<PAGE>
As filed with the Securities and Exchange Registration No. 333-8935
Commission on December 4, 1997
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO THE FORM S-1 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 2721 54-1799019
- -------- ------------- ----------
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Classification Identification
Incorporation or Number) Number)
Organization)
------------------------
1320 Old Chain Bridge Road -- Suite 220
McLean, Virginia 22101
(703) 883-1836
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
------------------------
Copy To:
Carl N. Duncan, Esq.
Duncan, Blum & Associates
5718 Tanglewood Drive
Bethesda, Maryland 20817
(301) 263-0200
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the
Registration Statement
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [x].
- --------------------------------------------------------------------------------
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 an amendment which specifically states that the Registration
Statement shall thereafter become effective in accordans with Section 8 (a)
of the Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Securities and Exchange commission,
acting pursuant to and section 8(a), may determine.
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
CROSS REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items of Form S-1)
An asterisk (*) under "Caption in Prospectus" indicates that the answer to
the item of Form S-1 Part I is negative or inapplicable.
<TABLE>
<CAPTION>
Items in Form S-1 Caption in Prospectus
- ----------------- ---------------------
<S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover of Prospectus............................ Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.............................................. Front Cover Page; Risk Factors
3. Summary Information and Risk Factors............................. Summary; Risk Factors
4. Use of Proceeds.................................................. Application of Proceeds
5. Determination of Offering Price.................................. Cover Page
6. Dilution......................................................... Dilution
7. Selling Security Holders......................................... *
8. Plan of Distribution............................................. Plan of Distribution
9. Description of Securities to be
Registered....................................................... Cover Page; Description of Capital Stock
10. Interest of Named Experts and Counsel............................ Conflicts of Interest
11. Information with Respect Cover Page; Summary;
to the Registrant................................................ The Company; Description of Capital Stock
12. Disclosure of Commission Position on Fiduciary Responsibility of
Indemnification for Securities Act Company's Management;
Liabilities...................................................... Description of Capital Stock
</TABLE>
<PAGE>
PROSPECTUS $12,500,000 DECEMBER 4, 1997
2,500,000 Shares of Common Stock
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
2,500,000 shares of common stock (the "Shares") are being offered hereby
by Heartland Communications & Management, Inc., a Delaware corporation (the
"Company), on a best-efforts, minimum-maximum basis. (See "Plan of
Distribution.") The Company will be engaged in a broad-based communications
and management business aimed at specific targeted markets, including the
development, production, marketing and syndication of advertising-supported
broadcast programs and print products. (See "The Company -- Specific
Projects Under Consideration.") These products are designed to meet the
expanding needs of the media business for creative content -- especially in
those segments, e.g., AM radio and newspaper publishing, in which syndicated
alternatives to locally-produced content are financially attractive. (See
"Prospectus summary -The Offering - Application of Proceeds.") At the
present time, all such investment opportunities are contingent on the
successful completion of this offering. Each of the currently contemplated
joint ventures requires the Company's investment to be substantially repaid
before any revenue sharing occurs with the creators of the idea(s).
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 SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION NOT CONTAINED IN THE
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANY PERSON
WITHIN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL.
MANAGING PLACEMENT AGENT
NORTHRIDGE CAPITAL CORPORATION
Unless earlier terminated, the Initial Offering Period will be up to two
(2) months from the date hereof unless, in the sole discretion of the Company
and Selling Agent, it is extended for periods up to a total of seven (7)
additional months. The Company is offering a minimum of $2,000,000 up to a
maximum of $12,500,000 of such Shares. (See "Plan of Distribution.") The
date that (1) subscriptions for a minimum of $2,000,000 in Shares have been
received and (2) the Company has accepted such subscriptions will mark the
end of the Initial Offering Period. As described in greater detail in "Plan
of Distribution," the offering is being made pursuant to a Registration
Statement which may be extended for additional periods which will, in the
aggregate, not exceed 18 months from the date of this Prospectus (the
"Continuous Offering Period"). (See "Risk Factors -- No Market For The
Company's Shares; Non-Transferability Of Shares Until This Offering Period
Ends."). During both the Initial and Continuous Offering Periods, Shares
will be offered at $5.00 per share, inclusive of an 8% selling commission
(the "Selling Price"). (See "Notes to the Cover Page.") If a minimum of
$2,000,000 of Shares is not sold during the Initial Offering Period (as it
may be extended), investor funds will be promptly returned with all interest
earned thereon. The minimum purchase is $5,000 (except that the Company, in
its discretion, may accept IRA accounts with lesser amounts); additional
purchases by existing Shareholders may be made in the amount of $1,000 or
more.
See "Risk Factors" for certain factors that should be considered by
prospective investors.
<PAGE>
THESE ARE SPECULATIVE SECURITIES
Potential investors in the Company are advised that an investment in its Shares
is subject to the following considerations, among others:
o Communications and/or management companies can be speculative and volatile
and involve significant risks, including those discussed in "Risk Factors."
o Specifically, prospective investors are advised that the Company's auditors
have issued an opinion ( as is true for all developmental stage entities)
which raises questions about the Company's ability to continue as a "going
concern". (See "Risk Factors - Going Concern Report Of Certified Public
Accountants.")
o The Company has not had significant prior operations, and market acceptance
is beyond the control of management. (See "The Company" and "Risk
Factors.")
o Certain conflicts of interest exist in the management of the Company. (See
"Conflicts Of Interest.")
o The success of the Company is dependent on its management. (See "The
Company -- Management" and "Risk Factors -- Reliance On Management.")
o Investors are advised that the Company is a developmental state company
and, as such, is the subject of a "going concern" opinion from its
accountants. (See Financial Statements, Appendix I.)
<TABLE>
<CAPTION>
Price to Public During Initial Offering Selling
Period (1)(2)(3) Commission (2)(3) Proceeds to Company (3)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Per Share $5.00 $0.40 $4.60
- -------------------------------------------------------------------------------------------------------------------------
Total Minimum $2,000,000 $160,000 $1,840,000
- -------------------------------------------------------------------------------------------------------------------------
Total Maximum $12,500,000 $1,000.000 $11,500,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During this Offering Period, there is a $5,000 minimum (except that the
Company, in its discretion, may accept IRA accounts with lesser amounts and
existing Shareholders may make additional purchases in the amount of $1,000
or more).
(2) A selling commission of 8 % will be paid on all Shares sold. The Company
has agreed to indemnify the Managing Placement Agent (and any additional
Placement Agents) against certain liabilities, including any that may exist
under the Securities Act of 1933. (See "Plan Of Distribution.")
(3) These amounts are before deducting offering expenses (estimated at $205,000
in the case of the minimum offering and $1,112,500 in the case of the
maximum offering payable by the Company.)
Until March , 1998 (90 days after the date hereof), any broker-dealer
effecting transactions in the Shares, whether or not participating in this
distribution, may be required to deliver a current copy of this Prospectus.
This is in addition to the obligation of dealers to deliver a copy of this
Prospectus when acting as underwriters and with respect to any unsold allotments
or subscriptions.
Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
herein is correct as of any time subsequent to the date hereof or that there
has been no change in the affairs of the Company since such date or, in the
case of information incorporated herein or therein by reference, the date of
filing with the Securities and Exchange Commission.
INVESTMENT REQUIREMENTS
Subscriptions for the purchase of the Shares offered hereby are subject
to the following conditions:
(1) The minimum initial purchase is $5,000 subject to discretion of the
Company to accept less. (See "Plan Of Distribution.") There is generally no
limit on the maximum number of Shares that may be purchased by any one
investor, except as limited by applicable regulatory considerations. (See,
for example, "ERISA Considerations.")
(2) To ensure enforcement of the investment requirements associated with this
offering, each purchaser must represent in the Subscription Agreement and
Power of Attorney that he has (a) a net worth of at least $100,000 (exclusive
of home, furnishings and automobiles) or (b) a net worth of at least $50,000
(similarly calculated) and an annual adjusted gross income of not less than
$25,000. The Administrators of securities laws of certain states have
imposed
2
<PAGE>
additional suitability requirements for investments by residents of such
states. This may include restrictions on transfer to those who meet initial
suitability requirements. (See Annex to the Subscription Agreement and Power
of Attorney).
(3) For example and specifically, the Commissioner of Corporations of the
state of California has imposed investor suitability standards of a minimum
of $65,000 annual gross income and $250,000 net worth or, in the alternative,
minimum net worth of $500,000. (Net worth excludes principal residence, home
furnishings and automobiles.) In addition, the investor's total purchase of
securities may not exceed 10% of his or her net worth." (See also Annex to
the Subscription Agreement.)
(4) In the case of a pension, profit sharing plan or trust or any
tax-deferred or tax-exempt entity, including retirement plans, the trustee or
custodian must represent that he, she or it is authorized to execute such
subscription on behalf of the plan and that such investment is not prohibited
by law or the plan's governing documents.
(5)The Company may reject any subscription. All subscriptions received are
irrevocable.
(6) The Company and any Placement Agent must have reasonable grounds to
believe, on the basis of information obtained from the purchaser concerning
his financial situation and needs and any other information known by the
Company and/or any Placement Agent, that (a) the purchaser is or will be in a
financial position appropriate to enable him to realize to a significant
extent the benefits described in the Prospectus; (b) the purchaser has a net
worth sufficient to sustain the risks inherent in an investment in the
Company, including possible losses on their investment and lack of liquidity;
and (c) the Company is otherwise a suitable investment for the purchaser.
(7) Shares will be legended to restrict transfer until the offering
terminates and may be subject to restrictions on transfers thereafter to
persons who meet specified suitability requirements. This may reduce the
possibility of any trading market developing in the Shares for an additional
period of time after the close of the offering. (See "Risk Factors - No
Market For The Company's Shares; Non-Transferability Of Shares Until This
Offering Period Ends.")
Following the conclusion of each calendar (which is also the fiscal)
year, Shareholders will receive an annual report, including a balance sheet,
statements of operations, cash flows and Shareholders' equity and related
footnotes. The financial statements contained in the annual report will be
audited by the Company's independent certified public accountants. Unaudited
quarterly reports on operations also will be distributed to Shareholders or
made available through E-Mail and/or the Internet.
[Balance of Page Left Intentionally Blank.]
3
<PAGE>
TABLE OF CONTENTS
Descriptive Title Page
- ------------------ ----
INVESTMENT REQUIREMENTS ........................................... 2
PROSPECTUS SUMMARY................................................. 6
SUMMARY FINANCIAL DATA............................................. 7
PRO FORMA FINANCIAL INFORMATION.................................... 9
INTRODUCTORY STATEMENT: WHO SHOULD INVEST.......................... 9
RISK FACTORS....................................................... 9
CONFLICTS OF INTEREST.............................................. 14
FIDUCIARY RESPONSIBILITY OF THE COMPANY'S MANAGEMENT............... 19
THE COMPANY........................................................ 20
General........................................................ 20
Introduction................................................... 20
Specific Opportunities under Consideration..................... 22
Fairness Of Consideration..................................... 29
Management..................................................... 29
Professional Advisors.......................................... 34
Remuneration................................................... 35
Employee Benefits.............................................. 35
Employee Agreements............................................ 36
Employees...................................................... 36
Property....................................................... 36
Litigation..................................................... 36
Securities Ownership Of Certain Beneficial
Owners And Management........................................ 36
SELECTED FINANCIAL DATA............................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 40
APPLICATION OF PROCEEDS............................................ 49
ABSENCE OF PUBLIC MARKET AND DIVIDEND POLICY....................... 51
CAPITALIZATION..................................................... 51
DILUTION........................................................... 51
DESCRIPTION OF CAPITAL STOCK....................................... 53
PLAN OF DISTRIBUTION............................................... 54
ERISA CONSIDERATIONS............................................... 56
LEGAL MATTERS...................................................... 56
EXPERTS............................................................ 56
AVAILABLE INFORMATION.............................................. 57
APPENDIX I (FINANCIAL STATEMENTS).................................. I-1
APPENDIX II (SCHEDULE 15G, "IMPORTANT INFORMATION ON PENNY STOCKS". III-1
APPENDIX III (FAIRNESS OPINION).................................... IV-1
EXHIBIT A -- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY.......... A-1
4
<PAGE>
CORPORATE SYMBOLS
WILL BE PLACED
HERE
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. All references in this Prospectus to Shares
are as of September 30, 1997, unless otherwise specified. Prospective
investors should carefully consider the information set forth under the
heading "Risk Factors."
The Company
Heartland Communications & Management, Inc. is a recently organized
Delaware corporation which will engage in a broad-based communications and
management business aimed at specific targeted markets. At the present time,
the Company has engaged mostly in organizational activities to structure the
various business areas. The Company, directly or indirectly, also has
contracts to market, produce and/or distribute certain syndicated radio
programs. (As of the date of this Prospectus, the Company's talk shows
include "Newsmaker" (with Mike Foudy) and "The Travel Show" (with Larry
Gelwix and Danny Kramer).) It is also performing initial due diligence on
various other business development opportunities. For example, the Company
contemplates forming one or more of its own satellite-transmitted radio
networks to sell broadcast time to advertisers and talk show hosts and a
subsidiary of its ATB Productions, L.L.C. affiliate is attempting to complete
the acquisition of three AM radio stations in California and Washington. In
addition, the Company has an option to obtain a substantial interest in two
prospective innovative, national specialty supplements to newspapers designed
to appeal to targeted segments of the mass audience the Company believes to
be under-served: teenagers and sports enthusiasts. Additional print,
broadcast, Internet-based products, management services and news media
components, as well as hybrid combinations, also are contemplated. They will
be developed by the Company or will be part of the Company's acquisition
strategy and/or management services will be offered to clients on a fee
and/or equity basis providing, for example, marketing concepts and
strategies.
The Company was incorporated on March 27, 1996 in Delaware. Its par
value $ .001 Shares are not expected initially to be listed on any listed
market for at least 6 to 18 months after the offering commences. In fact,
Shareholders will have their certificates legended to preclude the transfer
of their Shares until this Offering Period ends. Even after the continuous
Offering Period ends, there is no assurance the Company will satisfy then
current pertinent listing standards or if successful in getting listed, avoid
later delisting. (See "Risk Factors -- No Market For The Company's Shares")
The Offering
Securities 2,500,000 Shares having an aggregate offering price of
$12,500,000 are being offered at $5.00 per share (the "Selling
Price") during this Offering Period. (See "Plan of Distribution"
and Cover Page.)
Offering As described in greater detail in "Plan of Distribution" and on
Period the Cover Page, the offering begins on Period the date
of this Prospectus and may continue for up to nine (9) months
thereafter, unless earlier terminated or extended. (The date
that (1) subscriptions for a minimum of $2,000,000 of Shares have
been received and (2) the Company has closed the initial escrow
will mark the end of the Initial Offering Period.) Subject to
pertinent securities requirements, the Company expects to update
this Prospectus after its Initial Offering Period and continue
the offering (the "Continuous Offering Period") for up to 18
months from the date of this Prospectus if, as expected, the
$12,500,000 maximum is not achieved during the Initial Offering
Period.
Proceeds Held All subscriptions during the Initial Offering Period will be held
in an escrow account with George Mason Bank, McLean, Virginia.
Such proceeds will not be paid to the Company until receipt of
the minimum offering amount of $2,000,000; thereafter, if such
minimum is achieved, the offering will continue at the Company's
$5.00 per share Selling Price. If the minimum offering amount of
$2,000,000 is not achieved, the related proceeds and all interest
earned thereon will be returned to the
6
<PAGE>
investors. Even after the Initial Offering Period (so long as at
least the $2,000,000 minimum is achieved), subscriptions will
continue to be escrowed with George Mason Bank pending (i) month-
end acceptance or (ii) acceptance in "tranches" of at least
$250,000, whichever first occurs. Investors are reminded that,
given the duration of the Initial Offering Period, subscriptions
may be held in escrow for up to nine (9) months from the date of
this Prospectus. In addition, while it is expected that interest
will be earned on escrowed funds, there is no assurance that
interest will be earned and, in any event, interest earned will
not be returned to subscribers unless the $2,000,000 minimum
offering is not achieved.
Minimum The minimum purchase (except as to IRA accounts) is $5,000 and
Subscription minimum additional purchase(s) by an existing Shareholder is
$1,000. (See "Investment Requirements" and "Plan Of
Distribution-Subscriptions.")
Risks And An investment in the Company involves substantial risks due in
Conflicts Of Subscription part to the costs which the Company will incur,
Interest given the highly speculative nature of the communications and
management business. (See "Conflicts Of Interest. ") Risks
inherent in investing in the Company are discussed under
"Risk Factors."
Plan Of The Shares are being offered on a best-efforts basis by
Distribution registered broker-dealers. (See "Plan Of Distribution.")
Application of this offering will be applied to certain contemplated
Of acquisitions and/or start-ups outlined Proceeds herein and for
Proceeds working capital purposes. More specifically, the Company's
Heartland Radio Network, dire ctly or indirectly, will not only
produce news, information and talk programming of its own but
assist in the development of programming by outside producers,
secure syndication opportunities for them and share in the
revenue. The Company will be paid a specific negotiated portion
of the gross advertising receipts and/or income (or some
combination) of several talk radio shows. The Company
contemplates forming one or more of its own satellite-transmitted
radio networks to sell broadcast time to advertisers and talk
show hosts and is currently investigating the acquisition of a
satellite-based progr am radio network (to permit the Company to
act as a satellite- based program distributor). In addition, the
Company has the option to obtain a substantial interest in two
prospective innovative, national specialty supplements to
newspapers designed to appeal to targeted segments of the mass
audience the Company believes to be under-served: teenagers and
sports enthusiasts. Additional print, broadcast, Internet-based
products, management services and news media components, as well
as hybrid combinations, also are contemplated. They will be
developed by the Company or will be part of the Company's
strategy and/or management services will be offered to clients on
a fee and/or equity basis providing, for example, marketing
concepts and strategies. (See "Application of Proceeds" and "The
Company.")
SUMMARY FINANCIAL DATA
The Summary Financial Information, all of which (except the
information for the nine months ended September 30, 1996 and 1997) has been
derived from audited financial statements included elsewhere in this
Prospectus, reflects the operations of Heartland Capital Corporation ("HCC"
and "Predecessor Company"), the majority of whose development and contract
rights were assigned to the Company ("Successor Company") on May 17, 1996.
This information should be read in conjunction with the financial statements
and "Management's Discussion And Analysis Of Financial Condition And Results
Of Operation."
