damages arising from breaches of their fiduciary duty. The only limitations imposed under the statute and the Registrant's Certificate of Incorporation are that the provision may not eliminate or limit a director's liability (i) for breaches of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or involving intentional misconduct or known violations or law, (iii) for the payment of unlawful dividends or unlawful stock purchases or redemptions, or (iv) for transactions in which the director derived an improper personal benefit. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth the estimated costs and expenses to be incurred by the Company, other than commissions, in connection with the transactions described in the Registration Statement.
Accounting fees and expenses.. $ 10,000 Legal Fees and expenses....... 25,000 Printing and copying.......... 8,000 Blue Sky fees and expenses.... 5,000 Miscellaneous................. 2,000 ----------- Total..................... $ 50,000 ===========
II-1 Item 26. Recent Sales of Unregistered Securities. Set forth in chronological order is information regarding securities sold by the Company within the past three years, the consideration received by the Company for such securities and the section of the Securities Act of 1933, as amended (the "Securities Act"), or rule of the Securities and Exchange Commission under which exemption from registration was claimed. None of the sales of securities set forth below were registered under the Securities Act. No underwriter was utilized in connection with the sale of such securities and, except as noted below, no commissions were paid in connection with such sales. The securities described below are restricted securities that may not be sold or otherwise transferred absent registration under the Securities Act or the availability of an exemption from the registration requirements of the Securities Act, and each certificate evidencing the securities owned by each purchaser bears a legend to that effect. 1. On February 22, 1993, the Company completed an offering to Richard Friedman of 80,000 shares of Common Stock and 80,000 warrants, each of which entitling the holder to purchase one share of Common Stock at a price of $2.00 per share and having an exercise term of six months, for total consideration of $100,000. The offer and sale of the securities were made pursuant to the requirements of Rule 505 of Regulation D. 2. On October 28, 1994, the Company completed the sale of 50,000 shares to Curtis L. Ivey at a price of $1.00 per share. The offer and sale of the shares of Common Stock were made pursuant to the requirements of Rule 505 of Regulation D. In connection with the sale of the Common Stock, the Company paid a commission of $3,500 to Culverwell & Co., Inc., as selling agent. 3. On May 24, 1995, the Company issued 200,000 shares of Common Stock to Timothy J. Hayes in satisfaction of an outstanding account payable to Timmer Leasing Company of $75,000. The issuance of Common Stock was made in reliance on the exemption from registration available under Section 4(2) of the Securities Act. 4. On October 1, 1995, the Company issued 9,000 shares of Common Stock to Westerguard Publishing Company in satisfaction of an outstanding account payable in the amount of $9,000. The issuance of Common Stock was made in reliance on the exemption from registration available under Section 4(2) of the Securities Act. 5. On October 1, 1995, the Company issued 25,000 shares of Common Stock to its legal counsel in the Wal-Mart litigation, Everett, Shemin, Mars & Stills, in consideration for legal services having an estimated value of $62,500. The issuance was made in reliance on the exemption from registration available under Section 4(2) of the Securities Act. 6. In March 1995, the Company completed an offering consisting of (a) 500,000 warrants, each of which entitles the holder thereof to purchase one share of Common Stock of the Company at a price of $0.20 per share, exercisable for a two-year term from date of issuance; (b) promissory notes in an aggregate principal amount of $200,000, bearing interest at a rate of 10% per annum; and (c) a total of 10% of the net recovery, if any, from the Company's litigation with Wal-Mart Stores, Inc. The aggregate offering price received was $200,000. The offer and sale of the securities were made pursuant to the requirements of Rule 506 of Regulation D. Persons purchasing the securities were as follows: David A. Cole Donald R. Conway Richard S. Friedman Larre Barrett Timothy J. Hayes Fred Karp Robert W. Davis Edward G. Culverwell Todd and Sue Ellen Young Charles H. Hood William S. Atherton Gary W. Young Robert J. Koenig 7. On March 29, 1995, the Company issued 50,000 warrants, each of which entitles the holder thereof to purchase one share of the Company's Common Stock at a price of $0.25 per share and is exercisable within two years from II-2 the date of issuance, to Culverwell & Company, Inc., in consideration for services rendered during 1995. The issuance was made in reliance on the exemption from registration available under Section 4(2). 8. On September 30, 1995, the Company issued 50,000 warrants, each of which entitles the holder thereof to purchase one share of the Company's Common Stock at a price of $1.00 per share, and is exercisable within two years from the date of issuance, to L. G. Zangani in consideration for certain public relations services during 1994 and 1995. The issuance was made in reliance on the exemption from registration available under Section 4(2) of the Securities Act. Item 27. Exhibits and Financial Statement Schedules (a) Exhibits: -------- *1.1 Selling Agreement between the Company and Culverwell & Co., Inc. *1.2 Form of Warrant Solicitation Agent and Exercise Fee Agreement between the Company and Culverwell & Co., Inc. *3.1 Certificate of Incorporation and amendments thereto. 3.2 Fourth Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-49892 (the "S-1 Registration Statement")). *3.3 Bylaws. 4.1 Certificate of Designation, Preferences, Rights and Limitations of Series A 10% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *4.2 Warrant Agreement. *4.3 Form of Warrant (included as Exhibit A to Warrant Agreement). 4.4 First Supplement and Amendment to Warrant Agreement, dated June 25, 1994. 4.5 Second Supplement and Amendment to Warrant Agreement, dated June 25, 1995. *5.1 Opinion of Conner & Winters, A Professional Corporation, as to the legality of the securities being registered. *10.1 ADDvantage Media Group, Inc. 1991 Employee Stock Plan. 10.2 Loan Agreement for $1,800,000 line of credit dated June 5, 1992, between the Company and F&M Bank and Trust Company, as amended (incorporated by reference to Exhibit 10.5 to the S-1 Registration Statement). 10.3 Amendment dated December 16, 1992 to the Loan Agreement (incorporated by reference to Exhibit 10.5a to the S-1 Registration Statement). 10.4 Promissory Note for $100,000 line of credit dated September 17, 1992, between the Company and F&M Bank and Trust Company and related agreements, guaranties and promissory notes between the Company and its directors (incorporated by reference to Exhibit 10.6 to the S-1 Registration Statement). 10.5 Promissory Note for $125,000 line of credit dated October 29, 1992, between the Company and F&M Bank and Trust Company (incorporated by reference to Exhibit 10.8 to the S-1 Registration Statement). II-3 *10.6 Shopper's Calculator Contract, dated as of September 1, 1995, between the Company and Wal-Mart Stores, Inc., as amended by the First Amendment to the Shopper's Calculator Contract, the Second Amendment to the Shopper's Calculator Contract and the Third Amendment to the Shopper's Calculator Contract. 10.7 Promissory Note for $700,000 from the Company to The F&M Bank & Trust Company dated September 5, 1995 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). 10.8 ADDvantage Media, Inc. Supplemental Executive Retirement Plan effective December 7, 1995, and Subsequently Amended March 14, 1996 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). *10.9 Letter Agreement between the Company and The F&M Bank & Trust Company dated March 6, 1996, with respect to $3,406,655.66 credit facility. 10.10 Promissory Note for $3,406,655.66 from the Company to The F&M Bank and 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). 10.11 Agreement dated June 3, 1996, between the Company and Kmart Corporation. 11.1 Statement re: computation of per share earnings (incorporated by reference to Exhibit 11.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). 23.1 Consent of Tullius Taylor Sartain & Sartain. *23.2 Consent of Conner & Winters, A Professional Corporation (included in opinion filed as Exhibit 5.1). *24.1 Power of Attorney. *27.1 Financial Data Schedule. _____________________ *Previously filed as an exhibit to this Registration Statement. Item 28. Undertakings. 