7
<PAGE>
<TABLE>
HCC (Predecessor Company)(1)(6)
------------------------------------------------------------------------------------
Date of Date of
Formation Formation
(6/23/94) Year Year 9 Months 9 Months (6/23/94)
Through Ended Ended Ended Ended Through
12/31/94 12/31/95 12/31/96 9/30/96 9/30/97 9/30/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $-- $647 $2,847 $10,913 $-- $3,494
Costs and Expenses $211,372 $568,467 $361,354 $285,960 $140,500 $1,281,693
Loss from Operations(7) ($211,372) ($567,820) ($358,507) ($275,047) ($140,500) ($1,278,199)
Interest Expense (Income), net $8,342 $25,690 $69,880 $3,973 $7,488 $111,400
Net Loss(4) ($219,714) ($593,510) ($428,387) ($279,020) ($147,988) ($1,389,599)
Net Loss Per Share ($0.03) ($0.07) ($0.05) ($0.03) ($0.02) ($0.17)
Common and common equivalent
shares outstanding(2)(5) 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000
</TABLE>
<TABLE>
HCC (Predecessor Company)(1)(6)
--------------------------------------------------
As of As of As of As of
12/31/94 12/31/95 12/31/96 9/30/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (Deficiency) ($245,214) ($333,529) ($32,014) ($301,226)
Total Assets $36,274 $184,800 $605,375 $964,089
Stockholders' Equity (Deficit) ($217,714) ($171,379) $340,592 $192,604
Accumulated Deficit ($219,714) ($813,224) ($1,246,369) ($1,394,357)
</TABLE>
<TABLE>
HCMI (Successor Company)(1)(6)
--------------------------------------------------
Date of Date of Date of
Formation Formation Formation
(3/27/96) (3/27/96) 9 Months (3/27/96)
Through Through Ended Through
12/31/96 9/30/96 9/30/97 9/30/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Statement Data:
Revenue $3,507 $-- $4,757 $8,264
Costs and Expenses $321,421 $224,593 $849,558 $1,170,979
Loss from Operations(7) ($317,914) ($224,593) ($844,801) ($1,162,715)
Interest Expense (Income), net ($2,899) ($739) ($17,025) ($19,924)
Net Loss(4) ($315,015) ($223,854) ($827,776) ($1,142,791)
Net Loss Per Share ($0.25) ($0.18) ($0.62) ($0.88)
Common and common equivalent
shares outstanding(2)(5) 1,270,503 1,242,349 1,326,811 1,298,657
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
HCMI Successor Company)(1)(6)
--------------------------------------------
As of As of Minimum
12/31/96 9/30/97 Adjusted(3)
--------------------------------------------
<C> <C> <C>
Balance Sheet Data: ($516,327) ($1,012,628) ($932,628)
Working Capital (Deficiency)
Total Assets $797,964 $508,572 $2,143,572
Stockholders' Equity (Deficit) $275,143 ($552,633) $1,082,367
Accumulated Deficit ($315,015) ($1,142,791) ($1,142,791)
</TABLE>
(1) Effective May 17, 1996, the Company was assigned certain development
rights and obligations by HCC, its parent company at that time. Effective
May 18, 1996, the Company was spun off via a dividend to the HCC
shareholders. Consequently, the Company had yet to commence operations
and is presented as the "Successor" to HCC which, in turn, is deemed the
"Predecessor" in the above table. (2) For HCC, common and common
equivalent shares outstanding are based on the weighted average number of
shares of common stock equivalents outstanding each period, as adjusted
for the effects of Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, "cheap" stock and
warrants (that is, stock or warrants issued for consideration or with
exercise prices below the initial public offering ("IPO") price within a
year prior to the initial filing, or in contemplation of the IPO) should
be treated as outstanding for all reported periods. Consequently,
8,051,000 shares are the common and common equivalent shares outstanding
for all reported periods for purposes of computing net loss per share for
HCC. (3) Assumes completion of the offering and application of the net
proceeds of $1,635,000 in the case of the minimum offering. (4) There
have been no, nor are there expected to be, cash dividends. (5) For HCMI,
based on the weighted average number of shares outstanding during the
period, adjusted retroactively for the reverse stock split approved March
25, 1997. (6) The financial statements from which the above information
has been derived have been prepared assuming the Company and HCC will
continue as going concerns. However, both the Company and HCC have
incurred losses since inception. Such factors, among others, raise
substantial doubt about the Company's and HCC's ability to continue as
going concerns. In that regard, see "Reports of Independent Certified
Public Accountants" accompanying the Company's and HCC's audited
financial statements which cite substantial doubt about the Company's and
HCC's ability to continue as going concerns. There can be no assurance
that the Company and HCC will achieve profitability and adequate
financing in the future. If the Company or HCC fail to achieve
profitability and/or adequate financing, their growth strategies could be
materially adversely affected. (See "Risks Factors - Going Concern Report
of Independent Certified Public Accountants.") (7) Includes $618,690 in
write-off of deferred offering costs.
8
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information has not been presented since no
significant business combination has occurred or is probable and, even where
possible or remote, there have been no significant historical operations.
Furthermore, where historical activities have been transferred to the
Company, there has been, at best, minimum historical activity. Consequently,
pro forma information would serve no useful purpose. Furthermore, full
financial statements have been presented which include these transferred
activities, notably for Heartland Capital Corporation and ATB Productions,
L.L.C., as well as for the Company. (See Appendix I.) In addition, summary
financial data is provided in "Selected Financial Data."
INTRODUCTORY STATEMENT:
WHO SHOULD INVEST
PURCHASE OF THE SHARES OFFERED HEREBY SHOULD BE MADE ONLY BY
THOSE PERSONS WHO CAN AFFORD TO BEAR THE RISK OF A TOTAL LOSS OF THEIR
INVESTMENT. THE COMPANY RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION IN WHOLE
OR IN PART.
Each subscriber will be required to make certain
representations as to his net worth and income. (See "Investment
Requirements" and the Subscription Agreement and Power of Attorney attached
as Exhibit A.) The Company believes that prospective investors should
consider the Shares as a long-term investment. There is no public market for
these Shares, and none is likely to develop for approximately 6 to 18 months
after the date of this Prospectus. (See "No Market For The Company's Shares;
Non-Transferability Of Shares Until This Offering Period Ends.") Thereafter,
unless the Company achieves capitalization sufficient to allow it to trade on
the NASDAQ national market or Small Cap System, it is not likely that a
trading market will develop except for listing in the "Pink Sheets"; in
addition, market makers must be obtained for National Market and Small Cap
Listing and the Managing Placement Agent is not required to serve as a market
maker once this offering is concluded.
In addition, offerees should not purchase Shares with the
expectation of sheltering income.
RISK FACTORS
Prospective investors should consider carefully, in addition to
the other information contained in this Prospectus, the following factors
before purchasing the Shares offered hereby.
(1) Limited History Of Operation; Activities' Historical Net Losses.
While certain activities are being assigned to the Company from an affiliate,
Heartland Capital Corporation, it is in the early stage of development and
has only a limited history of operations. (See "The Company -- Introduction"
and "Conflicts Of Interest.") To the extent that the Company implements its
business plan, the Company's business will be subject to all of the problems,
expenses, delays and risks inherent in a new business enterprise (including
limited capital, delays in program development, possible cost overruns,
uncertain market acceptance and a limited operating history). (See also
below "Reliance On Management.") In addition, the Company's future success
will depend upon many factors, including those which may be beyond its
control or which cannot be predicted at this time, such as increased levels
of competition (including the emergence of additional competitors, changes in
economic conditions, emergence of new technologies and changes in
governmental regulations).
(2) Going Concern Report Of Independent Certified Public Accountants. The
factors described above in "Limited History Of Operations; Activities'
Historical Net Losses" raise substantial doubt about the Company's ability to
continue as a going concern. In this regard, See the Report of Independent
Certified Public Accountants accompanying the Company's audited financial
statements appearing elsewhere herein which cites substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance
that the Company will achieve profitability in the future, if at all. As a
result of these and other factors, there can be no assurance that the Company's
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proposed activities and/or acquisitions will be successful or that the
Company will be able to achieve or maintain profitable operations. If the
Company fails to achieve profitability, its growth strategies could be
materially adversely affected. (See "Management's Discussion And Analysis Of
Financial Condition And Prospective Results Of Operations.")
(3) Need For Additional Capital. The Company's capital resources are not
adequate to fully implement its business plan. While $12,500,000 would be
sufficient to pursue the specific opportunities already targeted and
described in this Prospectus, such amount would not be sufficient to pursue
the Company's larger business plan - e.g. embarking on a major program of
acquiring communications companies. Hence, as is true for other companies
contemplating significant growth, in due course the Company is expected to
require additional financing. There can be no assurance that any such
additional financing that is required will be available to the Company if and
when required, or on terms acceptable to the Company, or that such additional
financing, if available, would not result in substantial dilution of the
equity interests of existing Shareholders.
(4) Minimum/Maximum Offering. While $12,500,000 is the maximum offering
contemplated pursuant to this Registration Statement, it is subject to a
$2,000,000 minimum. If such minimum is not achieved during the up to nine
(9) month Initial Offering Period, subscription proceeds will be returned
(with pro rata interest based on amount and timing of the subscription) to
subscribers and the offering will be terminated. (See "Plan Of
Distribution.")
(5) Possible Adverse Impact Of Penny Stock Regulation. The Shares are
subject to the low-priced security (or so-called "penny stock") rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. For any transaction involving a penny stock, the rules require (
among other things) the delivery, prior to the transaction, of a disclosure
schedule required by the Securities and Exchange Commission relating to the
penny stock market. (See Appendix III, SEC Schedule 15G, "Important
Information On Penny Stocks," and Exhibit A, the Subscription Agreement and
Power of Attorney, acknowledging receipt of the Schedule 15G.) The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements must be sent disclosing recent
price information for the penny stocks held in the customer's account.
Because the Shares are characterized as a penny stock, the market liquidity
for the Shares could be severely affected. In such an event, the regulations
relating to penny stocks could limit the ability of broker-dealers to sell
the Shares and, thus, the ability of purchasers in this offering to sell
their Shares in the secondary market.
(6) Reliance On Management. Although members of management have
significant experience and expertise in the identification, acquisition and
operation of various businesses, none of its members previously has operated
such a broad-based communications and management company. Investors will
have no right or power to take part in or direct the management of the
Company. Thus, purchasers of the Shares offered hereby will be entrusting the
funds to the Company's management , upon whose judgment the investors must
depend, with only limited information concerning management's specific
intentions. Accordingly, no investor should purchase Shares unless such
investor is willing to entrust all aspects of the Company's management,
including the selection of businesses and/or companies to acquire, to its
officers and/or directors. This includes the fact that Shareholders will not
be given the opportunity to vote on acquisitions or review the associated
financials prior to such transactions being consummated. This potential risk
is even more important in this offering since (i) the Company's business is
dependent, to a significant degree, upon the performance of certain key
individuals, the departure or disabling of any of whom could have a material
adverse effect on the Company's performance and (ii) none of those key
persons is required to devote their services exclusively to the Company. (See
"The Company - Remuneration.") The Company has entered into an employment
agreement (which contains non-compete provisions) with each of Michael L.
Foudy, Gerald Garcia, Bradford W. Baker and Bradley B. Niemcek; the loss of
the services of any such key personnel could have a material adverse effect
upon the Company. The Company maintains key man life insurance of $1,000,000
on Mr. Foudy. These employment agreements contain non-compete provisions;
however, there can be no assurance that the Company will be able to retain
such employees or prevent them from competing with the Company in the event
of their departure.
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(7) Broad Discretion Of Management With Regard To Application Of
Proceeds. A significant portion of the net proceeds of this offering has
been allocated, among other uses, to expand the Company's contemplated
communications-related activities and/or acquisitions as well as for working
capital purposes. While the Company expects to use proceeds of this offering
as outlined in "Application Of Proceeds," management of the Company retains
broad discretion as to the specific use of such funds. For example, as
described in such discussion $305,000 (15.25%) of funds raised are expected
to be used for communications company acquisitions if the $2,000,000 minimum
is achieved but increases to $1,200,000 (32.5%) at $5,000,000 and $2,180,000
(17.44%) at the $12,500,000 maximum. In addition, the amounts available for
communication company acquisitions could be further increased in the event
preliminary exploration with potential strategic partners for the Company's
national sports weekly supplement mature to the point that a prospective
strategic partner invests in that venture.
(8) Additional Investment Opportunities. As a result of this offering,
the Company is expected to experience significant expansion, including
expansion into certain activities which neither the Company nor its
management has previously operated. (See "The Company" generally.) In
addition, the Company is pursuing additional opportunities for expansion
through the acquisition of additional communications and/or management
companies and, to that end, is expected to be regularly involved in
discussions with third parties regarding potential acquisitions. Although no
agreements have been reached regarding any such potential acquisition, in
light of the Company's pursuit of additional acquisitions and funding in this
and future offerings, it is likely that the Company will experience
significant expansion in the future. It is possible (as a result of these
recent preliminary activities -- and potential future acquisitions) that the
Company's management will be required to manage a larger business operation
than historically has been the case. There can be no assurance that the
Company will be able to effectively implement the organizational and
operational systems necessary for optimal management integration of its
expanded portfolio of activities.
(9) Future Acquisitions. Those contemplated future acquisitions are
fully within the discretion of management and are not subject to Shareholder
prior review of financials and/or approval before being consummated. To
expand its market and diversify its business mix, the Company's business
strategy includes growth through acquisitions and investments. (See "The
Company" generally.) There can be no assurance that future acquisitions will
be available and, if they are, will be consummated on terms favorable to the
Company or that any newly acquired companies will be successfully integrated
into the Company's operations. The Company may use equity or incur long-term
indebtedness or a combination thereof for all or a portion of the
consideration to be paid in conjunction with any future acquisitions. As
described in "Application of Proceeds", unspecified future acquisitions are
currently contemplated to constitute approximately $350,000 (15.25%) of the
funds raised at the $2,000,000 minimum.
(10) Competition. The Company's business plan spans a variety of
businesses, many of which overlap and are highly competitive. The Company
faces substantial competition from a number of well-established,
well-financed companies, many of whom have greater resources and are more
established than the Company. Increased competition by existing and future
competitors could materially and adversely affect the Company's ability to
achieve profitability. For example, to the extent that ownership of radio
stations is consolidated among only a few owners (see below), there may be a
reduction in the market for independently produced programs the Company has
developed or will develop. In addition, as the Company seeks to increase
market penetration, its success will depend, in part, on its ability to gain
market share from established competitors. For example, the success of each
of the Company's talk show activities is dependent, to a significant degree,
upon its audience ratings and share of the overall advertising revenue within
its market. Similarly, the broadcasting and newspaper publishing industry
are highly competitive businesses. The Company will compete for listeners
and/or readers and advertising revenue directly with other radio networks,
print and other media, within their respective markets. The Company's
audience ratings and market share are subject to change, and any adverse
change in a particular market could have a material and adverse effect on the
revenue of the Company and/or publishers located in that market. There can
be no assurance that any one of the Company's properties will be able to
attain, maintain and/or increase its current audience ratings, readership and
advertising revenue market share. (See "The Company" generally.)
(11) Strategic Relationships. The Company is currently negotiating
various strategic alliances. If successful, such alliances are expected to
dramatically reduce the Company's need for capital and result in additional
acquisitions and
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expanding of existing activity. (See "The Company" generally.) In fact, the
Company has entered into an agreement with ICON International, Inc. relating
to advertising in Xpress Ventures' national sports weekly. Moreover, the
Company's affiliate, ATB Productions, L.L.C. is in the final stages of
negotiations to acquire three AM radio stations.
(12) Market Studies; Due Diligence Reviews. In formulating its business
plan, the Company has relied on the judgment of management. No formal,
independent market studies concerning the demand for the Company's proposed
products and services have been conducted; however, market studies are
expected to be employed in the future. Moreover, directly or indirectly, the
Company will use certain proceeds of this offering to perform on-going due
diligence with regard to its proposed activities and/or contemplated future
acquisitions. (See "The Company" and "Application of Proceeds".) While the
Company's business plan is believed feasible, to the extent that the Company
determines any or part of its business plan is not feasible, the Company will
be unable to develop in accordance with its business plan and investors may
lose all or a portion of their investment in the Company.
(13) Dividends At Discretion Of Management; No Current Plans To Pay
Dividends. Dividends, if any, to Shareholders are in the discretion of
management. To conserve funds for its contemplated activities, management
does not presently intend to pay dividends. (See "Conflicts Of Interest -
Dividends Would Reduce Funds Available For Expanding Operations Or To Make
Acquisitions.") In fact, the Company anticipates that, for the foreseeable
future, it will continue to retain any earnings for use in the operation of
its businesses. Moreover, the Company may be restricted from paying dividends
to its Shareholders under future credit or other financing agreement(s).
(See "Absence Of Public Market And Dividend Policy.")
(14) No Market For The Company's Shares; Non-Transferability Of Shares
Until Offering Period Ends. The Company's Shares are not publicly traded,
and there can be no assurance that a public market ever will develop.
Moreover, none can develop until the end of the Continuous Offering Period
(approximately 6 to 18 months after the date of this Prospectus). (See
"Plan of Distribution.") In fact, Shareholders will have their certificates
legended to preclude the transfer of their Shares until the Offering Period
ends -- either because the $12,500,000 maximum offering is achieved or the
offering is terminated on a date not more than 18 months from the date of
this Prospectus. Thereafter, unless the Company achieves capitalization
sufficient to allow it to trade on the NASDAQ, National Market or Small Cap
System, it is not likely that a trading market will develop except for
listing in the "Pink Sheets;" in addition, market makers must be obtained for
National Market or Small Cap listing.
The Managing Placement Agent is not required to serve as a market
maker upon conclusion of this Offering Period. (See "Investment
Requirements.") The Company has been advised by the Managing Placement Agent
that it will make a market in the Shares, if at all, only after the Offering
Period as it may be extended, is concluded. However, any market maker of
the Company's Shares may discontinue such activities at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the Shares or that an active public market will develop or, if developed,
will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of the Shares may be adversely
affected. Consequently, holders of Shares acquired pursuant to this offering
may not be able to liquidate their investment in the event of an emergency or
for any other reason, and the Shares may not be readily accepted as
collateral for a loan. Accordingly, prospective investors should consider
the purchase of Shares only as a long-term investment.
(15) Financing Future Activities. While the Company has no long-term debt
currently, the Company anticipates that the proceeds of this offering will be
used to finance future activities and/or acquisitions of communications
and/or management companies, and for general corporate purposes. (See
"Application Of Proceeds." and "Need for Additional Capital.") The Company
may issue debt securities from time to time subject, among other things, to
compliance with applicable securities law considerations and possible future
credit or other financing agreements. Accordingly, the future issuance of
debt by the Company could have a positive or an adverse impact on the
Shareholders.
(16) Cyclicality. Advertising revenues of the Company, as well as those
of the media generally, are often cyclical and dependent upon general
economic conditions. Historically, advertising revenues have increased with
the beginning of an economic recovery, principally with increases in
classified advertising for employment, housing and automobiles.
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Decreases in advertising revenues have historically corresponded with general
economic downturns and regional recessions and local conditions. (See "The
Company" and "Application of Proceeds".) Management believes, however, that
the Company's pricing strategies, distribution, production cost structure,
marketing strategy and management's experience mitigate, to some degree, the
effects of an economic downturn to the extent such downturn is regional.
Moreover, the diverse nature of its targeted businesses -- talk radio, a
satellite distribution system, targeted print products, management and
marketing services, Internet and related media components -- should reduce
the cyclical risk often associated with communications companies.
(17) Dependence On Outside Advisors. In order to supplement the business
experience and expertise of the Company's management, the Company may employ
accountants, technical experts, appraisers, attorneys and other consultants
or advisors. The selection of such consultants or advisors will be made by
the Company's management without any influence or control by shareholders.
(See "The Company -- Professional Advisors.")
(18) Dilution. This offering will result in immediate and substantial
dilution of the net tangible book value per common share. Investors who
purchase Shares offered hereby will experience immediate dilution based on
the difference between the subscription price and the net tangible book value
per common share. Purchasers of Shares during at least the Initial Offering
Period will pay $5.00 per share which, upon completion of this offering, will
have a net tangible book value (based on the Company's balance sheet as of
September 30, 1997, after giving effect to this offering) of approximately
$1.50 if the $2,000,000 offering is achieved and $3.42 if the $12,500,000
maximum offering is achieved. That represents dilution of $3.50 per share
(or 70%) at the $2,000,000 level and $1.58 per share (or approximately 31.6%)
at the $12,500,000 level. Nonetheless, prospective investors are advised
that pertinent state securities laws preclude issuance of stock at a price
theat would result in a dilution of greater than 70% -- and such limitation
would extend to the Shares contingently issued to Shareholders but held in
escrow unless certain performance (including the 70% dilution) standards are
met. (See "Capitalization," "Dilution" and "Description Of Capital Stock --
Common Stock Generally; Reverse Stock Split.")
(19) Possible Issuance Of Preferred Stock. While none is currently
issued, the Company is authorized to issue up to 10,000,000 shares of
preferred stock, par value $.001 per share (the "Preferred Stock"). (See
"The Company" and "Description of Capital Stock.") Any such Preferred Stock
may be issued in one or more series, the terms of which may be determined at
the time of issuance by the Board of Directors, and may include voting
rights, preferences as to dividends and liquidation, conversation and
redemption rights and shrinking fund provisions as determined by the Board of
Directors. Although the Company has no present plans to issue any shares of
Preferred Stock, the issuance of Preferred Stock in the future could
adversely affect the rights of the holders of the underlying common stock
and, therefore, reduce their value and/or the voting power of existing common
stock Shareholders. The Board of Directors may issue any such Preferred
Stock without approval or other action by Shareholder; any issuance of
Preferred Stock could grant conversion or voting rights that could adversely
affect the rights of the common stock which is the subject of this offering
(the " Shares"). In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's ability to merge with
or sell its assets to a third party, thereby preserving control of the
Company by the Principal Shareholders and other present owners. However, the
Company will offer preferred stock to directors, officers or 5% or greater
Shareholders only on the same terms as to existing or new Shareholders on, in
the alternative, any such preferred stock issuance must be approved by a
majority of the Directors (meaning they have no interest in the matter) who
must, at Company expense, have access to Company or independent counsel.
(20) Control By The Principal Stockholders. Prior to the offering,
individual officers, directors and more than 10% shareholders (the "Principal
Stockholders") owned in the aggregate approximately 42.3% of the Shares. (See
"The Company -- Management -- Security Ownership Of Certain Beneficial Owners
and Management.") Upon completion of the offering, the Principal
Stockholders' and their affiliates' aggregate ownership Shares in the Company
will permit them to retain approximately 33.3% of the Shares, assuming the
$12,500,000 maximum is raised. Consequently, the Principal Stockholders may
be able to effectively control the outcome on all matters submitted for a
vote to the Company's stockholders (particularly if significantly less than
the $12,500,000 maximum is raised). Specifically, at least initially, the
Principal Stockholders will be able to elect all of the Company's directors.
Such control by the Principal Stockholders may have the effect of
discouraging certain types of transactions involving an
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actual or potential change of control of the Company, including transactions
in which holders of Shares might otherwise receive a premium for their Shares
over then current market prices.
(21) Future Sales Of Shares. The Principal Stockholders beneficially
hold, excluding escrowed shares, 3,314,500 Shares. All of such Shares held
by the Principal Stockholders are "restricted" as defined in Rule 144 under
the Securities Act ("Rule 144"). All of these "restricted" Shares have been
owned beneficially for more than one year by existing shareholders and may
not be sold in the market pursuant to Rule 144 with regard to sales by
affiliates until at least one year have passed from the date of their
purchase. (See "Description Of Capital Stock.") The Company can make no
prediction as to the effect, if any, that sales of Shares, or the
availability of Shares for future sale, will have on the market price of the
Shares prevailing from time to time. Sales of substantial amounts of Shares
in the public market, or the perception that such sales could occur, could
depress prevailing market prices for the Shares. Such sales may also make it
more difficult for the Company to sell equity securities or equity-related
securities in the future at a time and price which it deems appropriate.
(22) Conflicts Of Interest. Certain inherent and potential conflicts of
interest exist with respect to operations of the Company's business. (See
"Conflicts Of Interest.") These include: (i) the interest of certain current
or former affiliates in the contemplated activities of the Company (see
especially "Certain Related Party Transactions"); (ii) certain members of
management are not required to devote full time to the company's activities;
and (iii) there are, as of the date of this Prospectus, significant
overlapping ownership interests between the Company, HCC, ATB Productions,
L.L.C. ("ATB") and Xpress Ventures, Inc. (See "The Company".)
(23) Limitation Of Monetary Liability By (But Associated Fiduciary
Responsibility Of) The Company's Management. Because of certain statutory
and case law relating to broad discretion granted management of a company,
typically directors and officers of a corporation are indemnified by and have
limited monetary liability to its shareholders. Nonetheless, management of
the Company owes a fiduciary responsibility to its Shareholders. Failure to
satisfy that duty could subject management to certain claims. (See
"Fiduciary Responsibility Of The Company's Management.")
(24) Radio and Television Broadcasting Industry Subject To Federal
Regulation. The radio and television broadcasting industries are subject to
regulation by the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). Approval of the FCC is required for the issuance,
renewal or transfer of radio and television broadcast station operating
licenses. Because the Company's current plans contemplate marketing for
licensees (rather than ownership of stations), those FCC requirements are
expected to have little effect on the Company for the foreseeable future. It
should be noted that Congress and the FCC may in the future adopt new laws,
regulations and policies regarding a wide variety of matters (including
technological changes) which could, directly or indirectly, affect the
operations and ownership of the Company. For example, the Telecommunications
Act of 1995 relaxes the current limitations imposed on the number and
location of broadcasting properties that may be owned by any one person or
entity; such regulations had not permitted any person or entity to own more
than two FM or two AM radio stations in any one market over a specified size
or in excess of 20 FM and 20 AM radio stations in the aggregate and
restricted ownership of licensed properties by foreign nationals. (See
"Competition" above.)
CONFLICTS OF INTEREST
The following inherent or potential conflicts of interests should be
considered by prospective investors before subscribing for Shares. (See
disclaimer at the end of the following discussion regarding certain specific
transactions.)
Generally
(1) Certain Members Of Management Are Not Required To Devote Full-time To
The Business Activities Of The Company. Most, if not all, members of
management have professional responsibilities to entities other than the
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Company. Some of those are complementary (for example, media related
activities originally developed by ATB Productions, L.L.C., an affiliate).
Others, however, may be pursued within the discretion of each individual
member of management. However, as described in "Fiduciary Responsibility Of
The Company's Management" below, those activities are subject to fiduciary
standards even if full-time is not devoted to the Company. Moreover, any
activities that can be characterized as communications and/or
management-related in character are required to be submitted to the Company
for consideration pursuant to a right of first refusal to acquire such
business and/or project on terms comparable to what an independent third
party would pay.
(2) Dividends Would Reduce Funds Available For Expanding Operations To Make
Acquisitions. The amount and frequency of dividends declared and/or
distributed to Shareholders is solely within the discretion of the Company.
Since certain fees to management and/or related parties are, directly or
indirectly, related to assets of the Company and the Company seeks to invest
those funds to the maximum extent feasible, management would suffer an
economic disadvantage if the Company reduced its assets through such
distributions to Shareholders. Consequently, the Company does not expect to
declare dividends for the foreseeable future.
(3) Future Relationships. In undertaking activities which comprise the
Company's business plan, the Company may provide services to related
entities. In addition, the Company may consider investments in or with
Company-related persons or entities (such as Shareholders) or acquire
businesses identified by an affiliate. The Company will seek to avoid any
actual or perceived conflicts and will develop procedures with regard to such
activities to minimize the effect of such potential, actual or perceived
conflicts. (See "Certain Related Party Transactions" below.) For example,
any director or officer must recuse themselves from any negotiations or Board
consideration if they have any personal interest in the matter(s) under
consideration. Moreover, a majority of the Board of Directors are precluded
form being an officer of the Company or having a pecuniary interest in its
activities beyond those of being a Shareholder and/or director.
(4) Fees To, And Time Commitments Of, Professional Advisors. The Company uses
the services of professional advisors, certain of which are paid for their
services while others volunteer their time. The time commitment of each
varies from one advisor to the other. The professional advisors may receive
compensation for services in their respective capacity. (See "The Company
- --Professional Advisors.") To the extent such professional advisors (or the
firms with which they are associated) receive compensation, the Company
believes these fees are no less favorable than those which could be obtained
for comparable services from unaffiliated third parties.
(5) Other Relationships. Mr. B. Eric Sivertsen is a director of the Company
and a director and officer of HCC, an affiliate of the Company. Mr. Michael
L. Foudy is President and Chairman of the Board of the Company and HCC as
well as the managing member and an investor in ATB Productions, L.L.C.
("ATB"). Mr. Sivertsen, previously an employee of DeRand Corporation of
America, the financial advisor of HCC and an investor in the Company and HCC,
is executive vice president to Telecom Towers, L.L.C. Ms. Linda G. Moore and
Ms. Sherri Schwamb Denora are officers of the Company and Ms. Moore is an
investor in ATB. Messrs. Bradley B. Niemcek, Gerald Garcia and Bradford W.
Baker are officers of the Company; all three have either interests in
affiliated entities (Mr. Niemcek in ATB) and/or possible activities to be
pursued by the Company (Messrs. Baker in the proposed supplement for teens
and in the proposed national sports weekly). (See below and "Certain Related
Party Transactions" with regard to specific situations.)
(6) Gerald Garcia and Bradford W. Baker Relationships. Gerald Garcia was
previously the Chairman of the Company and President of both the Company and
HCC and is currently the Vice President of the Company. To the extent that
the relationships overlap, there may exist a conflict of responsibilities by
Mr. Garcia to such entities. Finally, certain compensation due Mr. Garcia
has not been paid in full and $60,000 has been deferred by the Company.
Moreover, Mr. Garcia (in partnership with Bradford W. Baker) developed the
supplement for teens and national sports weekly concepts. Consequently, the
terms negotiated by the Company, including a 50% joint venture interest being
retained by Messrs. Garcia and Baker (although funding is expected to be
provided entirely by the Company), may have not been established on an
arms'-length basis. In the same context, Mr. Baker is Secretary/Treasurer of
the Company and may have similar conflicts. (See below and "Certain Related
Party Transactions" with regard to specific situations.)
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(7) Michael L. Foudy Relationships. Mr. Foudy, an investor, Chairman of the
Board and President of the Company and HCC, is also managing director of
ATB. and the majority owner of that entity through a family-owned trust.
Finally, Mr. Foudy has extended loans to the Company and/or HCC and, as of
September 30, 1997, has a $478,644 note payable from HCC, an affiliate of the
Company. Finally, certain compensation due Mr. Foudy has not been paid in
full and as of September 30, 1997, $50,000 has been deferred by the Company
and $28,500 has been deferred by ATB. Consequently, there exist certain
overlapping rights and responsibilities by Mr. Foudy to the foregoing
entities and, to that degree, certain conflicts may arise in the future.
(See below and "Certain Related Party Transactions" with regard to specific
situations.)
(8) Overlapping Relationships Among Denison, Ryan And Angela Smith. Denison
is a principal of Financial West Group, a selling group member for the
offering. Denison Smith, in turn, is a principal of DeRand Corporation of
America which serves as a paid ($5,000 monthly plus expenses) advisor to HCC,
an affiliate of the Company, and is a shareholder of DeRand. Moreover,
Denison Smith will significantly benefit, directly or indirectly, if the
Company raises all or a substantial portion of the $12,500,000 offering.
This is because Mr. Smith is expected to be a major seller of Shares, thereby
participating in a negotiated portion of the 8% selling commission on Shares
offered and sold. In addition, since Denison Smith (or his wife, Angela)
owns 5,813 post-split shares acquired for services rendered and/or at a
maximum exercise price of $.50 per share as well as 21,037 escrowed shares,
he has a direct economic incentive in having the Company sell its Shares, all
offered at $5.00 per share during both the Initial and Continuous Offering
Periods. Ryan Smith, Denison Smith's son, was previously a production
associate of ATB and continues to be an investor in ATB. Finally, Angela
Smith, the wife of Denison Smith is a registered representative of Financial
West Group and is an investor in ATB.
(9) Certain Overlapping Ownership Interests. Investors in the Company as of
the date of this Prospectus acquired interests in the Company solely because
of their stock ownership in HCC. (See "Certain Related Party Transactions"
and "Description of Capital Stock..") As a result, at least until such time
as the Company's public offering minimum is achieved, there is common
ownership between HCC and the Company. In turn, a number of the investors in
HCC are also investors in ATB. Likewise, a number of investors in the
Company are also investors in ATB. As a consequence of those overlaps,
decisions as to whether to fund certain deals or terms (such as pricing and
amounts negotiated) may be affected.
(10) No Independent Review. Investors should note that the Company, HCC and
ATB and their management are represented by the same counsel. Therefore, to
the extent the Company and this offering would benefit by an independent
review, such benefit will not be available in this case. Such potential
conflict may be greater in this offering since a partner of the Company's
counsel owns Shares in, and serves as an advisor to, the Company. While it
is not expected to have any adverse consequence (such as undermining
professional representation), Max Miller (a partner of the law firm - Reed
Smith Shaw & McClay - that represents the Company, HCC and ATB) has made an
investment in Shares of the Company and HCC through a pension plan and serves
as an advisor to the Company; certain members of his family also own
interests in ATB, HCC and the Company. (See "The Company -- Management --
Professional Advisors.")
Certain Related Party Transactions
The Company was formed on March 27, 1996 to be a broad-based
communications and management business, including the development, production
and syndication of advertiser supported broadcast programs and print
products. Upon formation, Heartland Capital Corporation ("HCC") subscribed to
the Company's common stock. As of May 17, 1996, HCC paid its stock
subscription and the Company was simultaneously assigned certain development
and contract rights and obligations by HCC. The Company is also related to
another entity, ATB Productions, L.L.C. ("ATB"), with which it shares common
(but not identical) ownership and to which it will provide marketing services.
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. Several
opportunities were identified during the preceding three years, including
talk radio, a teen-oriented newspaper and a newspaper insert aimed at sports
enthusiasts. The talk radio venture was furthest along
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in the development process, with HCC having provided a line of credit as well
as marketing expertise to ATB which relationship may have been (and continues
to be) material to the Company. The other ventures identified are
developmental options and are intended to be pursued only if funding is
achieved (see below) and appropriate due diligence, which supports the
feasibility of the acquisitions, has been completed. Neither HCC nor the
Company has entered into any definitive agreements with respect to the
investment options.
HCC determined that these ventures could not be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned
its option and, in the case of ATB, its contract rights to the Company, its
wholly-owned subsidiary. On May 18, 1996, HCC spun off the Company via a
dividend to the HCC shareholders with the Company effectively replicating the
HCC capital structure by issuing a share of its common stock for each share
of HCC common and preferred stock outstanding as of May 18, 1996. Warrants
to purchase the Company stock were granted to holders of non-contingent HCC
stock purchase warrants, including warrants to the HCC preferred
shareholders, as of May 18, 1996. Additionally, on April 17, 1996, the
Company granted HCC warrants to purchase 1,236,000 shares of its common stock
for $.50 per share. (The contracts and option rights transferred to the
Company have no carrying value because development of, or servicing, the
rights is expected to require a substantial infusion of capital.) It is the
Company's intention to obtain necessary capital through an initial public
offering of its common stock.
Effective January 1, 1995, HCC entered into a marketing agreement
with ATB (the " HCC Agreement") whereby HCC will provide marketing services
on behalf of ATB. Such services include presenting programs to sponsors on a
worldwide basis, negotiating sponsorship agreements, and performing related
activities. In return for providing the marketing services, ATB is obligated
to pay HCC 40% of its gross advertising cash receipts and 15% of its
non-advertising gross receipts. The agreement was transferred to the Company
on May 18, 1996. The HCC Agreement automatically terminates on January 1,
1999, unless extended by mutual agreement, and it is terminable at earlier
dates under certain specified conditions. In the event of termination, the
amounts due under the HCC Agreement then existing shall remain due and
payable, notwithstanding the termination, if certain other conditions are met
for the period ending the later of the automatic termination of the HCC
Agreement or two years after its termination for other reasons. Revenues
recognized by HCC under the HCC Agreement aggregated $647 and $2,847 during
1995 and 1996, respectively. After the transfer, HCMI recognized $3,507 in
revenue from the HCC Agreement through December 31, 1996 and $4,757 during
the nine months ended September 30, 1997.
The total number of shares of stock that the Company has the
authority to issue is 60,000,000 (consisting of 10,000,000 shares of
preferred stock and 50,000,000 shares of common stock, each respectively par
value $.001 per share.) The Board of Directors of the Company is empowered to
provide for the issuance of shares of preferred stock in series, to establish
the number of shares to be included in each series and to fix the
designations, powers, preferences and rights of the shares of each such
series. To date, no series have been issued.
In conjunction with the Company's formation as an HCC subsidiary, HCC
subscribed to 1,030,086 post-split shares of the Company's common stock on
March 27, 1996. On May 17, 1996, HCC contributed the par value ($.001) of
those shares to the Company in cash ($4,758) in full payment of its
subscription receivable and 1,030,086 post-split shares were issued to HCC.
In conjunction with the Company's spin-off to the shareholders of HCC, on May
18, 1996, the Company retired those shares and issued 1,030,086 post-split
shares of common stock as follows: 426,280 shares to the existing common
shareholders of HCC and 603,806 shares to the preferred shareholders of HCC.
In addition, the Company issued 1,394,500 of its warrants to the HCC
preferred shareholders who held contingent HCC warrants on the basis of one
warrant for each two HCC preferred shares. Each warrant entitles the holder
to purchase an additional share of the Company's common stock. During May
1996, the Company notified the holders of its intent to make an initial
public offering (IPO) and that the Shareholders had until July 23, 1996 to
exercise their warrants at $.50 per share -- versus $4 per share thereafter
(80% of the expected IPO price of $5 per share). Through July 24, 1996,
warrants to purchase 253,387 post-split shares (1,170,400 pre-split shares)
were exercised for an aggregate purchase price of $580,200, leaving 224,100
warrants outstanding and excisable under the terms outlined above.
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On March 27, 1996, the Company's incorporators reserved 600,000 shares of
common stock for a Stock Option Plan. Conditions of grants, terms, exercise
prices and related terms have yet to be determined by the Board of Directors.
The Shareholders would be required to approve the plan prior to granting
options.
The Company has employment agreements (the "Agreements") with four
officers and employees, Michael L. Foudy, Gerald Garcia, Bradford W. Baker
and Bradley B. Niemcek. (See "The Company -- Management.") The Agreements
permit participation in an annual bonus pool, the amount and conditions of
which will be determined by the Company's Board of Directors and provide as
to Messrs. Foudy and Niemcek base annual salaries aggregating $180,000. In
addition, the Agreements provide that these employees are eligible to
annually receive options to buy up to 100,000 shares of common stock at $.10
per Share with terms, other than price, to be determined by the Board of
Directors. The agreement with Mr. Niemcek also provides for issuance of
75,000 shares of common stock to the employee if he is employed by the
Company for three years from May 1, 1996. The Agreements are effective as of
May 1, 1996 as to Messrs. Foudy, Baker and Niemcek and May 1, 1997 as to Mr.
Garcia, have terms of three years and provide for termination for cause with
a cessation in compensation payments. If terminated by the Company without
cause (or by the employees with cause) prior to the end of their term, the
Agreements require payments to be continued at the rate of base salary at the
date of termination for the period after termination through the end of the
terms of the Agreements.
On January 15, 1995, HCC executed a noncollateralized line of credit
agreement with ATB (the "Credit Agreement") which provides ATB with a standby
line of credit in the amount of $360,000. Borrowings under the Credit
Agreement bear interest at a fixed rate of 8% per annum, with payment of
interest on any borrowing commencing January 15, 1997. Through September 30,
1997, interest payments of $12,950 and $185 have been made to the Company and
HCC, respectively. Any principal and interest outstanding on the line of
credit must be repaid on December 31, 1999. During 1996, the Company began
co-funding this Credit Agreement with HCC. As of December 31, 1996 and
September 30, 1997, the Company had advanced $172,780 and $169,280
respectively, while HCC had advanced $338,695 and $431,145 as of December 31,
1996 and September 30, 1997, respectively. Although the total advances
($511,475 and $600,425 as of December 31, 1996 and September 30, 1997) are in
excess of the Credit Agreement's standby line of credit amount ($360,000),
the total advances are governed by the Credit Agreement, including interest
rates and due dates. Interest income earned by the Company on this credit
line amounted to $2,899 and $10,310 for the period March 27, 1996 (date of
formation) through December 31, 1996 and the nine months ended September 30,
1997, respectively. Interest income earned by HCC on its share of the
outstanding loans amounted to $3,364, $22,970 and $24,387 for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. A portion of these loans ($44,356) have been used to fund the
acquisition target of ATB Productions (Friendly Media, Inc.) in anticipation
of completion of the acquisition.
In conjunction with the public offering, HCC has incurred direct or
indirect costs, such as salaries and rent, which have been charged to the
Company. By the completion of the public offering, it is expected that such
costs could aggregate approximately $600,000. It is the intent of the
Company to reimburse HCC for these costs, or at least a portion thereof, on a
sliding scale (none if $2,000,000 is raised to $412,500 if $12,500,000 is
raised), solely from the offering proceeds. As of December 31, 1996 and
September 30, 1997, the amount owed by the Company to HCC for these costs,
net of repayments, amounted to $220,616 and $397,350, respectively.
Xpress Ventures, Inc. is a Tennessee corporation whose principals are
Gerald Garcia, (Executive Vice President of the Company) and Bradford W.
Baker (Secretary-Treasurer of the Company). (See "Conflicts Of Interest.")
Messrs. Garcia and Baker entered into a licensing agreement with Xpress
Ventures, delegating all its rights each has in a proposed magazine for teens
and a national sports weekly. In turn, Xpress Ventures, Inc. has now
assigned its rights in such proposed newspaper inserts to the Company in a
May 31, 1996 agreement. While Messrs. Garcia and Baker are affiliates and
have an interest in these transactions, all negotiations with the Company
have been independently negotiated by Company principal(s) other than Messrs.
Garcia and Baker.
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Because the Company has not generated sufficient cash flow to pay all
compensation when due to Mr. Garcia, a portion of such compensation has been
deferred, and the Company has entered into a $60,000 note payable to Mr.
Garcia.
A number of activities which the Company intends to pursue with the
benefit of funds raised during this offering are those which have been
assigned to the Company by HCC. Moreover, the management and all current
Shareholders of the Company, as of the date of this Prospectus, are
essentially identical to that of HCC. Accordingly, the economic terms,
including compensation and equity ownership, may not have been the result of
arm's-length negotiations. However, in evaluating this potential conflict of
interest, prospective Shareholders should be aware that a right of first
refusal has been granted by HCC and the Company's management for any
activities or acquisitions that fall within the communications and management
charter of the Company so long as on terms comparable to what an independent
third party would pay.