1. The Registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; (iii) include any additional or changed material information on the plan of distribution. (b) For determining liability under the Securities Act of 1933, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. II-4 (c) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions discussed in Item 24 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Post- Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tulsa, State of Oklahoma, on June 11, 1996. ADDVANTAGE MEDIA GROUP, INC. By: /s/ Gary W. Young ------------------ Gary W. Young Executive Vice President In accordance with the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment to the Registration Statement was signed by the following persons in the capacities and on the dates stated. Signatures Title Date ---------- ----- ---- /s/ Charles H. Hood President and Director June 11, 1996 - --------------------- (Principal Executive Officer) Charles H. Hood /s/ Gary W. Young Executive Vice President - Finance and June 11, 1996 - --------------------- Administration, Treasurer and Director Gary W. Young (Principal Financial Officer and Principal Accounting Officer) Director - --------------------- J. Larre Barrett /s/ John W. Condon Director June 11, 1996 - --------------------- John W. Condon II-6 INDEX TO EXHIBITS Sequentially Numbered Exhibit No. Description Page - ----------- ----------- -------- *1.1 Selling Agreement between the Company and Culverwell & Co., Inc. *1.2 Form of Warrant Solicitation Agent and Exercise Fee Agreement between the Company and Culverwell & Co., Inc. *3.1 Certificate of Incorporation and amendments thereto. 3.2 Fourth Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-49892 (the "S-1 Registration Statement")). *3.3 Bylaws. 4.1 Certificate of Designation, Preferences, Rights and Limitations of Series A 10% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *4.2 Warrant Agreement. *4.3 Form of Warrant (included as Exhibit A to Warrant Agreement). 4.4 First Supplement and Amendment to Warrant Agreement dated June 25, 1994. 4.5 Second Supplement and Amendment to Warrant Agreement dated June 25, 1995. *5.1 Opinion of Conner & Winters, A Professional Corporation, as to the legality of the securities being registered. *10.1 ADDvantage Media Group, Inc. 1991 Employee Stock Plan. 10.2 Loan Agreement for $1,800,000 line of credit dated June 5, 1992, between the Company and F&M Bank and Trust Company, as amended (incorporated by reference to Exhibit 10.5 to the S-1 Registration Statement). 10.3 Amendment dated December 16, 1992 to the Loan Agreement (incorporated by reference to Exhibit 10.5a to the S-1 Registration Statement). 10.4 Promissory Note for $100,000 line of credit dated September 17, 1992, between the Company and F&M Bank and Trust Company and related agreements, guaranties and promissory notes between the Company and its directors (incorporated by reference to Exhibit 10.6 to the S-1 Registration Statement). 10.5 Promissory Note for $125,000 line of credit dated October 29, 1992, between the Company and F&M Bank and Trust Company (incorporated by reference to Exhibit 10.8 to the S-1 Registration Statement). *10.6 Shopper's Calculator Contract, dated as of September 1, 1995, between the Company and Wal-Mart Stores, Inc., as amended by the First Amendment to the Shopper's Calculator Contract, the Second Amendment to the Shopper's Calculator Contract and the Third Amendment to the Shopper's Calculator Contract. 10.7 Promissory Note for $700,000 from the Company to The F&M Bank & Trust Company dated September 5, 1995 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). 10.8 ADDvantage Media, Inc. Supplemental Executive Retirement Plan effective December 7, 1995, and subsequently Amended March 14, 1996 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). *10.9 Letter Agreement between the Company and The F&M Bank & Trust Company dated March 6, 1996, with respect to $3,406,655.66 credit facility. 10.10 Promissory Note for $3,406,655.66 from the Company to The F&M Bank and 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). 10.11 Agreement dated June 3, 1996, between the Company and Kmart Corporation. 11.1 Statement re: computation of per share earnings (incorporated by reference to Exhibit 11.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995). 23.1 Consent of Tullius Taylor Sartain & Sartain. *23.2 Consent of Conner & Winters, A Professional Corporation (included in opinion filed as Exhibit 5.1). *24.1 Power of Attorney. *27.1 Financial Data Schedule. _____________________ *Previously filed as an exhibit to this Registration Statement. EX-4.4 2 FIRST WARRANT AGREEMENT DATED JUNE 25, 1994 EXHIBIT 4.4 FIRST SUPPLEMENT AND AMENDMENT TO WARRANT AGREEMENT This First Supplement and Amendment to Warrant Agreement, dated as of June 25, 1994 (this "Supplement"), is made between ADDVANTAGE MEDIA GROUP, INC., an Oklahoma corporation (the "Company"), and NORTH AMERICAN TRANSFER CO. (the "Warrant Agent"). WHEREAS, the Company and Warrant Agent have heretofore executed and delivered a Warrant Agreement, dated as of June 26, 1991 (the "Warrant Agreement"); and WHEREAS, capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Warrant Agreement; and WHEREAS, pursuant to Section 2.2 of the Warrant Agreement, the original Expiration Date for exercising the Warrants was 5:00 p.m., New York Time on June 25, 1994; and WHEREAS, the Company desires to extend the Expiration Date for exercising the Warrants for an additional one-year period and, with the concurrence of the Warrant Agent, amend the Warrant Agreement as set forth in this Supplement to provide for the further extension of the Expiration Date; and WHEREAS, the Board of Directors of the Company has duly adopted a resolution authorizing the execution and delivery of this Supplement by the Company. NOW THEREFORE, in consideration of the premises and mutual agreements herein set forth, the parties hereto agree as follows. 1. Amendment to Warrant Agreement. The first sentence of Section 2.2 of ------------------------------ the Warrant Agreement is hereby amended and shall read in its entirety as follows: "Each Warrant may be exercised at any time after June 25, 1992 but not after 5:00 p.m., New York Time on June 25, 1995 (the "Expiration Date")." 2. General. Except as amended by this Supplement, all terms and ------- provisions of the Warrant Agreement shall remain in full force and effect in accordance with their terms. All reference to the Warrant Agreement in any other agreement or document shall, from and after the date hereof, be deemed to refer to the Warrant Agreement as so amended. 3. Effectiveness. This Supplement shall be effective as of the ------------- day and year first above written upon the due execution and delivery of this Supplement by each of the parties. 4. Multiple Counterparts. This Supplement may be executed in any --------------------- number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties may execute this Supplement by signing any such counterpart. IN WITNESS WHEREOF, the parties have caused this Supplement to be duly executed as of the day and year first written above. ADDVANTAGE MEDIA GROUP, INC. By: /s/ Gary W. Young ----------------------- Gary W. Young Executive Vice President NORTH AMERICAN TRANSFER CO. By: /s/ Mildred Rostholder ----------------------- Name: Mildred Rostholder ----------------------- Title: Principal ----------------------- EX-4.5 3 SECOND WARRANT AGREEMENT DATED JUNE 25, 1995 EXHIBIT 4.5 SECOND SUPPLEMENT AND AMENDMENT TO WARRANT AGREEMENT This Second Supplement and Amendment to Warrant Agreement, dated as of June 25, 1995 ("Second Supplement"), is made between ADDVANTAGE MEDIA GROUP, INC., an Oklahoma corporation (the "Company"), and NORTH AMERICAN TRANSFER CO. (the "Warrant Agent"). WHEREAS, the Company and Warrant Agent have heretofore executed and delivered a Warrant Agreement, dated as of June 26, 1991 (the "Warrant Agreement"); and WHEREAS, capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Warrant Agreement; and WHEREAS, pursuant to Section 2.2 of the Warrant Agreement, the original Expiration Date for exercising the Warrants was 5:00 p.m., New York Time on June 25, 1994; and WHEREAS, pursuant to that certain First Supplement and Amendment to Warrant Agreement dated as of June 25, 1994 (the "First Supplement"), the Company and the Warrant Agent agreed to extend the Expiration Date for exercising the Warrants from June 25, 1994 to June 25, 1995; and WHEREAS, the Company desires to further extend the Expiration Date for exercising the Warrants for an additional one-year period and, with the concurrence of the Warrant Agent, amend the Warrant Agreement as set forth in this Second Supplement to provide for the further extension of the Expiration Date; and WHEREAS, the Board of Directors of the Company has duly adopted a resolution authorizing the execution and delivery of this Second Supplement by the Company. NOW THEREFORE, in consideration of the premises and mutual agreements herein set forth, the parties hereto agree as follows. 1. Amendment to Warrant Agreement. The first sentence of Section 2.2 of ------------------------------ the Warrant Agreement, as amended by the First Supplement, is hereby further amended and shall read in its entirety as follows: "Each Warrant may be exercised at any time after June 25, 1992 but not after 5:00 p.m., New York Time on June 25, 1996 (the "Expiration Date")." 2. General. Except as amended by this Second Supplement, all terms and ------- provisions of the Warrant Agreement, as amended by the First Supplement, shall remain in full force and effect in accordance with their terms. All reference to the Warrant Agreement in any other agreement or document shall, from and after the date hereof, be deemed to refer to the Warrant Agreement as so amended. 3. Effectiveness. This Second Supplement shall be effective as of the ------------- day and year first above written upon the due execution and delivery of this Second Supplement by each of the parties. 