The Company believes that any past transactions with its affiliates
have been at prices and on terms no less favorable to the Company than
transactions with independent third parties. The Company may enter into
transactions with its affiliates in the future. However, the Company intends
to continue to enter into such transactions only at prices and on terms no
less favorable to the Company than transactions with independent third
parties. In that context, the Company will require any director or officer
who has a pecuniary interest in a matter being considered to recuse
themselves from any negotiations. In any event, any debt instruments of the
Company in the future are expected generally to prohibit the Company from
entering into any such affiliate transaction on other than arm's-length
terms. In addition, a majority of the Board is (and must continue to be)
neither an officer nor have a pecuniary interest (other than as a Shareholder
or director) in any transactions with the Company. In turn, commencing
immediately, a majority of the independent Board of Directors members
(defined as having no pecuniary interest in the transaction under
consideration) will be required to approve all matters involving interested
parties. Moreover, it is expected that additional independent directors
will be added to the Board and an independent escrow agent/registrar will be
appointed, no later than the initial closing for this offering, to assure
proper issuance of stock to Shareholders.
FIDUCIARY RESPONSIBILITY OF THE COMPANY'S MANAGEMENT
Counsel has advised the Company's management it has a fiduciary
responsibility for the safekeeping and use of all assets of the Company.
(See "Conflicts Of Interest" and "Risk Factors -- Conflicts Of Interest.")
Management is accountable to each Shareholder and required to exercise good
faith and integrity with respect to its affairs. (For example, whether under
SEC and/or general fiduciary principles, management cannot commingle property
of the Company with the property of any other person, including that of
management.)
Cases have been decided under the common or statutory law of
corporations in certain jurisdictions to the effect that a shareholder may
institute legal action on behalf of himself and all other similarly situated
shareholders (a class action) to recover damages from management for
violations of fiduciary duties, or on behalf of a corporation (a corporation
derivative action), to recover damages from a third party where management
has failed or refused to institute proceedings to recover such damages. On
the basis of federal and/or state statutes, including most critically the
Delaware General Corporation Law, and rules and decisions by pertinent
federal and/or state courts, accordingly, (a) shareholders in a corporation
have the right, subject to the provisions of the Federal Rules of Civil
Procedure and jurisdictional requirements, to bring class actions in federal
court to enforce their rights under federal securities laws; and (b)
shareholders who have suffered losses in connection with the purchase or sale
of their shares may be able to recover such losses from a corporation's
management where the losses result from a violation by the management of SEC
Rule 10b-5, promulgated under the Securities Exchange Act of 1934, as
amended. It should be noted, however, that in endeavoring to recover damages
in such actions, it would be generally difficult to establish as a basis for
liability that the Company's management has not met such standard. This is
due to the broad discretion given the directors and officers of a corporation
to act in its best interest.
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The SEC has stated that, to the extent any exculpatory or
indemnification provision purports to include indemnification for liabilities
arising under the Securities Act of 1933, as amended, it is the opinion of
the SEC that such indemnification is contrary to public policy and,
therefore, unenforceable. Shareholders who believe that the Company's
management may have violated applicable law regarding fiduciary duties should
consult with their own counsel as to their evaluation of the status of the
law at such time.
THE COMPANY
General
Heartland Communications & Management, Inc. (the "Company") was
organized March 27, 1996. The Company's offices are located at 1320 Old Chain
Bridge Road -- Suite 220, McLean, Virginia 22101, and its telephone number is
(703) 883-1836. The Company intends to raise capital, perform support
services and pursue specific targeted business development opportunities as
its basis for growth and profitability. The Company has identified several
service and support areas where it intends to establish profit centers.
These include, but are not limited to, business areas such as radio talk show
programming, newspaper supplements and inserts publishing and other
communications- and management-related activities. (See "Specific
Opportunities Under Consideration.") The Company has investigated business
opportunities for investment and has performed preliminary due diligence on
certain projects. It is the intent of management to use a part of the
proceeds of this offering to continue the due diligence process on these
projects (which will include third party feasibility studies where management
considers such studies prudent to complete the required due diligence).
More specifically, the Company will engage in the broad-based
communications and media business, including (but not limited to) the
development, production, marketing and syndication of advertising-supported
broadcast programs and print products. These products will be designed to
meet the expanding needs of the media business for creative content --
especially in those segments, e.g., AM radio and newspaper publishing, in
which syndicated alternatives to locally-produced content are financially
attractive. Its radio operation will not only assist in the development of
programming by outside producers, secure syndication opportunities for them
and share in their revenue but also produce news, information and talk
programming of its own, the latter effected through an affiliate, ATB
Productions, L.L.C. The Company expects to own a specific, negotiated
portion (typically 10% to 60%) of the gross advertising receipts and/or net
income of several radio productions. The Company contemplates forming one or
more of its own satellite-transmitted radio networks to sell broadcast time
to advertisers and talk show hosts and a subsidiary of its ATB Productions,
L.L.C. affiliate is currently completing the acquisition of up to three AM
radio stations in California and Washington. In addition, if the Company
provides the associated funding, the Company has the option to obtain a 50%
interest in two prospective innovative, national specialty supplements to
newspapers designed to appeal to targeted segments of the mass audience which
the Company believes are under-served: teens and sports enthusiasts.
Additional print, broadcast, Internet-based products, information services
and news media components, as well as hybrid combinations, also are
contemplated. Such activities will be developed by the Company or will be
part of the Company's acquisition strategy and/or management services will be
offered to clients on a fee and/or equity basis.
Introduction
Though recently organized, many of the Company's contemplated
activities to be pursued during the early years of operations will be based
on opportunities developed by Heartland Capital Corporation ("HCC"), a
private merchant banking business advisory firm which was incorporated in
June 1994 to pursue a broad spectrum of investment opportunities. To the
date of this public offering, HCC has concentrated much of its activities in
communications-related businesses, most specifically the support of talk show
programs and a contemplated radio network. Because of the faster than
expected progress of HCC's efforts in the communications arena and the slower
than expected development of other areas, the HCC Board of Directors
determined that the best strategy was to take an affiliate public at this
time. Specifically, the decision was made by HCC to assign all contracts,
business opportunities and performance obligations meeting certain investment
development criteria to the Company with existing HCC shareholders receiving
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the same number of shares and associated rights that they owned in HCC,
including the right to exercise warrants for Shares of the Company, by paying
a variable exercise price (ranging from $.001 up to $.50 per share). (Some
limited merchant banking activities may take place in the Company as well.)
Accordingly, on May 17, 1996, HCC assigned these opportunities to the
Company, which was a wholly-owned subsidiary on that date, and HCMI
thereafter was responsible for pursuing development of these opportunities.
Because the Company has assumed the rights previously negotiated and owned by
HCC and there continues to be common ownership and management, the Company
and HCC may be deemed to be affiliated. For a discussion of the associated
conflicts, see "Conflicts of Interest. "
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. Several
targeted opportunities were identified in 1994 and 1995, including talk
radio, a teen-oriented supplement to newspapers and a newspaper insert aimed
at sports enthusiasts. The talk radio venture was furthest along in the
development process, with HCC having provided a line of credit as well as
marketing expertise to ATB. The other ventures identified to date are only
developmental options.
HCC has determined that these ventures cannot be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned
its option (and in the case of ATB, its contract) rights to the Company.
Formed as a wholly-owned subsidiary of HCC, the Company received on May 17,
1996 the development and contract rights and obligations and the assumed
responsibility for costs to be associated with the future development of
these activities. On May 18, 1996, HCC spun off the Company via a taxable
dividend to the HCC stockholders with the Company replicating the HCC capital
structure, including replicating HCC's outstanding non-contingent stock
options and warrants and issuing 301,903 of the Company's warrants to the HCC
preferred shareholders, who held contingent warrants, on the basis of one
warrant for each two HCC preferred shares. A share of the Company's common
stock was issued to each HCC common and preferred shareholder for each share
of HCC common and preferred stock outstanding May 18, 1996. Warrants to
purchase the Company's stock were granted to holders of non-contingent HCC
stock purchase warrants as of May 17, 1996. Additionally, on April 17, 1996,
HCC itself was granted warrants, exercisable until April 16, 2001, to
purchase 267,589 Shares of the Company's common stock for $.50 per share.
The contracts and option rights transferred to the Company have no net book
value because development or servicing the rights is expected to require a
substantial infusion of capital. It is HCMI's intention to obtain the
necessary capital through this initial public offering of its common stock to
develop these rights and associated activities.
The activities to date principally relate to "Newsmaker" with Michael
Foudy and "The Travel Show" (with Larry Gelwix and Danny Kramer). There are
a number of other related talk show programs under development which are
expected to be added to the existing line-up, thereby enabling the Company to
develop a network of its own. This would permit stations around the country
to pick and choose from the Company's stable of talk shows. Such an
arrangement permits economies in production and enhances cross selling
opportunities to maximize advertising revenues and revenues from sponsorship
of these programs. (However, see "Risk Factors.")
HCC also has obtained rights to acquire working and/or equity
interests in specialized newspaper supplements (described in greater detail
in "Specific Opportunities Under Consideration"); while expected to cost
considerably more to develop, they are believed to be quite promising.
Accordingly, as a function of the amount of monies raised, it is intended
that a series of special interest supplements be developed and distributed by
newspapers around the country. The supplements can best be analogized to the
Parade insert that goes into many Sunday newspapers around the country.
These new products will be value-added supplements distributed by local
newspapers either within the newspaper or as stand-alone supplements to
segments of the non-subscribing market. The Company believes its proposed
magazine for teens and a national sports weekly have unique attributes.
Based upon its market research, actual experience and/or proprietary concepts
(including their expected distribution through existing newspapers), the
Company believes that a large readership can be developed relatively
quickly. (See, however, "Risk Factors.") (The "national sports weekly" and
"magazine for teens" names are working titles only; all materials and
editorial content will be protected by pertinent trademark and copyright
laws.)
As described in greater detail under each of the individual sections
which follow, the ownership interests will be negotiated independently for
each activity. For example, individual radio programs might be based upon a
fee or a
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percentage of gross advertising revenues generated and/or a percentage of net
profits without any actual ownership in the talk show itself. In contrast,
the proposed magazine for teens and national sports weekly are expected to be
separate joint ventures between the Company and the creators of such concepts
with each party sharing on a 50/50 basis after all expenses and the Company
has been repaid its original investment(s). Such expenses include paying
royalties aggregating 5% annually; during the first five years, the Company
will receive a royalty of 1.25% annually and its creators (or an entity
Messrs. Garcia and Baker control) will receive 3.75%; thereafter, the 5%
royalty payment will be paid entirely to its creators (or an entity they
control.) (See "Conflicts Of Interest - Gerald Garcia And Bradford W. Baker
Relationships" with regard to the relationship of such creators of these
specialized newspaper supplements to the Company.)
Specific Opportunities Under Consideration
The Company has identified several projects for which it proposes to
provide funding. No fixed commitments have been made for any of these
projects. The projects listed below are in different states of due diligence
and are intended to be pursued once, and only if, the funding contemplated
from this offering is achieved and the appropriate due diligence has been
completed. Therefore, at present, these projects cannot be viewed as probable
acquisitions. This list is not complete and those identified below are
subject to being discontinued if warranted after its due diligence review is
concluded. Management intends to fund projects strictly based on satisfactory
completion of appropriate due diligence and based on investment guidelines as
they may evolve over time. Any specific opportunities pursued will relate to
communications, broadcast or print, and/or management activities.
The Company intends to consider many other development projects and
intends to continue to raise capital to take advantage of opportunities, thus
providing income and asset growth for its shareholders based on its planned
investment and development strategy. The Company intends to develop strict
guidelines for investment, first considering preservation of capital, then
equity participation and liquidity. In most situations, it will endeavor to
maintain a preferred position with emphasis on an exit strategy with earnings
and a residual equity position. Actual liquidation of an investment will be
based on management's assessment of growth and earnings potential of each
investment. However, investments as suggested herein are inherently risky,
and there can be no assurance that these risks can be mitigated to the extent
that losses will not occur, and there can be no assurance that investors in
this offering will not lose all of their investment. Potential investors are
advised to consult their own legal and accounting counsel as to their
suitability for investment in the Company.
(1) Heartland Radio Network
The Company has established radio program marketing and, directly
and/or through contractual arrangements with ATB, production (in addition to
station ownership/operation) as one of its primary activities. It will
market those services to the $11.5 billion advertiser - supported commercial
radio broadcasting market. (Source: National Association of Broadcasters
1995 Annual Report.) The Company has a variety of other communication
properties, broadcast and/or print, under development and/or consideration.
The Company, directly or through ATB, will acquire, create, develop and own
creative content that it markets for domestic and international broadcasters
with the production being done by its affiliate, ATB. (See "Conflicts Of
Interest.").
The Company believes most nationally syndicated and locally produced
talk shows adopt a conservative political slant, attempting to emulate the
success of Rush Limbaugh's 15-year-old program by appealing to the so-called
"angry white male" which typically feels under-served by other media outlets.
The general tenor of talk radio has therefore become negative, angry and
anti-government, with much of the content provided by listeners themselves.
This has made some advertisers reluctant to advertise on talk radio
programming.
Because talk radio has largely ignored alternatives to conservative,
"sound off" themes, the Company believes the potential for talk radio which
is non-partisan and which presents alternative viewpoints emphasizing the
search for solutions to societal problems (rather than just complaining about
those problems) is considerable. (In fact, the
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Company will test its theory that the success of talk radio -- which it
believes strongly relies on participation by angry or alienated listeners but
is cheaper to develop and sustain -- may have peaked.) Support for this
theory can be found in the success of ethnic-oriented programming and
National Public Radio ("NPR") programming such as "All Things Considered" and
"Morning Edition." The NPR programs air in morning and afternoon drive
times; however, the economic potential of such programs is largely untested
because of their non-profit, non-commercial nature.
There are approximately 11,500 radio stations in America; about half
of these are AM stations, and most of them are co-owned and operated with FM
affiliates. Many AM radio stations lose money; about 1,200 of them have a
news/talk format, the only format to emerge in the past 20 years which has
consistently demonstrated the potential for profit on AM stations -- which do
not have the bandwidth required for the successful programming of music
formats. (Source: Broadcasting & Cable 1996 Yearbook.) Complicating this
inequity has been the inclination of packaged goods advertisers to
concentrate their messages on younger audience segments, as they have on
television. Thus, the share of advertising revenues flowing to AM stations
has steadily declined since 1975, and joint AM/FM licensees have concentrated
their energies on FM programming. Operators spend relatively little on AM
program content. In fact, almost 1,000 AM operators merely "simulcast" on
their AM outlets the programming that is produced on their FM outlets,
although the Federal Communications Commission ("FCC") frowns on the practice.
The limited local spending on local AM programming content has
provided a major opportunity for programmers who provide a national service
distributed inexpensively by satellite. As a result, AM radio, once thought
of as the prototypically local medium, is today heavily reliant on national
programs.
Most syndicated programs are provided to the local affiliate on a
barter (free, in exchange for advertising time) basis. Typically, the
national program receives one-quarter to one-half of the total commercial
time (up to 15 minutes total) available per hour in exchange for providing
the program content itself. Some programs are distributed on a cash basis
only. Talk radio programs can be broken down into several categories --
entertainment/humor, advice/information, host opinion and listener driven.
Several networks have sprung up to provide additional syndicated
programming on a barter basis, including Talk America, Sun Network,
Chancellor Radio Network, Talk Radio Network and the Business Radio Network.
These networks typically sell production and transmission services to the
program hosts, who then sell national advertising time to cover their costs.
Syndicated talk shows air from one to six hours per day -- most often
two to three hours -- and most have 15 to 60 local affiliates. Most
affiliates are in medium to small markets or cover portions of larger markets
(radio coverage areas are substantially smaller than TV coverage areas). The
Company believes station operators and programmers face a paradox in
designing talk radio formats. According to listener surveys at the station
level and in the media which cover them, controversial programs draw the
largest audiences and are therefore the most desirable. However, most
nationally syndicated advertisers avoid controversial program formats for
fear of having their product(s) identified with a particular controversial
political viewpoint. Thus, nationally syndicated talk shows may have great
difficulty selling their advertising time.
As a recently formed, development stage company, the Company has only
recently begun to have business activities. Many of these activities are
those that were assigned from HCC, incorporating pre-existing business
relations, contractual rights and opportunities. In that context, ATB has
been producing and distributing a number of radio shows as described above or
has a number under development. To expand those activities and to create a
focus, the talk radio programs have been cross marketed to prospective radio
stations and newspapers under the trade style, the "Heartland Radio Network"
("HRN"). Under those pre-existing agreements, ATB enters into the contracts
and the Company receives various percentages of the gross revenues generated.
As described above, those interrelated transactions constitute an affiliated
relationship among the Company, ATB and HCC. Because ATB is an integral part
of the communications business contemplated by the Company, it is possible
that a merger between the two will be affected at some time in the future.
Because the communications activities developed by HCC have already been
spun-off and HCC will continue to function as a merchant bank in other areas,
it is unlikely that a merger or other combination will
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occur between the Company and HCC. (As described in the last paragraph of
"Conflicts Of Interest," any such merger(s) would require approval by a
majority of the independent Board of Directors members.)
HRN has been formed to take advantage of the inherent opportunity in
this situation. Specifically, ATB has obtained agreements with various
nationally syndicated talk shows (of the host opinion and advice/information
type) and a talk radio network to market their availabilities. By combining
buys in several programs, the Company can assemble an audience sufficient to
justify an advertising buy for national advertisers who have minimum
audience-coverage requirements. In addition, HRN will work to place
advertising in targeted local talk shows in major markets to assure
appropriate coverage.
By delivering sponsors to struggling talk show hosts, the Company
believes it has the opportunity to demonstrate to those hosts how they can be
financially and politically independent. The Company expects the resulting
increase in diversity of its talk radio programming by programmers seeking to
exploit targeted markets will serve to build audience size and interest. The
Company believes this will help AM broadcasters become financially viable and
help attract both hosts and advertisers to the Company and HRN. Moreover,
the Company believes it can assemble a team of professionals with experience
and expertise in media who will assure quality programming, provide
personalized service to advertisers and develop excellent affiliate relations.
A substantial portion of the Company's revenues initially will be
generated from the sale of advertising and production services for broadcast
on its talk show programs in various market niches. Additional broadcasting
revenue will be generated from production services agreements and other
miscellaneous transactions. Local advertising sales will be made by each
talk show's sales staff (or that of their affiliates). National advertising
sales are made by firms specializing in radio advertising sales on the
national level in exchange for a commission from the Company (based on its
gross revenues from the advertising contained on the respective talk show
programs).
The Company believes that radio is one of the most efficient and
cost-effective means for advertisers to reach specific demographic groups.
Advertising rates charged by talk shows are based primarily on (i) the
program's penetration of demographic groups targeted by advertisers; (ii) the
number of stations in the market competing for the same demographic group;
(iii) the supply of, and demand for, radio advertising time; and (iv) certain
qualitative factors. (Because of a larger audience, rates are generally
higher during morning and afternoon commuting hours.)
In large markets, where national and regional advertisers are
particularly active, radio stations live and die on the strength of their
ratings. A station's ability to deliver audiences of specific demographic
type is evaluated by advertisers and used by their representatives when
negotiating advertising contacts with broadcasters. The radio broadcast
industry's principal ratings service is Arbitron, which publishes the results
of quarterly ratings surveys in the largest markets and which maintains
databases on station ratings in smaller markets as well, for use by
subscribers. These survey data, contracted through Marketron, are an
important tool used by the Company in fashioning program production
strategies and setting advertising rates for its programs.
Broadcasters in smaller markets, and the program suppliers who serve
them, frequently do not have Arbitron data available to them. Moreover,
broadcasters in some cases ignore these data even when they are available
because the broadcasters specialize in developing audiences among niche
population segments not counted by Arbitron. Ethnic minorities who speak
neither English nor Spanish constitute a growing niche market. Serving these
market segments is a growing business for radio broadcasters, particularly
among AM licensees located on the fringes of major markets. Typically, the
station rely on their on-air personalities to develop their ethnic audience
coverage and to market advertising time to local businesses serving those
niches. The stations sell air time to these personalities in hour-long
blocks (and thereby are relieved of the heavy financial burden of maintaining
their own staffs of personalities and advertising sales specialists).
The Company is assisting its ATB affiliate in entering this market.
Working with Texas businessman, Fred Lundgren, ATB Media, Inc. - a new ATB
subsidiary - is attempting to acquire three distressed AM licensed stations
in California, Washington and other states and converting them to block-time
sales operations. Lundgren, a radio
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industry veteran, is replicating a station conversion formula successfully
employed in the Houston market over the past three years. The Company will
earn fees for arranging the financing for station acquisition as well as
assisting in the management of them and, as a consequence, will receive a
share of station revenues through its contractual relationship with ATB.
Future expansion in this area would include producing programs for
possible television and/or cable television syndication as well.
(2) Communications Companies Acquisitions
As of this date, the Company has been engaged principally in
organizational activities and limited operations. Nonetheless, the Company
has identified a number of investment opportunities that it intends to
continue investigating when capitalized. While the Company has performed
limited due diligence on these projects to date, it intends to continue to
investigate them (and other opportunities) adequately as capital becomes
available. Any specific opportunities pursued will relate to communications,
broadcast or print, and/or management activities.