4. Multiple Counterparts. This Second Supplement may be executed in any --------------------- number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties may execute this Second Supplement by signing any such counterpart. IN WITNESS WHEREOF, the parties have caused this Second Supplement to be duly executed as of the day and year first written above. ADDVANTAGE MEDIA GROUP, INC. By: /s/ Gary W. Young ---------------------- Gary W. Young Executive Vice President NORTH AMERICAN TRANSFER CO. By: /s/ Mildred Rostholder ---------------------- Name: Mildred Rostholder ---------------------- Title: Principal ---------------------- EX-10.11 4 SHOPPER'S CALCULATOR PROGRAM AGREEMENT EXHIBIT 10.11 AGREEMENT SHOPPER'S CALCULATOR PROGRAM ---------------------------- This Agreement is made this 3rd day of June , 1996 by and ------------ ---------------------- between ADDvantage Media Group, Inc. located at Meridian Tower, Suite 1080, 5100 E. Skelly Drive Tulsa, OK 74135 (hereinafter "AMG") and Kmart Corporation, located at 3100 W Big Beaver Road Troy, MI 48084 (hereinafter, "Kmart") WHEREAS, AMG is an advertising and promotion company that has developed and patented a shopping cart calculator for use by customers in retail stores; and WHEREAS, Kmart is engaged in the business of operating general merchandise and combination stores; and WHEREAS, AMG desires to operate a shopping cart calculator program in Kmart stores, pursuant to the terms and conditions detailed below. NOW THEREFORE, in consideration of the mutual covenants, terms and conditions contained herein, the parties agree as follows: 1. Shopper's Calculator (a) During the term of this Agreement, Kmart -------------------- hereby grants AMG the right to install, maintain and operate shopping cart calculators, complete with an integral advertising panel (the "Units"), on the shopping carts in Kmart and Super Kmart Center stores ("the Stores") agreed to by the parties from time to time. AMG will install a Unit on all shopping carts (except for carts with child seats) in each designated store. The Units and the Shopper's Calculator program (the "Program") will be supplied, installed, maintained and operated at no cost or expense to Kmart or the Stores, and all costs and expenses incurred in connection with the performance of this Agreement shall be the responsibility of AMG. AMG shall also be solely responsible for obtaining advertisers to participate in the Program to place advertisements on the advertising panel located on the Units. It is Kmart's understanding, that AMG will pursue advertising/promotional funds from manufacturers for the Program that are not currently available to Kmart through it's existing promotional and advertising programs. (b) AMG's Units will be maintained and operated in the Stores on a non- exclusive basis. AMG acknowledges that nothing contained in this Agreement shall prevent Kmart from conducting other in-store advertising programs in the stores or otherwise limit Kmart's right to contract for competing in- store advertising and promotional programs with any other company. Provided, however, in no event shall any competing program be permitted to obstruct any of the Units supplied by AMG. Further, nothing contained in this Agreement shall be interpreted to require Kmart to allow the installation of the Units in any minimum number of Stores or create any expectation on behalf of AMG that the Program will continue in the Stores for any specific duration. 2. The Stores. AMG will be permitted to install and operate its Units in ----------- the Kmart and Super Kmart Centers Stores designated by Kmart as listed on the attached Exhibit A, as may be amended from time to time. The Units shall be rolled out to the participating Stores based on a rollout schedule agreed to by the parties. AMG shall provide Kmart with an initial rollout schedule for Kmart's review and approval, which approval shall not be unreasonably withheld. Provided, however, Kmart reserves the right to exclude the Units from any store if Kmart determines that it does not want the Units installed 1 and operated in a particular store. From time to time, Kmart will provide AMG with a list of new Stores that are scheduled to open as well as a list of Stores scheduled to close. 3. Commission. (a) In consideration of the rights granted herein, AMG ----------- agrees to pay Kmart, without demand, a fee equal to fifteen (15) percent of the gross advertising revenue generated from advertisers placing advertising on the Units installed and operated in the Stores. Advertising on the Units will be conducted by AMG in consecutive four (4) week cycles beginning with the installation of the initial Units. AMG shall pay to Kmart the fee detailed above within thirty (30) days after the end of each cycle for revenue generated during the previous cycle and received by AMG prior to the fee payment date. As used herein, the term gross advertising revenue shall mean the full amount payable by any advertiser (before the deduction of any agency and/or production expenses) to advertise on the Units in the Stores. (b) Kmart shall have the right, at Kmart's expense and during normal business hours, to review and/or audit the books and records of AMG as they relate to the conduct of the Shopper's Calculator program in the Stores and the advertising revenue generated pursuant to the program, upon reasonable advance notice to AMG. During such an audit, upon completion of a Letter of Confidentiality, AMG shall provide to Kmart information detailing the full amounts billed to each advertiser participating in the Program. 