The Company will continue to identify (and expects to pursue)
acquisitions of communications-related activities in situations where the
Company believes it can successfully apply its operating strategy and where
such businesses can be acquired on economically attractive terms. The
Company expects to grow by emphasizing internal growth of its business and by
making targeted acquisitions of companies in the communications sector with
above average growth potential (at least 20%) at prices believed by
management to be attractive, even under-valued, and which fit synergistically
in a regional concept that will aid in the targeted marketing and promotion
of the Company --i.e., a community newspaper and a community radio station
working together to cross-market programs and products targeted at specific
demographic and/or psychographic niche markets. Management will continue to
emphasize strategic acquisitions and dispositions, internal growth, operating
efficiencies and cost reduction. As a result, management believes that the
Company is positioned to achieve internal growth and to benefit from the
general economic recovery as well as from the current recovery in the
communications industry.
The Company has had preliminary discussions with a competitive talk
show network with regard to possible acquisition. To date, those discussions
would have to be characterized as preliminary. Nonetheless, it is expected
that once at least $2,000,000 has been raised, those discussions could result
in future acquisitions -- for example, other radio network(s) or portions
thereof and/or at least access to another network's transponder. (See
"Application Of Proceeds.")
Other communications companies which might be sought would include
community newspapers and Internet-related businesses. (For example, one talk
radio network recently became the first to offer its programming in real time
on the Internet 7 days a week, 24 hours a day.) Because of the current lack
of funding to actively pursue potential targets, possible future acquisitions
might occur fairly rapidly once funding of at least $12,500,000 has been
achieved. Moreover, as a public company, it is possible that Shares of the
Company will be exchanged for interests in those companies or facilities.
As part of this strategy, the Company envisions acquiring certain
properties. This is felt to have certain advantages under a "cluster" theory
that has proven quite successful for other communications companies.
Specifically, if one advertises on talk radio, those same prospective
advertisers may want to advertise in local newspapers, particularly smaller
suburban newspapers. This same principle can be expanded to specific niche
newspapers in certain geographic areas.
One of the Company's contemplated activities is to provide management
in integrated marketing communication services. Because of the breadth of
experience of its principals, this provides tremendous cross-marketing
opportunities across the local spectrum of media -- local newspaper and/or
radio and/or television. This provides a cost-effective mechanism for
products and programs to be advertised. This is typically arranged through
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a barter of certain time and space on one medium for time and space for
another. Such practices are complementary rather than competitive since many
advertisers want to engage in a media mix that is viewed as prudent. For
such services, the Company will typically be paid the standard industry
commission/advertising agency rate of 15% of the gross value of the
transaction. Accordingly, even if the media involved are not affiliated and
no money changes hands, the Company would nonetheless be paid its
contemplated commission.
(3) A National Sports Weekly Magazine
Because sports are an integral part of the American way of life, the
Company believes those viewing and participating in sports are a very large,
but underserved, print market niche. The Company believes sports are
universal activities that cut across age, sex, income, ethnic and other
demographics. Like the magazine for teens described in the following section,
the Company intends to bring the proposed national sports weekly to market
through a joint venture with the creators of the concept, Gerald Garcia
(Executive Vice President and formerly President) and Bradford W. Baker
(Secretary-Treasurer of the Company) in return for the Company providing
needed funding (approximately $5,037,000 if $12,500,000 is raised). (See
"Conflicts Of Interest.")
The proposed national sports weekly (hereinafter called "NSW") will
use distribution channels similar to the proposed magazine for teens (see
discussion following), thereby permitting economies of scale. NSW will be
published as a national medium for advertisers to reach adults 18 - 54. A
national sports weekly also would lend itself to being co-sponsored by
commercial networks or companies associated with sports.
With a staff of top sports editors and writers, NSW will provide a
fully formatted tabloid-size magazine to newspapers on a weekly basis. While
most people's first choice today for printed information is their local
newspapers, those publications cannot afford the staff to report in depth on
all of the major sports beyond the news of franchise and college teams in or
near the newspaper's coverage area, much less provide coverage of the less
popular sports.
The Company anticipates signing up a reasonable percentage of the
nation's newspapers to distribute NSW. The overhead and production structure
of NSW is expected to be highly efficient. The Company expects it will be
able to offer advertisers a media product with a high circulation at a low
cost-per-thousand. In fact, the Company expects its weekly reach will be
significantly higher than other sports-oriented media, including television
sports shows, but at a cost-per-thousand that is highly competitive.
For example, Parade Magazine, printed independently and then
distributed through newspapers, has a circulation of 37,614,000. (Source:
AdWeek's Guide to Media, 1995. ) Most print publications are printed and
distributed independently, resulting in significantly lower circulation and
higher costs. For example, Sports Illustrated's circulation is 3,465,000,
Inside Sports' circulation is 675,000, Sporting News' circulation is 515,000
and Baseball Weekly's circulation is 303,409. (Source: AdWeek's Guide to
Media, 1995 and ABC, 1994.) While the market penetration for NSW may not be
as high as Parade Magazine's 37.614 million circulation, the Company believes
it can achieve a reasonable penetration rate.
Network and cable television also will be considered a competitor of
NSW because it is an efficient means of reaching a large audience
cost-effectively. At the currently projected cost-per-thousand, NSW rate
will be very competitive against all "day parts" (a media term meaning all
segments of the programming day), delivering a readership that may equal or
exceed that of a typical prime time show.
NSW will be created weekly at NSW's headquarters, then distributed
electronically to subscribing newspapers. National advertising will be sold
directly by the staff of NSW. Participating newspapers can add local
advertising by either deleting certain identified editorial content or by
adding more pages. These newspapers also can add their own local editorial
content, if desired.
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The targeted advertisers for NSW are those companies that have a
desire to generate immediate sales, have a need to disseminate printed
information (for image, couponing, schedules, etc.) and who want to
supplement their electronic advertising.
The Company will commit approximately $5,037,000 of this offering's
net proceeds to create NSW. The Company has executed an agreement with ICON
International, Inc., a media barter and trade company, for $11,800,000 in
advertising placement over a five year period. Based upon the potential
represented by such agreement, the Company believes NSW is viable (with
operations capable of commencing as early as September 1998.).
Such funds will be used for purposes relating to bringing NSW to
fruition, including research and development to further fine-tune the
competitive advantages as well as exposing any potential obstacles among the
Company's three target audiences (newspaper publishers, advertisers and
readers); hire an editorial and sales staff to create, sell and distribute
NSW; maximize sales with an extensive advertising and public relations
campaign to promote their product; and build customer support services to
handle the demands created by the influx of advertisers and participating
newspapers. In addition, there will be a negotiated royalty fee to the
copyright owners for the national sports weekly concept. (See last paragraph
of "Introduction.") However, the Company is currently exploring potential
strategic partners for its national sports weekly. Should these
relationships develop, the Company's investment in this venture may be
reduced. (See "Application Of Proceeds.")
(4) A Magazine for Teens
The Company intends to create a magazine for teens which will be
developed for the purpose of delivering a cost-effective medium for
advertisers to reach the targeted teen and pre-teen (ages 11 - 18) market.
The Company intends to bring such magazine for teens to market through a
joint venture with the creators of the concept, Gerald Garcia ( Executive
Vice President and formerly President of the Company) and Bradford W. Baker
(Secretary-Treasurer of the Company) in return for the needed funding
(approximately $2,300,000). (See "Conflicts Of Interest.")
While there have been electronic means (such as MTV) to reach the $60
billion teen market (Source: AdWeek's Guide to Media, 1995), the Company is
not aware of one national print publication that can reach a large audience
at one time. Similarly, a 1994 survey reported that teenagers spend their
money on food, electronics, entertainment and health and beauty aids.
(Source: Find/SVP 1994.) Advertisers also desire to establish a relationship
with teens because of not only their buying power but also their influence on
household purchases. The Find/SVP 1994 study revealed teenagers influence
household purchases amounting to more than $161 billion annually.
The Company is now in the development phase of a magazine for teens.
From 1989 to 1991, Xpress was published for the Knoxville, Tennessee area
teen market as a joint venture between the Knoxville Journal and The Creative
Network, Inc., and its two principals, Garcia and Baker. (Xpress was
discontinued in 1991 after the sale of the Knoxville Journal). Originally
tested as a monthly, the magazine was distributed in East Tennessee schools.
Written by and for students, Xpress was the first publication of its kind.
Teen acceptance was extremely high with a circulation of more than 20,000
monthly. This publication also set new standards in the field of computerized
pre-production -- e.g., Xpress was one of the first publications in the
country to be produced entirely on computer. (See "Specific Opportunities
Under Consideration.")
The proposed magazine for teens will be aimed at middle and high
schools (grades 7-12) and will be published weekly. It will be created at
the magazine's headquarters, then distributed electronically to subscribing
newspapers which will distribute it to students at schools in their market
area as part of their "Newspapers in Education" program.
National advertising will be sold directly by the magazine.
Participating newspapers can add local advertising by either deleting certain
identified editorial content or by adding additional pages. These newspapers
also can add their own local editorial content, if desired.
The targeted advertisers for the magazine are those companies that
have a desire to reach the affluent teen market -- companies such as
Coca-Cola, Taco Bell, Pepsi, Levi's, Blockbuster, The Gap and McDonald's.
The
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Company believes it can attract advertisers who know teens spend (especially
when it comes to food, clothes and fun) and help such advertising entities to
generate immediate sales and establish future brand loyalty. In turn, this
influences the buying decisions of parents of teens. According to market
research, teens have increasingly more money to spend, do a
disproportionately large portion of the family shopping and are more apt to
try a new product than would be their parents. (Source: Find/SVP Study,
1994.) The Company business plan was developed on the premise that the
magazine will permit the Company to tap into such favorable demographics.
Future product development by the Company will include the targeting
of other demographic niche market groups such as 50+ adults, African
Americans, Hispanics and Native Americans, as well as other products that can
be distributed in a manner similar to the magazine.
The Company will commit a portion of the offering's net proceeds to:
create the magazine for teens, including hiring an initial editorial and
sales staff to create, distribute and sell the magazine; maximize sales with
an extensive campaign to promote the magazine; build customer support
services to handle the demands created by the influx of advertisers and
participating newspapers; and use research and development to create other
products capable of being distributed through pre-existing newspaper
networks. In addition, a negotiated royalty fee for the magazine's concept
will be paid to its copyright owners. (See "Introduction" with regard to the
fee and "Conflicts Of Interest -- Gerald Garcia And Bradford W. Baker
Relationships" with regard to the relationship between such creators and the
Company).
There is no niche market teen-oriented national publication that can
reach a large teen audience. Magazines such as Sassy and Seventeen reach at
best 1.9 million subscribers per issue and are targeted to females. (Source:
AdWeek's Guide to Media, 1995.) There are even fewer choices in male teen
publications (Boy's Life and Sports Illustrated for Kids), reaching only
1,300,000 and 950,000, respectively. (Source: AdWeek's Guide to Media,
1995.) Electronic media have been successful at reaching teens; however,
their reach is generally less than commonly perceived -- for example, MTV's
audience is currently approximately 328,000 per quarter hour between 1:00
a.m. and 3:00 a.m. and 656,200 between 7:00 p.m. and 3:00 a.m. (Source: A.C.
Nielsen, 1995.)
While the Company believes the magazine for teens will be more
interactive and wider-reaching than MTV-like products, it is also
complementary with them (since the magazine is a printed product) with
respect to their use by major advertisers. For example, the magazine's
printed format allows for couponing and can be used as a cross-selling device.
Xpress was distributed in Knoxville to 90% of the high schools (18 of
20) and 83% (20,000 of 24,000) of the students at those schools actually read
it. (Source: Knoxville Journal, 1991.) While the market penetration on a
national basis is not expected to be as high as in the Knoxville experience,
the Company believes a reasonable penetration rate of the targeted 37
million, $60 billion teen audience can be achieved. (Source: Ad Week's Guide
to Media, 1995.)
(5) Management and Marketing Services
While currently a limited activity of the Company, it is expected
that integrated communications management services will constitute a growing
portion of the Company's business. Once funding is in place, for example, it
is anticipated that new personnel will be engaged to complement the Company's
existing personnel. The contemplated activities would be associated with
representing clients for cash fees (and possible equity-based) compensation
for management advisory services. Because the Company intends to embark upon
an active acquisition strategy, it is felt that these management and
consulting services would complement the Company's other activities since it
would already be seeking comparable information and generally be in the
"information flow." It is believed attractive economies for upcoming business
activities will result, thereby permitting the Company to acquire poorly
managed companies that could benefit from professional management techniques.
One of the Company's contemplated activities is to provide management
in integrated marketing communication services. Because of the breadth of
experience of its principals, the Company believes there are promising
cross-marketing opportunities across the local spectrum of media -- local
newspaper and/or radio and/or television. This provides a cost effective
mechanism for products and programs to be advertised. This is typically
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arranged through a barter of certain time and space on one media for time and
space on another. Such practices are complementary rather than competitive
since many advertisers want to engage in a media mix that is viewed as
prudent. For such services, the Company will typically be paid the standard
industry commission/advertising agency rate of 15% of the gross value of the
transaction. Accordingly, even if the media involved are not affiliated and
no money changes hands, the Company would nonetheless be paid its
contemplated commission.
The Company believes this will introduce attractive economies
because, once an advertiser uses a particular medium, it is a good candidate
for doing more advertising on related medium and programming in the
community. This approach also ties into the phenomenon that most advertising
(approximately 53%) is done in print and the balance is allocated between
television, radio and other media. (Source: Advertising Age, September
1995.) (See "Communications Companies Acquisitions.")
One of the principal functions of the marketing services function
will be to develop marketing concepts, ideas and strategies for a fee to
non-affiliated entities. This will constitute the generator of new revenue
sources and provide value-added service to advertisers on the Company's radio
programming. It is believed that the Company can develop new marketing and
promotion strategies based upon this basic concept.
In the same vein, much of the Company's strategy is to avoid
traditional distribution networks but rather to deliver directly in bulk
- --whether the proposed magazine for teens, a contemplated national sports
weekly or any other specialty publication. This permits the Company to get
incremental returns in an existing market with little or no costs.
Fairness of Consideration
On June 26, 1996, the Company retained the valuation firm of Houlihan
Valuation Advisers, Inc. ("Houlihan") to review the proposed terms of the
$5.00 per share initial public offering (the "IPO") price. Houlihan was
selected from among a number of investment banking firms and consultants on
the basis of its lack of affiliation with the Company, its affiliates or
possible underwriters, as well as its experience, expertise and national
reputation. Houlihan was retained for the sole purpose of opining whether or
not the proposed transaction was fair from a financial point of view to
prospective investors in the IPO. No limitation was placed on the scope of
Houlihan's investigation. The Company believes Houlihan is qualified to
render the opinion because of its extensive experience in valuing companies,
including those going public for the first time.
Houlihan has rendered an opinion to the Company, attached to this
Prospectus as Appendix III (the "Fairness Opinion"), to the effect that the
offering price to the public shareholders is fair from a financial point of
view. In preparing to render the Fairness Opinion, Houlihan reviewed the
Company's Prospectus, financial statements, forecasts and management reports,
budgets and projections, met with the Company's management, members of the
Board of Directors and conducted such other studies, analysis and inquiries
as the firm deemed appropriate to discuss the businesses and prospects and
made such other investigations as it considered necessary. Houlihan visited
with the Company's officers but did not cause any physical assets of the
Company to be appraised.
The Company paid a $30,000 fee to Houlihan and has agreed to
reimburse Houlihan for certain expenses in connection with rendering the
Fairness Opinion and to indemnify it against certain costs, expenses and
liabilities to which it may become subject arising from services rendered in
connection with the Fairness Opinion. During the five years prior to being
retained by the Company, Houlihan had not performed any services for the
Company or any of its affiliates.
Management
(1) Officers
Michael L. Foudy, born 1951, a principal founder, President, Chief
Executive Officer and Chairman of the Board of Directors, graduated from the
University of Arizona in 1973 and received a Juris Doctorate from the
University
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of Arizona College of Law in 1976. Mr. Foudy hosted ATB's "America The
Beautiful" nationally syndicated talk radio show from February 27, 1995 until
February 28, 1977 and now co-hosts "Nesmaker" which is broadcast on 119 radio
stations by the United Broadcasting Network. He has diverse experience in
public affairs, integrated marketing communications, strategic planning,
management, entrepreneurship, finance, writing and broadcasting. Mr. Foudy's
accomplishments include creation of a 30,000 member Utility Shareholder's
Association to intervene in rate legal cases and winning over $400 million in
increased rate base. During the 1992 Presidential primary campaign, he was
actively engaged in organizing a movement to draft an independent candidate
for President (which activities generally would permit an independent
candidate for President to obtain ballot access in all U.S. jurisdictions).
During 1974, while in law school, Michael Foudy founded a small
marketing communications Company in Tucson. When he sold his interest in the
Company thirteen years later, WFC/Westcom had grown to be the largest public
affairs/public relations Company in Arizona with billings of over $7 million,
with offices in Tucson, Phoenix and San Diego, a staff of twenty-five
professionals, a base of "blue chip" clients and a history of profitability.
Since 1987, Mr. Foudy has undertaken a variety of projects on behalf
of distressed clients. These range from a comprehensive marketing audit for
the owners of Garfinckel's Department Stores in Washington, D.C. to
preparation of promotional and sales materials for the liquidation of $86
million of commercial property and the auction of 4,000 residential
properties once owned by First City Bank of Houston, Texas. He directed the
successful repositioning of a master planned golf and retirement community
owned by Fairfield Homes in Green Valley, Arizona and designed a
comprehensive marketing communications program which doubled home sales for
the troubled home builder. He also supervised the restructuring/liquidation
of Compass Publishing based in Chicago, Illinois and Sarasota, Florida.
Mr. Foudy wrote the book Reinventing America which was published by
the Institute for American Democracy. He serves on the Board of Directors of
Heartland Capital Corporation, which he co-founded, and is Of Counsel to the
DCM Group, an integrated communications strategy firm based in McLean,
Virginia. Mr. Foudy has been active in a variety of charitable and community
organizations including the Tucson Free Clinic, Tucson Community Food Bank,
Arizona Opera Company and Southwestern Film Consortium. He currently serves
on the foundation for American Liberty and the American Initiative Committee
Board of Directors and is Editor of the American Initiative Newsletter.
Gerald Garcia, born 1943, Vice President and formerly Chief Executive
Officer and Chairman of the Board of Directors, graduated from Texas A&M
University in 1967. Mr. Garcia joined the Company from The Houston Post,
where he was vice president and editor. During his three-years there, The
Post was honored regularly for journalistic excellence. Prior to his return
to his native Texas, Mr. Garcia was editor and publisher of the Knoxville
Journal and president and publisher of the Maryville Daily Times, its nearby
sister publication. Mr. Garcia had a significant impact on both newspapers.
He supervised the transformation of the Daily Times to a morning paper,
redesigned the Journal and led both papers to journalistic excellence and
economic vitality. During his tenure, the Journal was credited with having
developed the "Best Sports Section in the Country" for newspapers of 50,000
circulation and under and the Daily Times was named "Tennessee's Best
Newspaper" by the Tennessee Press Association in 1990 and 1991. While Mr.
Garcia was editor of the Journal and Daily Times, respectively, market
penetration grew for both newspapers at rates superior to industry standards
for newspapers of comparable size.
Mr. Garcia began his career at the Brenham Banner-Press while
attending Texas A&M. He held the positions of reporter, sports editor and
managing editor there. After receiving his B.A. degree in Journalism, he
moved to the Corpus Christi Caller-Times as sports reporter and sports news
editor and then on to the Fort Worth Star-Telegram as a sports reporter and
his first significant newsroom management responsibilities.
In 1976, Mr. Garcia went to the Kansas City Star and Times where he
was director of newsroom operations and assistant to the publisher. He later
also assumed directorship of the Capital Cities' Minority Training Program.
Mr. Garcia moved next to the Gannett Company where he was general executive
of the San Bernadino Sun and then editor and publisher of the Tucson
Citizen. In 1983, he was named vice president of Gannett West Newspaper
Group.
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Mr. Garcia played an integral role in the launch of USA Today,
supervising the building of Gannett's print site in Phoenix. He returned to
the home of his alma mater in 1986 to be publisher of the Bryan-College
Station Eagle before moving to Knoxville in 1988.
In 1984, Mr. Garcia received the Ruben Salazar award for his
achievements in publishing. Mr. Garcia has been a community leader wherever
he has lived, most notably in Tucson, where he is credited with creating "The
New Pueblo" concept. He served a two-year term, in 1989-1991, as chairman of
the American Newspaper Publishers Association's Task Force on Minorities in
the Newspaper Business.
Bradley B. Niemcek, born 1940, Vice President-Operations and
director-elect of the Company, is a 1965 Journalism graduate of Marquette
University and is currently pursuing, on a part-time basis, a graduate
degree in International Telecommunications at George Mason University. He
plays and active role in the Heartland Radio Network, which not only provides
marketing and management services to ATB Productions , L.L.C. but also has
other broadcast activities under development. Mr. Niemcek is a 30-year
veteran of the communications industry. He spent his early years as a
newspaper reporter, television news writer and public relations executive.
In addition, Mr. Niemcek for the past two decades has worked for, or
established and built his own, companies specializing in client services
based on emerging communications technologies. Mr. Niemcek began his career
as a reporter and writer for the Milwaukee Sentinel and the NBC affiliates in
that city, WTMJ radio and TV. He was recruited into the corporate public
relations field in 1967 by Carl Byoir & Associates in Chicago and, after one
year there, moved to its New York headquarters. Mr. Niemcek departed Byoir
in 1974 to undertake a series of entrepreneurial enterprises in the sports
promotion field, television syndication and in newsletter publishing. In
1982, he founded Newslink, Inc. to develop and market a satellite
distribution service to connect public relations enterprises with the
nation's local TV newsrooms. By 1988, the firm had expanded to include
offices in New York and Washington, D.C. and diversified into providing
facilities management satellite services for broadcast and cable TV clients
as well; its largest client was Cable News Network ("CNN"). Mr. Niemcek sold
his interest in Newslink in 1988 and formed TV People, Inc., a television
facilities management firm and, from his new base in the Washington, D.C.
area, consulted on the development of a number of local and regional
political campaigns.
Bradford W. Baker, born 1955, Secretary -Treasurer of the Company,
attended the University of Dallas from 1974 - 1975. Mr. Baker's professional
experience spans 20 years of advertising, sales management and marketing. He
is currently President and partner of The Creative Network, Inc., an award
winning full-service advertising agency located in Knoxville, Tennessee.
Prior to helping form The Creative Network, Mr. Baker was a VP/Account
Supervisor at Charles Tombras Advertising, Inc. in Knoxville and at Caraway
Kemp Communications in Jacksonville, Florida. He has worked on both the
client and agency sides of the business and won several awards and
distinctions including: Who's Who in Advertising, a Presidential Citation for
Private Sector Initiative, two 1990 Telly Awards, a 1992 National ADDY award
from the American Advertising Foundation and a 1996 Knoxville ADDY Best of
Show. Mr. Baker has extensive experience in creating, marketing and
publishing various media vehicles. These include:
- - Boating Magazine: The Creative Network is the agency of record for
this industry-leading publication. Work for this client includes all
marketing facets, with heavy concentration on trade advertising and
positioning.
- - Xpress, a magazine for teens. (See "Specific Opportunities Under
Consideration -- A Magazine For Teens.")
- - The Star: Published for MasterCraft Boat Company, this quarterly
publication has a circulation of 25,000. The Star, generally
recognized as one of the best publications within the boating
industry, is designed, written and produced entirely by he Creative
Network.
- - The Weekend Journal: The Creative Network was responsible for all
research, marketing and publicity for this new weekly newspaper which
was successfully launched in January 1992.
Mr. Baker has also acted as consulting advisor for The Knoxville Journal and
two Knoxville suburban newspapers, The Oak Ridger and the Maryville Daily
Times, and worked extensively on the launch and marketing of several
publications
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for target marketer, Whittle Communications, L.P. Mr. Baker was also
instrumental, together with Mr. Garcia, in refining the concept and
developing the business plans respectively for the proposed teen magazine and
national sports weekly joint ventures.
Linda G. Moore, born 1947, Assistant Treasurer and Chief Financial
Officer of the Company, attended Chico State College from 1965 to 1968. Ms.
Moore has been Chief Administrative Officer of the DCM Group, an affiliate of
Edward S. DeBolt and Company, Inc. ("ESD") since 1978. She was Secretary of
the Republican State Central Committee of California from 1969 to 1970 and,
in 1971and 1972, was Assistant to the Deputy Chairman of the Republican
National Committee. During 1973, Ms. Moore was Office Manager of Donnelly
Marketing's National Political Office. She was Office Manager and held the
office of Secretary-Treasurer from 1974 to 1996 of ESD and has served on its
Board of Directors since 1974.
Sherri Schwamb Denora, born 1961, Assistant Secretary of the Company,
is a 1983 graduate of Mary Washington College, Fredericksburg, Virginia.
During 1983 and 1984, Ms. Denora was a secretary and receptionist of Marinas
International, Ltd. Since 1984, she has been production manager of the DCM
Group, a subsidiary of ESD, responsible (among other activities) for print
production, event management and the training and supervision of new
employees.
It is expected that additional personnel will be employed to assist
in operations and financial management. The Company has also identified
several people that are candidates for key positions within the organization.
The Company has discussed opportunities with some of these people and
intends to actively recruit them upon funding. Management recognizes that
their expertise and experience is essential to success of its business plan.
The Company intends to also continue to expand its advisory group in the
areas of business and finance.
(2) Directors
Michael L. Foudy. (See "Officers" above.)
Ron Alexenburg, born 1942, has been President of National Record
Company since April 1997 and a music business consultant since 1990 for,
among others, The Beach Boys, Cabin Fever Entertainment (a division of U.S.
Tobacco), American Re-Insurance Company, Rawkus Entertainment (an affiliated
company of James Murdoch) and Joseph Antonini (past chairman of K-Mart). He
also recently taught at New York University as a Professor of Business Music,
Music Promotion and Advertising. From 1988 to 1990, Mr. Alexenburg was a
partner with Cy Leslie at Aegis Entertainment in 1988. In March 1980, he
joined Peter and Trudy Meisel and Ariola (GMB) to establish Handshake
Records, leaving in 1988. In April 1978, Mr. Alexenburg established Infinity
Records, in association with MCA, until he left in 1980. As CEO and
President, he signed entertainers or groups that included Orleans, Hot
Chocolate, Spryo Gyra and Rupert Holmes (all of which had "gold" recordings).
Prior to that association, Mr. Alexenburg was named Senior Vice President
and General Manager of Epic Records, a division of the CBS Records group, in
July 1977; at that time, he also started the Portrait label, signing the
highly successful group Heart. Sales increased at Epic and the CBS
associated labels dramatically during the next seven years. For five
consecutive years, the organization signed, developed and successfully
marketed more than 25 new artists, all of which achieved "gold" (sold over
half a million units) status, including two of the most successful album
sellers of all time: the artist Meatloaf and the group Boston. Mr.
Alexenburg joined Columbia Records in December 1965 and was promoted to Vice
President of Epic Records in May 1971, after holding increasingly responsible
positions and receiving numerous industry awards for his achievements.; a
year later, in 1972, he was given full responsibility for the label's growth
at which time he brought Michael Jackson (and "Thriller," the most successful
album of all time) and The Jackson Family to Epic Records. Mr. Alexenburg
began his career with Garmisa Distribution, one of Chicago's leading
independent record distributors in 1962, were he held positions in sales,
marketing and promotion, while he represented companies such as ABC Dunhill,
Mercury, Phillips and United Artists.
32
<PAGE>
Thomas Burgum, born in 1935, is a principal of Thicksten Grimm
Burgum, a Washington, D.C.-based law firm. Mr. Burgum is a 1958 graduate of
Jamestown college (North Dakota) and a recipient of a 1965 law degree from
the University of North Dakota. Since 1982, he has been a principal and
Executive Vice President of Thicksten Grimm Burgum, overseeing the
implementation of lobbying and consulting services to industrial financial
and government clients. From 1980 - 1982, Mr. Burgum was the principal of
Burgum and Associates, serving as a government relations consultant to a
variety of agricultural and local government clients. In 1979 - 1980, he
served as Deputy Under-Secretary of Agriculture, directing operation of the
FmHA (rural development) loan, Alternative Energy and Rural Rail Acquisition
programs; in such capacity, Mr. Burgum was selected to act as chairman of the
Secretary's Working Group of Agriculture and Transportation; selected to
represent the Department in issue negotiations with the Office of Management
and Budget as well as the Department of the Treasury; and received a
Presidential Commendation for coordinating successful Carter Administration
efforts to pass the rural Development Act of 1980. From 1971 - 1979, he
served as a member of the staff of the appropriations committee for North
Dakota Senator Quentin N. Burdick, directing legislative research for that
committee's Agriculture, Transportation and Environmental Subcommittees and
coordinated legislative efforts during the period with representatives of the
Executive Branch during the Nixon, Ford and Carter Administrations. From
1972 - 1974, Mr. Burgum served as Staff Director of the Bankruptcy Reform
committee for Senator Burdick' directed the legislative drafting and lobbying
effort for the Municipal Bankruptcy Amendments of 1975, acted as Staff
Advisor for the Judiciary Subcommittee Chairman during the floor debate; and
received a special Presidential commendation for staff work on the Municipal
Bankruptcy Amendments. From 1968 - 1972, he served as North Dakota State's
Attorney for Stutsman County; in such capacity, Mr. Burgum represented the
state in all criminal prosecutions and, as the senior attorney for this
governmental unit, managed all legal operations of the county.
Kirby S. Ralston, born 1953, is a 1976 graduate of Texas Christian
University with a B.A. in Journalism. While in college, Mr. Ralston worked
in the sports department at the Fort Worth Star-Telegram. He also was a
staff member of the TCU student newspaper and radio station. After
graduation, Mr. Ralston joined the family-owned Ralston Advertising in
Omaha, Nebraska where he handled the sales and marketing of promotional
advertising products. In 1978, Mr. Ralston formed A Advertising & Supply, a
direct mail marketing unit of Ralston Advertising specializing in the
promotion of political campaign items. In 1990, Mr. Ralston was named
President of Ralston Advertising/A Advertising & Supply. He is a board
member of the Mid-America Direct Marketing Association and an active member
of the Greater Omaha America Marketing Association and the Omaha Federation
of Advertising.
B. Eric Sivertsen, born 1953, who graduated from the College of
William & Mary in 1975 and George Mason University School of Law in 1981,
previously served as an officer and director of various subsidiaries of
DeRand Corporation of America. Mr. Sivertsen, who currently serves as
executive vice president of Telecom Towers, L.L.C., is a member of the
Virginia state bar and has extensive experience creating marketing strategies
products and has coordinated the development of a national securities
marketing organization and selling group. He has performed acquisition due
diligence, including financial and other risk analysis of potential
acquisitions, budget preparation and other pro forma financial analysis. Mr.
Sivertsen has negotiated various acquisition-related agreements, including
purchase and sale, senior and subordinated commercial financing, seller
refinancing, mortgages, leases, employment and credit enhancement agreements.
He also manages operations of a public telecommunications fund, oversees
preparation of budgets, contract negotiations, development of operating
strategies, as well as the review and hiring of personnel. He served as
senior deputy to the chairman of the board of DeRand Corporation of America,
serves as in-house counsel to DeRand and Chief Personnel Manager and
Administrator for several DeRand subsidiaries. During the last several
years, he has been selected to speak at various investment seminars and
conferences and on radio regarding telecommunications investments and
investment banking.
(b) Directors - elect
Effective concurrent with registration of this offering, the
following will become Directors of the Company:
Bradley B. Niemcek. (See "Officers" above.)
33
<PAGE>
Gregory Jackson, born 1942, an undergraduate of Columbia University
and Whitman college as well as a 1996 graduate of Columbia's Graduate School
of Journalism, was the principal New York correspondent for ABC news from
1970 to 1977. Mr. Jackson went on to produce and host a number of network
series and syndicated productions. These include: managing editor of "How'd
They Do That?," a Telepictures/CBS 1994 - 1995 prime-time series; producer
and host of "Up front With . . .," a syndicated half-hour celebrity series;
producer and host of "Heart of the Mater," a WCBS (New York City) daily
15-minute "Nightline"-style field piece and studio discussion; producer and
host of "One on One," an ABC nightly network half-hour high profile celebrity
series (after "Nightline"); executive producer of non-dramatic programming at
CBS Cable; producer and host of "Signature" for CBS Cable; producer and host
of "healthline," a weekly PBS health series; producer and writer of "To Be An
Astronaut," a one-hour ABC videocassette; producer and writer of "Caring For
Your Newborn," a two-hour child care video with Dr. Benjamin Spock. Mr.
Jackson is also author of the textbook, "Getting Into Broadcast Journalism."
Mr. Jackson also has often served as a marketing advisor and board member on
small, high-tech companies unrelated to broadcasting. For example, he
created a video sales campaign key for a private company $450,000 in debt so
successful that, due to a rise in sales and/or projected sales, the Company
was bought out by a major competitor for $14,000,000. In 1989, he purchased,
managed and (in 1996) sold a full service country club in Boise, Idaho. Mr.
Jackson began his journalism career in Boise. He started with United Press
International, became an assistant managing editor at the daily paper, press
secretary to the Idaho governor and, finally, local television news director.
In 1966, while in Columbia's master degree in journalism program (where NBC
had sent him) he was instrumental in setting up the school's TV production
program and subsequently taught.
Sharon M. Murphy, born 1940, is Provost and Vice President for
Academic Affairs of Bradley University. Dr. Murphy received her Ph.D. from
the University of Iowa and has served in faculty and administrative positions
at Marquette University, Southern Illinois University, University of
Wisconsin-Milwaukee and, during 1977-78, as a Fulbright senior lecturer in
mass communication at the University of Nigeria. She is co-author of Great
Women of the Press (1983), co-editor of International Perspectives on News
(1982), co-author of Let My People Know: American Indian Journalism 1828-1978
(1981), co-editor of Screen Experience: An Approach to Film (1968) and author
of Other Voices: Black, Chicano and American Indian Press (1974). Dr. Murphy
has been a public relations director, magazine editor and newspaper reporter.
She was vice-president of the national Accrediting Council on Education in
Journalism and Mass Communication (1983-1986), president of the Association
for Education in Journalism and Mass Communication ("AEJMC") (1986-1987) and
member of various committees for AEJMC and the Association of Schools of
Journalism and Mass Communication. She has been honored by Women in
Communications, Inc., the Milwaukee Press Club, the Catholic School Press
Association, the Jaycees, the YWCA and the Gannett Foundation. Dr. Murphy is
a member of the North Central Association Consultant-Evaluator Corps and
serves on the Board of Directors of the Everett McKinley Dirksen
Congressional Leadership Research Center, the Women's Fund of the Peoria
Community Foundation, the Peoria Area Chamber of Commerce, the Peoria
Symphony Orchestra, a member of the Peoria Riverfront Development Commission
and the Peoria Race Relations Committee.
Professional Advisor(s)
In order to ensure that the Company takes all steps necessary for its
ultimate success, it has retained the services of certain professional
advisors. Despite the fact that the Company is still in the development
stage, with the help of its legal, accounting and financial advisors,
management continues to strive for a level of professionalism commensurate
with the Company's strategic plan and goals. (See "Conflicts Of Interest --
Professional Advisors" with regard to compensation, time commitment and
related conflict issues.) The Company's professional advisors include:
(1) Frank Callahan, born 1928, who graduated from Baker University in
1950, is a professor at the Thunderbird Graduate School of International
Management in Glendale, Arizona. Mr. Callahan is a former officer of the
advertising agency Young and Rubicam, owner of Winters, Francheski and
Callahan Advertising and partner in WFC Public Relations. He has had a long
and successful career introducing new products and services. Among his
successful introductions are Duncan Hines Cake Mixes, Purina Dog Chow, Gallo
Wines, Pentel Pens, Scotchguard, Club Med, Hyundai Personal Computers and
various products for Armour Foods. Mr. Callahan has an extensive history
relating
34
<PAGE>
to new product introduction, including careful consideration of positioning
issues, marketing strategies, obstacles to success, competitive forces,
prospect definition, channels of distribution, advertising, public relations
and sales.
(2) Max E. Miller, Esq., born 1949, has provided legal and financial
advice to the Company since early 1995. He is currently a senior partner at
the Washington, D.C. law firm of Reed Smith Shaw & McClay and, from June1987
through September 30, 1996, a senior partner at the Washington, D.C. law firm
of Bayh & Connaughton, P.C. (founded and chaired by former U.S. Senator Birch
Bayh). Mr. Miller specializes in federal, state and international tax
planning and business consulting and commercial transactions on behalf of
publicly-held and closely-held corporations, partnerships, trusts, estates
and individuals. He has often assisted in the development of business plans
and the financial structure of start-up companies, and has worked closely
with U.S. companies expanding overseas. Also a certified public accountant,
Mr. Miller combines a strong legal background with a solid understanding of
corporate finance and the financial consequences of business transactions.
Prior to joining the firm, Mr. Miller was a senior tax manager with Coopers &
Lybrand, an international accounting and business consulting firm. He has
been a frequent lecturer at tax seminars and special business programs and
has written extensively on tax matters. Mr. Miller received his B.S. in
accounting from Indiana University and his law degree from Indiana University
School of Law. Mr. Miller also attended the graduate tax law program at
Georgetown University Law Center. He is a member of the District of
Columbia, Virginia and Indiana Bars, and is admitted to practice before the
United States Tax Court and the Federal District Court for the Eastern
District of Virginia. He is also a member of the American Institute of
Certified Public Accountants, as well as the Indiana and Northern Virginia
Societies of Certified Public Accountants.
(3) John M. Novack, born 1951, currently works as a financial consultant.
Previously, he was employed by NHP, Incorporated, as Senior Vice President,
Finance and Accounting from 1993 - 1995, a financial consultant from 1992
- -1993, Vice President-Controller of Woodward & Lothrop, Incorporated from
1981 -1992 and an Audit Manager in the Washington, D.C. office of Arthur
Andersen, L.L.P. from 1973 - 1981. He holds a B.B.A. degree in Accounting
from the College of William and Mary.
Remuneration
The Company was formed on March 27, 1996 and therefore paid no
compensation prior to that time. Under the current compensation agreement,
dated as of May 1, 1996 with the Company, Michael L. Foudy and Bradley B.
Niemcek earn compensation at the annual rate of $120,000 and $60,000,
respectively, plus certain out-of-pocket expenses during this start-up
period. In addition, Bradford W. Baker and Gerald Garcia have employment
agreements with the Company which do not provide for direct compensation but
do make each eligible for certain employee benefits, including a bonus and/or
stock options. (See "Employment Agreements" following.)
If only the minimum funding is subscribed for in this offering and no
other funds are available, it is intended that the amount of salaries for
Messrs. Foundy and Niemcek will be reduced sufficiently until cash flow is
available to adequately pay these amounts. However, it is intended that the
difference between the full compensation level and what is paid will be
accrued and ultimately paid when funds are available. As the Company's
operations develop, it is anticipated that additional personnel and outside
consultants may be hired. It is currently anticipated that each of these
individuals will devote up to approximately 50% of their time to either HCC
or ATB Productions, L.L.C. (for which the Company will be reimbursed for that
portion of the individual's base salary). Determination of time allocation
will be at the discretion of the Board of Directors.
Employee Benefits
It is anticipated that the Company will implement, in the near
future, a Restricted Employee Stock Option plan under which its Board of
Directors may grant employees, directors and certain advisors of the Company
options to purchase its Shares at exercise prices of less than 8.5% of the
then current market price on the date of the grant. Any income from such
options are not expected to be tax deferrable. As of the date of this
Prospectus, the plan has not been defined and no options have been granted
but 600,000 Shares have been reserved.
35
<PAGE>
The Company anticipates that it will adopt in the future an employee
cash bonus program to provide incentive to the Company's employees. It is
anticipated that such a plan would pay bonuses to employees based upon the
Company's pre-tax or after-tax profit for a particular period. It is
anticipated that the Company will adopt a retirement plan such as a 401(k)
retirement plan and that it will implement an employee health plan comparable
to the industry standard. Establishment of such plans and their
implementation will be at the discretion of the Board of Directors; any such
bonus plan will be based on annual objective, goal-based criteria developed
by the Board of Directors for eligible participants and will be exercisable
only at prices greater than or equal to the market value of the underlying
Shares on the date of their grant.
Employment Agreements
Messrs. Foudy, Baker and Niemcek (as of May 1, 1996) and Mr. Garcia
(as of November 1, 1997) each entered into a three-year employment agreement
with the Company (collectively, the "Employment Agreements") that provides
for bonuses and such other benefits (including base annual salaries as to
Messrs. Foundy and Niemcek) as set forth in their agreements. As described
in "Remuneration", it is anticipated that Messrs. Foundy and Niemcek will
devote approximately 50% of their time to HCC or ATB and the determination of
time allocation, and any and any associated salary adjustment will be at the
discretion of the independent members of the Board of Directors. Messrs.