4. Term/Termination. (a) This Agreement shall commence on the date first ----------------- written above and shall continue in effect for an initial term of one year. Thereafter, this Agreement shall extend on a month to month basis and may be terminated by either party at any time, without cause, on sixty (60) days prior written notice. In addition, this Agreement may be immediately terminated by either party in the event of (i) a material breach of the Agreement of the Agreement by the other party, (ii) a material failure of any covenant, representation or warranty set forth herein, (iii) the insolvency of, or the institution of proceeding by or against the other party under any federal or state bankruptcy or insolvency laws, (iv) an assignment for the benefit of all or substantially all of its creditors or (v) the cessation of operations by the other party. (b) Upon termination of this Agreement for any reason, AMG shall promptly remove all Units from the Stores, regardless of when such Units were installed. Further, neither party shall have any liability to the other party as a result of or in consequence of any without cause termination as provided above, for any loss or damage caused by such termination, including, but not limited to, any loss of future profits, and/or any expenses incurred or claimed to have been incurred by the other party in alleged reliance upon the continued effectiveness of this Agreement, such as for, among other things, development of business, procuring customers, expenditures or commitments made in connection with such party's business, or for any other cause, provided that the forgoing shall not be construed to affect any indebtedness than due and owing between the parties. 5. Title and Risk of Loss. (a) The Units installed in the Stores shall ----------------------- remain the property of AMG. Nothing contained in this Agreement shall give or convey to Kmart any right, title or interest in or to the Units. (b) Risk of loss or damage to the Units installed in the Stores, from whatever cause, shall be the sole responsibility of AMG. Under no circumstances shall Kmart be liable to AMG or any other party for any lost, stolen or damaged Units that are utilized in the Program. Provided that, AMG shall have the right to remove Units from any store based on excessive damage or disappearance of the Units. 2 6. Advertising. All advertising to be placed on the Unites located in the ------------ stores is subject to the prior approval of Kmart. AMG shall forward such material to Kmart for approval. Kmart shall notify AMG within three (3) working days of its objection to any proposed advertising material. In the event Kmart fails to so notify AMG regarding any objections to the material, the material shall be deemed approved. 7. Field Service. AMG shall provide, at its sole expense, all service and -------------- maintenance necessary to keep the Units in good working order while installed in the Stores. Kmart shall permit AMG or its representatives reasonable access to the Units during normal business hours to service the Units. 8. Indemnification: (a) AMG shall reimburse, indemnify, defend, and hold --------------- Kmart harmless from and against any damage, loss, expense or penalty or any claim or action therefore, by or on behalf of any person, arising out of the performance or failure of performance of this Agreement, including, but not limited to, personal injury and death claims and all claims of AMG's employees and agents whether for injury, death, compensation, social security, pension, unemployment compensation, etc. AMG shall not be relieved of its obligation to indemnify Kmart based on allegations that Kmart was in any manner negligent. (b) AMG agrees to reimburse, indemnify, defend and hold harmless Kmart from and against any damage, loss, expense or penalty, or any claim or actions therefore by or on behalf of any person, including claims of personal injury and death occurring in connection with the installation, operation, maintenance, use or repair of the Units. (c) AMG shall reimburse, indemnify, defend and hold Kmart harmless from and against all third-party claims asserted against Kmart alleging that any equipment furnished under this Agreement infringe any patent, copyright, trademark or other proprietary right or constitute a misuse of any trade secret information and shall pay all costs, attorney fees, settlement payments and damages arising in connection with any such claims. Kmart agrees to timely advise AMG of any such suit, claim or proceeding and to extend reasonable cooperation to AMG in the defense or settlement of such suit, claim or proceeding, but AMG shall have sole control thereof. 9. Insurance. AMG shall, during the performance of this Agreement, ---------- maintain the following insurance coverage as indicated with insurers in good standing and authorized to do business under the laws of the state(s) where performance shall occur: (a) Comprehensive General Liability including without limitation Contractual Liability and Products Liability, with broad form property damage and bodily injury (including Personal Injury) coverage. The minimum limits for each shall be $1,000,000 per occurrence and $2,000,000 annual aggregate. (b) Worker's Compensation and Employers' Liability with minimum limits of $500,000 per accident, $500,000 disease (each employee) and $1,000,000 disease (policy limits). 10. Independent Contractor. AMG is and at all times shall be an ----------------------- independent contractor in the performance of this Agreement and is not authorized to bind Kmart to any agreement or contract, or in any other manner, with any third party. No employer-employee, partnership, franchise, agency or joint venture relationship exists or will exist between the parties. AMG shall exercise control over its employees and agents and shall be solely responsible for the verification of identity and employment eligibility, for the payment of any wages, salaries or other remuneration of its employees and agents and for the payment of any payroll taxes, contributions for unemployment or workers' compensation, 3 social security, pensions or annuities which are imposed as a result of the employment of AMG's employees and/or agents. 11. Force Majeure. Neither party shall be liable to the party for any -------------- failure, inability or delay in performance of its obligation hereunder is such failure or delay is caused by circumstances beyond the control or without the fault of the offending party. By way of example and not limitation, such causes may include, acts of war, strike, fire, explosion, sabotage, accident, any governmental law, order or regulation or any other cause beyond the control of the parties which renders performance commercially impractical. 12. Limitation on Damages. NEITHER PARTY SHALL BE LIABLE TO THE OTHER ---------------------- UNDER THIS AGREEMENT OR AS A RESULT OF THE TERMINATION THEREOF FOR ANY CONSEQUENTIAL, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES REGARDLESS OF WHETHER THE OTHER PARTY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES AND WITHOUT REGARD TO THE NATURE OF THE CLAIM OR THE UNDERLYING THEORY OR CAUSE OF ACTION, AND EACH PARTY HEREBY WAIVES ITS RIGHT TO ALL SUCH DAMAGES. Integration. This Agreement is intended as the complete, final and ------------ exclusive statement of the terms of agreement between AMG and Kmart and supersedes all prior oral and written agreements, understandings, commitments and practices between the parties relating to the placement and operation of Units in the Stores. Any and all such prior agreements and understandings shall be considered null and void as of the effective date of this Agreement. 14. CHOICE OF MICHIGAN LAW AND FORUM. THIS AGREEMENT SHALL BE DEEMED TO --------------------------------- HAVE BEEN EXECUTED AND DELIVERED IN TROY, MICHIGAN, AND SHALL BE CONSTRUED, INTERPRETED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MICHIGAN. AMG AGREES TO EXERCISE ANY RIGHT OR REMEDY IN CONNECTION WITH THIS AGREEMENT EXCLUSIVELY IN, AND HEREBY SUBMITS TO THE JURISDICTION OF, THE STATE OF MICHIGAN COURTS OF OAKLAND COUNTY, MICHIGAN OR THE UNITED STATES DISTRICT COURT AT DETROIT, MICHIGAN. Agreed to and Accepted: Kmart Corporation ADDvantage Media Group, Inc. By: /s/ Cecil B Kearse By: /s/ Charles H. Hood ---------------------------------- --------------------------- Name: CECIL KEARSE Name: Charles H. Hood -------------------------------- -------------------------- VICE PRESIDENT - MERCHANDISE Title: PRESENTATION AND COMMUNICATION Title: President ------------------------------- ------------------------ 4 EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated March 6, 1996 on the financial statements of ADDvantage Media Group, Inc. at December 31, 1995 and 1994, included in or made a part of this Post-Effective Amendment No. 3 to Form SB-2 Registration Statement. TULLIUS TAYLOR SARTAIN & SARTAIN Tulsa, Oklahoma June 11, 1996 -----END PRIVACY-ENHANCED MESSAGE-----