Foudy, Garcia, Baker and Niemcek and the Boards of Directors each have the
right to terminate the Employment Agreements with or without cause at any
time; provided, however, that termination by the Board of Directors without
cause would obligate the Company to pay the compensation due under the
applicable Employment Agreement for the remainder of its term. Pursuant to
the terms of the Employment Agreements, Messrs. Foudy, Garcia, Baker and
Niemcek have agreed that they will not compete with the Company during the
period of their employment and for a one-year period after termination of the
applicable Employment Agreement.
Employees
As of October 30, 1997, the Company had one full-time and two
part-time employees, all of whom are located in its Virginia offices. None
of such employees is represented by employee union(s). The Company believes
its relations with all of its employees are good.
Property
The Company rents its office facilities at market rates. (However,
see "Conflicts Of Interest" -- Certain Related Party Transactions.") Such
leased office space is adequate, the Company believes, to satisfy its needs
for the foreseeable future.
Litigation
There has not been any material civil, administrative or criminal
proceedings concluded, pending or on appeal against the Company or its
affiliates and principals.
Securities Ownership Of Certain Beneficial Owners And Management
The following table summarizes certain information with respect to
the beneficial ownership of the Company's Shares, immediately prior to and
after this offering (as well as the reverse stock split described in
"Description of Capital Stock - Reverse Stock Split").
36
<PAGE>
<TABLE>
<CAPTION>
Prior to the Offering After the Offering
--------------------- ------------------
Minimum(2) Maximum(3)(4)
---------- -------------
Name of Beneficial Owner: Number(1) % Number % Number %
- ------------------------ --------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Directors and Officers
Michael L. Foudy 2,072,500 22.4 2,072,500 21.6 2,072,500 17.6
Bradford W. Baker - - - - - -
Gerald Garcia 414,007 4.5 414,007 4.3 414,007 3.5
Bradley B. Niemcek (5) 112,500 1.2 112,500 1.2 112,500 1.0
Linda G. Moore - - - - - -
Sherri Schwamb Denora - - - - - -
Ron Alexenburg 12,500 .1 12,500 .1 12,500 .1
Thomas Burgum 12,500 .1 12,500 .1 12,500 .1
Kirby Ralston 12,500 .1 12,500 .1 12,500 .1
B. Eric Sivertsen 37,500 .4 37,500 .4 37,500 .4
Gregory Jackson (5) - - - - - -
Sharon Murphy (5) - - - - - -
--------- ------ --------- ---- --------- -----
All Directors and Officers as a Group 2,674,007 28.8% 2,674,007 27.8% 2,674,007 22.8%
--------- ------ --------- ----- --------- -----
--------- ------ --------- ----- --------- -----
All 10% Shareholders
Michael L. L. Foudy 2,072,500 22.4 2,072,500 21.5 2,072,500 17.6
Heartland Capital Corporation
(warrants only) 1,236,000 13.4 1,236,000 12.8 1,236,000 10.5
--------- ------ --------- ----- --------- -----
All 10% Shareholders as a Group 3,308,500 35.8% 3,084,500 34.3% 3,308,500 28.1%
--------- ------ --------- ----- --------- -----
--------- ------ --------- ----- --------- -----
All Beneficial Owners as a Group 3,910,007 42.3% 3,910,007 40.6% 3,910,007 33.3%
--------- ------ --------- ----- --------- -----
--------- ------ --------- ----- --------- -----
</TABLE>
(1) Reflects total outstanding Shares of 1,326,811, escrowed shares of
4,801,589, the assumed issuance of 75,000 contingent shares and the assumed
exercise of warrants to purchase 3,033,600 shares, all as of September 30,
1997 Detailed ownership by director and/or officer are listed under the
heading, "Directors and Officers."
(2) Assumes issuance and sale of 400,000 of the Company's shares during this
Offering Period (the "minimum" offering), in addition to the 1,326,811 shares
currently outstanding, the escrowed Shares of 4,801,589, the issuance of
75,000 contingent shares and the assumed exercise of warrants to purchase
3,033,600 additional Shares, all as of September 30, 1997.
(3) Assumes issuance and sale of 2,500,000 of the Company's shares during
this Offering Period (the "maximum" offering), in addition to the 1,326,811
Shares currently outstanding, the escrowed Shares of 4,801,589, the issuance
of 75,000 contingent shares and the assumed exercise of warrants to purchase
3,033,600 additional Shares, all as of September 30, 1997.
(4) As described in "Description Of Capital Stock- Reverse Stock Split." a
reverse stock split was effected by the Company as of March 25, 1997 to
reduce the dilutive effect on new investors in the Company's planned initial
public offering. Because the Shares escrowed are issued contingent upon
required performance standards being met, they have no voting and dividend
rights and are, while in escrow, not deemed to be outstanding Shares. On the
assumption those performance standards will be met during each of the six
years of the escrow, the following directors and officers would have the
following escrowed Shares released to them (in annual increments of 16.67%):
Michael L. L. Foudy (934,329) , Gerald Garcia (194,706) and Bradley C.
Niemcek (19,588).
37
<PAGE>
(5) These persons are expected to be elected as members of the Board of
Directors concurrent with registration of this offering. While such persons
currently own no Shares of the Company in such capacity (Mr. Niemcek does own
shares as an officer), each will be issued 12,500 Shares as of May 1, 1998.
<TABLE>
<CAPTION>
Shares Under Shares Under
Director and/or Outstanding Escrowed Non-Contingent Contingent
Officer Shares Shares Warrants Warrants Share Total
- -------------- ----------- -------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Michael L. Foudy 270,671 934,329 867,500 - 2,072,500
Gerald Garcia 53,801 194,706 165,500 - 414,007
Bradley B. Niemcek 5,412 19,588 12,500 75,000 112,500
Eric B. Sivertsen 12,500 - 25,000 - 37,500
Ron Alexenberg 12,500 - - - 12,500
Kirby Ralston 12,500 - - - 12,500
Thomas Burgum 12,500 - - - 12,500
----------- ---------
TOTAL 379,884 1,148,623 1,070,500 75,000 2,674,007
----------- -------- -------------- ------------ -----------
----------- -------- -------------- ------------ -----------
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial data for the
Company. The selected financial data should be read in conjunction with the
Company's and Heartland Capital Corporation's (HCC) "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements of the Company and Notes thereto and the Financial
Statements of HCC and Notes thereto included elsewhere in the Prospectus.
The selected financial data for the periods ended December 31, 1994, 1995 and
1996, have been derived from the Company's and HCC's financial statements,
which have been audited by independent certified public accountants and are
included elsewhere in this Prospectus. The selected financial data for the
nine months ended September 30,1996 and 1997 have been derived from unaudited
financial statements which are included elsewhere in this Prospectus. In the
opinion of management of the Company, the unaudited financial statements of
the Company and HCC have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for this period. Operating results
for the nine months ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997.
This data should be read in conjunction with the Company's and HCC's
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" and the financial statements, and related notes thereto, included
elsewhere in this Prospectus.
38
<PAGE>
<TABLE>
HCC (Predecessor Company)(1)(6)
------------------------------------------------------------------------------------
Date of Date of
Formation Formation
(6/23/94) Year Year 9 Months 9 Months (6/23/94)
Through Ended Ended Ended Ended Through
12/31/94 12/31/95 12/31/96 9/30/96 9/30/97 9/30/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $-- $647 $2,847 $10,913 $-- $3,494
Costs and Expenses $211,372 $568,467 $361,354 $285,960 $140,500 $1,281,693
Loss from Operations(7) ($211,372) ($567,820) ($358,507) ($275,047) ($140,500) ($1,278,199)
Interest Expense (Income), net $8,342 $25,690 $69,880 $3,973 $7,488 $111,400
Net Loss(4) ($219,714) ($593,510) ($428,387) ($279,020) ($147,988) ($1,389,599)
Net Loss Per Share ($0.03) ($0.07) ($0.05) ($0.03) ($0.02) ($0.17)
Common and common equivalent
shares outstanding(2)(5) 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000
</TABLE>
<TABLE>
HCC (Predecessor Company)(1)(6)
--------------------------------------------------
As of As of As of As of
12/31/94 12/31/95 12/31/96 9/30/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (Deficiency) ($245,214) ($333,529) ($32,014) ($301,226)
Total Assets $36,274 $184,800 $605,375 $964,089
Stockholders' Equity (Deficit) ($217,714) ($171,379) $340,592 $192,604
Accumulated Deficit ($219,714) ($813,224) ($1,246,369) ($1,394,357)
</TABLE>
<TABLE>
HCMI (Successor Company)(1)(6)
--------------------------------------------------
Date of Date of Date of
Formation Formation Formation
(3/27/96) (3/27/96) 9 Months (3/27/96)
Through Through Ended Through
12/31/96 9/30/96 9/30/97 9/30/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Statement Data:
Revenue $3,507 $-- $4,757 $8,264
Costs and Expenses $321,421 $224,593 $849,558 $1,170,979
Loss from Operations(7) ($317,914) ($224,593) ($844,801) ($1,162,715)
Interest Expense (Income), net ($2,899) ($739) ($17,025) ($19,924)
Net Loss(4) ($315,015) ($223,854) ($827,776) ($1,142,791)
Net Loss Per Share ($0.25) ($0.18) ($0.62) ($0.88)
Common and common equivalent
shares outstanding(2)(5) 1,270,503 1,242,349 1,326,811 1,298,657
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
HCMI Successor Company)(1)(6)
--------------------------------------------
As of As of Minimum
12/31/96 9/30/97 Adjusted(3)
--------------------------------------------
<C> <C> <C>
Balance Sheet Data: ($516,327) ($1,012,628) ($932,628)
Working Capital (Deficiency)
Total Assets $797,964 $508,572 $2,143,572
Stockholders' Equity (Deficit) $275,143 ($552,633) $1,082,367
Accumulated Deficit ($315,015) ($1,142,791) ($1,142,791)
</TABLE>
(1) Effective May 17, 1996, the Company was assigned certain development
rights and obligations by HCC, its parent company at that time. Effective
May 18, 1996, the Company was spun off via a dividend to the HCC
shareholders. Consequently, the Company had yet to commence operations
and is presented as the "Successor" to HCC which, in turn, is deemed the
"Predecessor" in the above table. (2) For HCC, common and common
equivalent shares outstanding are based on the weighted average number of
shares of common stock equivalents outstanding each period, as adjusted
for the effects of Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, "cheap" stock and
warrants (that is, stock or warrants issued for consideration or with
exercise prices below the initial public offering ("IPO") price within a
year prior to the initial filing, or in contemplation of the IPO) should
be treated as outstanding for all reported periods. Consequently,
8,051,000 shares are the common and common equivalent shares outstanding
for all reported periods for purposes of computing net loss per share for
HCC. (3) Assumes completion of the offering and application of the net
proceeds of $1,635,000 in the case of the minimum offering. (4) There
have been no, nor are there expected to be, cash dividends. (5) For HCMI,
based on the weighted average number of shares outstanding during the
period, adjusted retroactively for the reverse stock split approved March
25, 1997. (6) The financial statements from which the above information
has been derived have been prepared assuming the Company and HCC will
continue as going concerns. However, both the Company and HCC have
incurred losses since inception. Such factors, among others, raise
substantial doubt about the Company's and HCC's ability to continue as
going concerns. In that regard, see "Reports of Independent Certified
Public Accountants" accompanying the Company's and HCC's audited
financial statements which cite substantial doubt about the Company's and
HCC's ability to continue as going concerns. There can be no assurance
that the Company and HCC will achieve profitability and adequate
financing in the future. If the Company or HCC fail to achieve
profitability and/or adequate financing, their growth strategies could be
materially adversely affected. (See "Risks Factors - Going Concern Report
of Independent Certified Public Accountants.") (7) Includes $618,690 in
write-off of deferred offering costs.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(1) Heartland Communications & Management, Inc. (the "Company")
(a) Liquidity and Capital Resources
The Company was incorporated as a wholly-owned subsidiary of
Heartland Capital Corporation ("HCC") on March 27, 1996 for the purpose of
raising capital to develop several print and electronic media and investment
concepts (the "Media Concepts") and bring them to market. The development
rights to these Media Concepts had been owned by HCC and were assigned to the
Company on May 17, 1996 simultaneously with payment by HCC of its $4,758
subscription for the stock of the Company to which it subscribed on March 27,
1996.
The Company has not yet commenced generating substantial revenue.
The Company expects to fund development expenditures and incur losses until
it is able to generate sufficient income and cash flows to meet such
expenditures and other requirements. The Company does not currently have
adequate cash reserves to continue to cover such anticipated expenditures and
cash requirements. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. In this regard,
see the Independent Certified Public Accountants' Report appearing elsewhere
herein which cites substantial doubt about the Company's ability to continue
as a going concern.
The Company and HCC have been evaluating financing and
capitalization alternatives as part of their long-term business plans. These
alternatives include HCC's sale of preferred stock and warrants and other
alternatives, including the formation of the Company and the associated
transfer thereto of many of HCC's development options, with the Company, in
turn, undertaking an initial public offering (the "IPO") of a portion of its
common stock. To preserve operating funds, HCC and the Company have also
developed a strategic plan which provides for reductions of expenditures and
a prioritization of development options, as discussed below.
The following table sets forth certain data from the Statements of
Cash Flow for the Company:
For the Period March 27, 1996 (date of formation) through December 31, 1996
and for nine months ended September 30, 1997:
<TABLE>
<CAPTION>
Period Ended
------------
12/31/96 9/30/97
-------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities ($417,290) $16,408
Net cash provided by (used in) investing activities,
principally loans to ATB (172,780) 3,500
Net cash provided by financing activities, principally
from exercise of warrants 590,158 -
-------- ------
Increase in cash $ 88 $ 19,908
-------- ------
-------- ------
</TABLE>
The development rights, which are discussed in more detail below
under "Anticipated Operations," had only a nominal intrinsic value as of the
date they were assigned to the Company because of the significant anticipated
future development costs and, therefore, such rights have no carrying value
on the Company's balance sheet. The Media Concepts cannot be developed
without the capital expected to be raised by the Company's IPO. The extent
to which the Company can realize any return on the development rights is
directly related to the amount of funding obtained
40
<PAGE>
through the Company's offering of its shares to the public, as well as its
ability to successfully develop the Media Concepts.
Subsequent to the assignment, ownership of the Company was "spun
off" to the shareholders of HCC and HCC's stock ownership was retired. As
part of the spin-off, the Company issued shares of its common stock (the
"Shares") to HCC's common and preferred shareholders equal to shares they
currently held in HCC on a one-for-one basis. Holders of HCC preferred stock
also received warrants to buy the Company's common stock on the basis of one
warrant for each two HCC preferred shares held, resulting in 1,394,500
warrants for 2,789,000 outstanding shares of HCC preferred stock. Holders of
non-contingent warrants to purchase HCC shares were likewise provided the
same number of warrants to purchase shares of the Company, at exercise prices
identical to those contained in the HCC warrants.
During May 1996, the Company notified its warrant holders of its
intent to do an initial public offering ("IPO") stating that the warrant
holders had until July 6, 1996 to exercise their warrants at $.50 per share
versus $4 per share thereafter (80% of the expected IPO price of $5 per
share). On July 19, 1996, the Company extended this warrant exercise period
until July 23, 1996. Through that date, 1,170,400 of the warrants had been
exercised resulting in net proceeds to the Company of $585,200, virtually all
of the cash provided by financing activities.
To facilitate the IPO, the stockholders approved a reverse stock
split as of March 25, 1997 in which one new share of the Company's common
stock was issued for each 4.6190302 shares outstanding with shares for the
remaining 3.6190302 shares being placed in escrow and being released only if
the Company meets a specified level of future performance. Likewise, the
exercise of the remaining outstanding warrants were tied to the attainment of
this specified level of future performance. The principal purpose of the
reverse stock split was to reduce the number of outstanding common shares
prior to the IPO.
(b) Results of Operations
Since its inception (March 27, 1996) through September 30, 1997, the
Company's activities have been organizational and devoted to developing a
business plan and raising capital. Where such costs are indirect and
administrative in nature, they have been expensed in the accompanying
statement of operations and, together with the write-off of $618,690 of such
costs as discussed below, account for the majority of the $1,142,791 deficit
accumulated by the Company during the development stage. Where such costs
relate to capital raising and are both direct and incremental, such costs
have been treated as deferred offering costs in the accompanying balance
sheets. During the nine months ended September 30, 1997, the Company, in
recognition of the length of the IPO process, wrote off $618,690 of such
deferred costs. Such deferred costs amounted to $290,715 as of September 30,
1997. Together such costs account for $1,433,506 of expenditures and, when
netted against the non-cash increases in liabilities of $1,033,000,
approximate the $400,882 amount of net cash used in operations.
Due to the importance of ATB to the Company's business plan, the
Company has joined HCC in co-funding the ATB Credit Agreement. HCC
originally executed a line of credit agreement with ATB in January 1995 to
provide working capital for its operations. In 1996, HCMI began co-funding
this credit facility. HCMI had advanced $172,780 as of December 31, 1996.
During the nine months ended September 30, 1997, ATB repaid $3,500 of this
loan. The $169,280 outstanding balance is due in December 1999.
The Company will structure its operations based on both the amount
of capital raised in the IPO and the timing of the receipt of the proceeds.
The Company has developed an action plan geared to varying amounts of capital
being raised. Assuming that only $2,000,000 of capital is raised, the
Company's goals will be to develop additional programming and broadcast
capabilities for the Heartland Radio Network (the "Network") and to make
media acquisitions which will help develop the Network. In addition, the
Company also plans to develop a weekly publication aimed at the youth (ages
11 to 18) market that would be distributed free to students in schools.
Based on preliminary discussions, it is expected that several major national
companies would be prominent advertisers in the publication. Additionally,
at the $5,000,000 level, the Company also would expand its investment in the
teen publication and would
41
<PAGE>
plan to invest in additional media acquisitions. If a total of $12,500,000
is raised, the Company also would expect to devote additional capital to
investments in the teen publication and more media acquisitions as well as to
partially fund the creation of a sports-based weekly newspaper insert which
would be provided to newspapers around the country. This publication also is
expected to be supported by advertising revenue from major national
companies.
At the conclusion of this development effort, which for some of the
Media Concepts will require as much as nine months, the Company may still
need to obtain additional financing to begin operations. There can be no
assurance that the Company will complete the necessary work on the Media
Concepts on schedule or that bank or additional equity financing will be
available to the Company as it seeks to develop the Media Concepts and begin
operations.
Because the Company has no history of operations, there is no
assurance that the Media Concepts can be successfully developed and put into
operation within the anticipated levels described above. Additionally, there
is no assurance that the Media Concepts would in fact be acceptable to the
general public and, as a result, there is no assurance that revenues would
ever be generated sufficient to recover the capital raised in the IPO, let
alone provide a return to shareholders on invested capital.
The Company also did not record an income tax provision or benefit
in the financial statements for the period December 31, 1996 because of the
existence of net operating losses. The Company expects to incur a net loss
for the period December 31, 1997. Consequently, there will be no income tax
provision or benefit in the financial statements for 1996 and 1997.
(c) Recent Accounting Pronouncements
Recent accounting pronouncements and their effect on the Company are
discussed below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," was issued.
The Company adopted SFAS No. 121 as of March 27, 1996, and its implementation
did not have a material effect on the Company's financial statements.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. SFAS No. 123 establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company intends to adopt the employee stock-based
compensation provisions of SFAS No. 123 by disclosing the pro forma net
income and pro forma net income per share amounts assuming the fair value
method is adopted at the date it grants stock options to officers, employees
and directors. The adoption of this standard will not impact the Company's
financial position or cash flows.
On March 3, 1997 ,the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share
(SFAS 128)". SFAS 128 provides a different method of calculating earnings
per share than is currently used in accordance with APB Opinion 15. SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to existing fully diluted earnings per share. Using the
principles set forth in SFAS 128, basic earnings per share would not be
different from reported earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information
about an entity's capital structure. SFAS 129 requires disclosure of the
pertinent rights and privileges of various securities outstanding (stock,
options, warrants, preferred stock, debt and participation rights), including
dividend and liquidation preferences, participants rights, call prices and
dates, conversion or exercise prices and redemption requirements. Adoption
of SFAS 129 will have no effect on the Company as it currently discloses the
information specified.
42
<PAGE>
In June 1997, the Financial Accounting Standards board issued two
new disclosure standards. Results of operations and financial position will
be unaffected by implementation of these new standards.
Statements of Financial Accounting ("SFAS") 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major customers. SFAS
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evacuated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance.
Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evacuate the impact, if
any, they may have on future financial statement disclosures.
(2) Heartland Capital Corporation
(a) Liquidity and Capital Resources
Heartland Capital Corporation ("HCC"), the original shareholder of
the Company, was incorporated on June 23, 1994, and provides merchant
banking, marketing and consulting services. HCC incurred a net loss of
$428,387 for the year ended December 31, 1996 and $147,988 for the nine
months ended September 30, 1997, and has incurred losses since formation
resulting in an accumulated deficit of $1,394,357 as of September 30, 1997.
At September 30, 1997,HCC had negative working capital, as indicated by
current liabilities exceeding current assets, of $301,226. Furthermore, HCC
expects to incur additional losses until it is able to generate sufficient
income to cover operating expenses. HCC does not currently have sufficient
cash reserves to cover such anticipated losses. In addition, HCC had
significant receivables of $892,441, as of September 30, 1997, from the
Company and ATB which, in turn, are both development stage companies. The
most recent audit reports of the Company and ATB, dated April 25, 1997 and
September 19, 1997, respectively, expressed concern about the Company's and
ATB's ability to continue as going concern(s). In addition, the Company's
most recent audit report, dated April 25, 1997, expressed concern about the
Company's "ability to continue as a going concern." These factors raise
substantial doubt about HCC's ability to continue as a going concern. In
this regard, see the Independent Certified Public Accountants' Report
appearing elsewhere herein which cites substantial doubt about HCC's ability
to continue as a going concern.
HCC has been evaluating financing and capitalization alternatives in
its long-term business plan. These include HCC's sale of its 12% preferred
stock and warrants, and other alternatives, such as the formation of the
Company, including the transfer thereto of many of HCC's development options
with the Company, in turn, undergoing an IPO of common stock. To preserve
operating funds, HCC has furthermore developed a strategic plan which
provides for the reduction of expenditures and a prioritization of
development options as discussed below.
43
<PAGE>
The following table sets forth certain data from the Statement of Cash
Flows for HCC.
<TABLE>
<CAPTION>
For the For the
period period
6/23/94 6/23/94
(date of (date of
formation) For the For the For the nine months formation)
thru year ended year ended ended September 30, thru
12/31/94 12/31/95 12/31/96 1996 1997 9/30/97
--------- --------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided
by (used in)
operating activities $(101,928) $(260,015) $(471,823) $(425,309) $(216,203) $(1,049,969)
Net cash used in
investing activities,
principally loans to
ATB -- (147,875) (194,255) (191,255) (151,606) (493,736)
Net cash provided
by financing
activities,
principally from
loans from investors
and sales of
preferred stock 102,000 427,505 647,642 632,400 369,360 1,546,507
--------- --------- --------- -------- --------- -----------
Increase (decrease)
in cash $ 72 $ 19,615 $ (18,436) $ 15,836 $ 1,551 $ 2,802
--------- --------- --------- -------- --------- -----------
--------- --------- --------- -------- --------- -----------
</TABLE>
In 1994, HCC's operations were funded primarily by $100,000 in
loans from investors. In 1995, HCC began raising capital through the sale of
12% non-cumulative convertible preferred stock in a private placement. As of
December 31, 1995, $686,000 (before commissions and related costs) of
preferred stock had been sold and during the year ended December 31, 1996, an
additional $708,500 (before commissions and related costs) of preferred stock
was sold. Additional funds of $369,360 were provided in the nine months
ended September 30, 1997 from the proceeds of a loan from an officer.
Even with the proceeds of preferred stock sales received through
December 31, 1996, HCC did not have adequate resources to continue operating
throughout 1997 at the same level as 1995 and 1996. However, certain changes
are anticipated in HCC's operations in 1997 which increase the likelihood of
HCC being able to fund its operations in 1997 without obtaining additional
capital. First, effective May 17, 1996, HCC transferred certain contract and
development rights to the Company which undertook plans for an initial public
offering ("IPO") in 1996. Several employees previously on HCC's payroll have
transferred to the Company, reducing HCC's operating costs. Additionally, it
is anticipated that the Company will reimburse HCC for funding provided to
the Company for the IPO. Second, HCC has funded certain not-for-profit
initiatives, the Institute for American Liberty, the American Initiative
Committee and the Philadelphia II initiative, expecting to be repaid as these
organizations begin operations and raise working capital. As a matter of
accounting policy, advances to these organizations have been expensed when
made and recoveries will be recorded to the extent that any repayments are
received. If necessary to preserve operating funds, HCC could cease funding
these organizations for the remainder of 1997. Through September 30, 1997,
HCC has advanced a total of $354,768 to these organizations. However, in
1996, HCC has reduced these expenditures by over 50% compared to the year
ended December 31, 1995.
44
<PAGE>
(b) Results of Operations
Since its inception, HCC has been engaged in merchant banking and
related activities, with its primary initial emphasis to develop certain
media concepts into viable stand-alone businesses. HCC has received an
insignificant amount of revenue ($647 for the year ended December 31, 1995
and $2,847 for the year ended December 31, 1996 until the underlying contract
was transferred to the Company in May 1996) while incurring costs to develop
the various media concepts. HCC's net loss for the year ended December 31,
1995 was $593,510 compared to a net loss of $219,714 for the period from
inception (June 23, 1994) through December 31, 1994. Because 1994 was not a
full year of operations, results for the 1994 partial year can not be
meaningfully compared to results for 1995. Net loss was $428,387 for the
year ended December 31, 1996. The reduced loss of $170,000 for 1996, over
1995, was due principally to the reduction in funding of the not-for-profit
organizations in 1996 offset by an increased interest expense due to higher
borrowings and an increase in interest costs due to the use of below market
stock grants. During the nine months ended September 30, 1997, the net loss
was $147,988, or an annualized loss of approximately $200,000. The
annualized loss of $200,000 represents a continued reduction on expenses,
particularly salaries and funding of the not-for-profit organizations from
the 1996 level.
As of December 31, 1996, HCC also has approximately $680,000 of net
operating loss carryforwards ("NOLs") which expire year-end in 2009 through
2011. A valuation allowance equal to the tax benefit of the NOLs was
established reflecting the uncertainty of realizing these benefits in future
years. Furthermore, as a result of an ownership change due to the sale of
preferred stock, the use of the NOLs is restricted to an annual limitation of
approximately $65,000. HCC did not estimate an effective tax rate for the
period ended September 30, 1997 or 1996 due to the existence of net operating
losses.
(c) Recent Accounting Pronouncements
Recent accounting pronouncements and their effect on HCC are discussed
below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," was issued.
HCC adopted SFAS No. 121 as of January 1, 1996, and its implementation did
not have a material effect on HCC's financial statements.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. SFAS No. 123 establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. HCC intends to adopt the employee stock-based compensation
provisions of SFAS No. 123 by disclosing the pro forma net income and pro
forma net income per share amounts assuming the fair value method was adopted
January 1, 1995. The adoption of this standard will not impact HCC's results
of operations, financial position or cash flows.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share
(SFAS 128)." SFAS 128 provides a different method of calculating earnings
per share than is currently used in accordance with APB Opinion 15. SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share include no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an
entity, similar to existing fully diluted earnings per share. Using the
principles set forth in SFAS 128, basic earnings per share would not be
different from reported primary earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and
participation rights), including dividend and
45
<PAGE>
liquidation preferences, participants rights, call prices and dates,
conversion or exercise prices and redemption requirements. Adoption of SFAS
129 will have no effect on the HCC as it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards board issued two
new disclosure standards. Results of operations and financial position will
be unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evacuated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evacuate the impact, if
any, they may have on future financial statement disclosures.
(3) ATB Productions, L.L.C. ( A Development Stage Company)
(a) Liquidity and Capital Resources
ATB Productions, L.L.C. ("ATB") was formed as a Virginia limited
liability company on April 17, 1995 as successor to a sole proprietorship of
the same name. Under its operating agreement, ARB restricts its activities
to the business of producing radio shows and publishing.
ATB incurred net losses of $218,637 and $364,037 in 1995 and 1996,
respectively, and has incurred losses since formation, resulting in an
accumulated deficit of $855,971 as of September 30, 1997. At September 30,
1997, ATB had negative working capital as indicated by current liabilities
exceeding current assets by $171,897 as well as $653,765 of noncurrent
liabilities. Furthermore, ATB expects to incur additional losses until it is
able to generate sufficient income to cover operating expenses. ATB does not
currently have sufficient cash reserves to cover such anticipated losses.
Borrowings under ATB's line of credit with HCC and HCMI amount to $600,425 at
September 30, 1997. And HCC and HCMI, in turn, have similar problems with
significant doubt as to their own ability to continue as going concerns as
well as their ability to fund more advances to ATB. These factors raise
substantial doubt about ATB's ability to continue as a going concern. In
this regard, see Independent Certified Public Accountants' Report appearing
elsewhere herein which cites substantial doubts about ATB's ability to
continue as a going concern.
According to ATB's long-term business plan, ATB has been evaluating
financing and capitalization alternatives with HCC and the Company. These
alternatives include the sale of preferred stock and stock warrants by HCC
and other alternatives, such as the formation of the Company and the transfer
thereto of many of HCC's development options, including the ATB contract with
the Company and the transfer hereto of many of HCC's development options,
including the ATB contract, with the Company, in turn, undergoing an initial
public offing of its common stock. Additionally, ATB continues to expand the
radio shows it produces and broadcasts in an attempt to increase its own
revenues. To preserve operating funds, ATB has furthermore developed a
strategic plan which provides for the deduction of expenditures and a
prioritization of development options, as discussed below.
The following table sets forth certain data from the Statement of Cash Flows
for ATB.
46
<PAGE>
<TABLE>
<CAPTION>
For the For the For nine For the period
year year months 1/1/95 (date of
ended ended ended formation) thru
12/3/95 12/31/96 9/30/97 9/30/97
------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Net cash used in
operating activities.................. $ (182,523) $ (347,337) $ (93,405) $(623,265)
Net cash used in
investing activities.................. (4,824) (16,634) 1,798 (19,660)
Net cash provided by financing
activities, principally proceeds
from HCC line of credit and
initial capital....................... 188,907 365,068 88,950 642,925
------- -------- -------- ---------------
Increase (decrease) in cash........... $ 1,560 $ 1,097 $ (2,657) $ -
------- -------- -------- ---------------
------- -------- -------- ---------------
</TABLE>
A total of $42,500 was contributed to equity in 1995 by ATB's
founding members at the time ATB was formed. There are at present no plans
to raise additional capital through subscriptions from members, although
ATB's operating agreement provides that its managing member may solicit
additional contributions from members; the members are, however, not legally
compelled to invest additional funds in ATB. Effective January 15, 1995, ATB
entered into a line of credit agreement with Heartland Capital Corporation
("HCC"), a related organization having shareholders similar to those of ATB,
whereby ATB was able to borrow from HCC at a fixed interest rate of 8% per
annum. HCMI began co-funding this line of credit during 1996. Any borrowings
under the agreement must be repaid no later than December 31, 1999. As of
December 31, 1995and 1996, ATB had borrowed $144,850 against the line. The
amount borrowed increased to $600,425 as of September 30, 1997.
Cash used in operations was $182,523 and $347,337 for the years ended
December 31, 1995 and 1996, respectively. The comparison of the use of cash
between 1995 and 1996 is not meaningful because ATB only commenced its
initial operations in 1995 with a loss of $218,637. In 1996, the first year
of full operations, the loss increased to $364,037. Cash used in operations
was $167,216 and $93,405 for the nine months ended September 30, 1996 and
1997, respectively. The reduction in cash used for 1997 was due principally
to the approximately $150,000 increase in accounts payable at September 30,
1997 which did not require the use of cash. Cash used in operations adjusted
by the non-cash items, such as the increase in accounts payable, determines
the net loss for the respective periods, as discussed below.
(b) Results of Operations
The net loss for the nine months ended September 30, 1996 and 1997
was $188,046 and $273,297, respectively. The primary reason for the
increased loss in 1997 was a $80,000 reduction in advertising and
generational revenue form 1996 to 1997. This reduction was principally
caused by the decline in political advertising revenue which was more
prevalent in 1996, a national election year, and a decline in advertising
revenue due to disbanding the production of the radio show "America The
Beautiful" hosted by Mike Foudy to allow Mr. Foudy a chance to concentrate on
multi-show production and network development.
47
<PAGE>
(c) Recent Accounting Pronouncements
A recent accounting pronouncement and its effect on ATB is discussed
below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," was issued.
ATB adopted SFAS No. 121 as of January 1, 1996, and its implementation did
not have a material effect on the financial statements.
In October 1995, SFAS No 123, "Accounting for Stock-Based
Compensation," was issued. SFAS No. 123 establishes a fair value method for
accounting stock-based compensation plans either through recognition or
disclosure. HCC intends to adopt the employee stock-based compensation
provisions of SFAS No. 123 by disclosing the pro forma net income and pro
forma net income per share amounts assuming the fair value method was adopted
January 1, 1995. The adoption of this standard will not impact HCC's results
of operations, financial position or cash flows.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share
(SFAS 128)." SFAS 128 provides a different method of calculating earnings
per share than is currently used in accordance with APB Opinion 15. SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share include no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an
entity, similar to existing fully diluted earnings per share. Using the
principles set forth in SFAS 128, basic earnings per share would not be
different from reported primary earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and
participation rights), including dividend and liquidation preferences,
participants rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of SFAS 129 will have no effect on the ATB
as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards board issued two
new disclosure standards. Results of operations and financial position will
be unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evacuated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evacuate the impact, if
any, they may have on future financial statement disclosures.
48
<PAGE>
APPLICATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
common stock (the "Shares") offered hereby (after selling commissions and
associated organization and offering expenses) are estimated to be
approximately $10,387,500 if the maximum offering is achieved and $1,635,000
if the minimum offering is achieved. (See Capitalization" below with regard
to the Company's capitalization currently and that will exist if the minimum
or maximum offering is achieved.) The Company expects that such net proceeds
will be used to finance expansion of existing activities and future
acquisitions as well as for general corporate purposes. The Company reviews
potential acquisition opportunities on an ongoing basis and periodically
engages in discussions with acquisition candidates. The Company has not,
however, entered into any definitive agreements with respect to the
acquisition of any properties.
In the event only the minimum amount of funding is subscribed, the
Company will concentrate its efforts primarily on [expanding its Heartland
Radio Network and possible communications-related acquisition(s).]
In the event that more than the minimum is subscribed, the Company intends
to be more aggressive in implementing its business plan and further develop
operations, personnel and projects. Anticipated application of proceeds
below does not, however, include cash flow from revenue. The Company
anticipates receiving revenues from operations, but there can be no assurance
that such revenues will be sufficient to generate positive cash flow before
proceeds from this offering are expended to fund operations for 12-18 months
at anticipated "burn rates." (See "Risk Factors.")
49
<PAGE>
<TABLE>
<CAPTION>
Gross Proceeds
--------------
$2,000,000 $5,000,000 $12,500,000
---------------------------- --------------------------- -------------------------
Dollar Amount Percentage Dollar Amount Percentage Dollar Percentage
------------- ---------- ------------- ---------- ------ ----------
Amount
------
<S> <C> <C> <C> <C> <C> <C>
Selling Commissions $160,000 8% $400,000 8% $1,000,000 8%
Non-accountable Expense
Allowance 40,000 2% 100,000 2% 250,000 2%
Legal Fees 15,000 .75% 200,000 4% 200,000 1.6%
Due Diligence Fee 50,000 2.5% 50,000 1.0% 50,000 0.4%
Printing And Related Costs 75,000 3.75% 75,000 1.5% 75,000 0.6%
HCC Indirect Expense
Reimbursement (1) - - - - 412,500 3.3%
Accounting Fees 25,000 1.25% 50,000 1% 125,000 1.0%
Working Capital 80,000 4.0% 250,000 5.0% 275,500 2.2%
Proposed Investment
Opportunities (2):
Heartland Radio 250,000 12.5% 250,000 5.0% 250,000 2.0%
Network
Communications 305,000 15.25% 1,200,000 24.0% 2,180,000 17.44%
Companies
Acquisition(s)
A Magazine for Teens 1,000,000 50% 2,300,000 46% 2,300,000 18.4%
A National Sports - - - - 5,037,000 40.3%
Weekly (3)
Management and - - 125,000 2.5% 345,000 2.76%
Marketing Services ----------- ------- ---------- ------- ---------- ------
$2,000,000 100.0% $5,000,000 100.0% 12,500,000 100.0%
----------- ------- ---------- ------- ---------- ------
----------- ------- ---------- ------- ---------- ------
</TABLE>
(1) In conjunction with the public offering, HCC has incurred costs, such as
salaries and rent, which have been allocated to the Company. By completion
of the public offering, it is expected that such costs could aggregate
approximately $600,000. It is the intent of the Company to reimburse HCC for
these costs, or at least a portion thereof, as reflected in the above tables.
As of December 31, 1996 and September 30, 1997, the amount owed by the
Company to HCC for these costs, net of repayments, amounted to $220,616 and
$397,350, respectively.
(2) A portion of the proceeds of this offering are expected to be used to pay
net salaries of the Company's management, such amounts projected to aggregate
$90,000 in 1997 (and thus from 4.5% - at the minimum offering - to 0.7% at
the maximum).
(3) The Company is currently conducting exploratory discussions with
potential strategic partners for its national sports weekly supplement.
Should these relationships develop, it is expected that the Company's
investment in the venture would be allotted to additional communications
company acquisitions.
50
<PAGE>
Except as to selling commissions and, at the minimum, legal and accounting
fees, the Company reserves the right to change the application of proceeds
depending on unforeseen circumstances at the time of this offering. The
intent is to implement the Company's business plan to the extent possible
with funds raised in this offering. Unforeseen events, timing, the general
state of the economy and the Company's ability or inability to generate
revenue could greatly alter the application of proceeds from that shown above.
As part of the Company's business strategy, the Company will
evaluate potential acquisitions of communications and/or management-related
activities and businesses. However, the Company has no present
understanding, commitment or agreement with respect to any acquisitions.
Future acquisition of communications properties effected in connections with
the implementation of the Company's expansion strategy are expected to be
financed from cash flow from operations, bank or other financial institution
borrowings, debt or additional equity financings or a combination of those
methods.
ABSENCE OF PUBLIC MARKET AND DIVIDEND POLICY
There is no public trading market for the Shares nor is any expected
to develop for at least 6 - 18 months after the offering commences. There is
no assurance that the Company can satisfy then current pertinent listing
standards or, if successful in getting listed, avoid later delisting. (See
"Risk Factors.")
The Company intends to retain future earnings for use in its
business and does not anticipate paying any dividends on Shares in the
foreseeable future. While not currently so restricted, the Company may be
prohibited from paying dividends on the Shares in the future under credit or
other financing agreement(s) unless certain amounts are available and certain
other conditions are satisfied. (See "Description of Capital Stock--Common
Stock-- Dividends.")
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company
as of September 30, 1997, and (ii) the pro forma capitalization of the
Company on the same date, reflecting (a) the sale of the 400,000 shares of
Common Stock offered by the Company hereby for estimated net proceeds of
$4.0875 per share (the "Minimum Offering") and (b) the sale of 2,500,000
shares of Common Stock (maximum) offered by the Company for estimated net
proceeds of $4.155 per share (the "Maximum Offering"). (See "Application of
Proceeds" and "Description of Capital Stock." --including "Reverse Stock
split" -- and footnote (4) to "The Company --Securities Ownership of Certain
Beneficial Owners and Management.")
<TABLE>
<CAPTION>
September 30,1997
Actual As Adjusted
------ -----------
Minimum Maximum
------- --------
<S> <C> <C> <C>
Shareholders' equity $1,327 $1,727 $3,827
Common stock, $.001 par value; 50,000,000 Shares
authorized;, 1,326,811 Shares issued and outstanding;
1,726,811 (Minimum) and 3,826,811(Maximum) Shares
to be issued and outstanding, as adjusted
Paid-in capital 588,831 2,223,431 10,973,831
Deficit accumulated during the development stage (1,142,791) (1,142,791) (1,142,791)
----------- ---------- ----------
Total shareholders' equity and total capitalization $(552,633) $1,082,367 $9,834,867
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
DILUTION
The following table sets forth the percentage of equity the
investors in this offering will own compared to the percentage of equity
owned by the present stockholders, and the comparative amounts paid for the
Shares by the investors as compared to the total consideration paid by the
present stockholders of the Company. (See "Description of Capital Stock,"
"Risk Factors" and "Capitalization" for a more complete discussion of total
number of Shares and associated rights and consequences.)
51
<PAGE>
<TABLE>
<CAPTION>
Dilution For $2,000,000 Offering (1)
<S> <C> <C>
Initial public offering price per Share $ 5.00 (100.0%)
Net tangible book value per Share before offering $0.445 (8.9%)
Increase per Share attributable to new Shareholders 1.055 (21.1%)
-----
Pro forma net tangible book value per Share after offering 1.50 (30.0%)
------
Total dilution per Share to new Shareholders $ 3.50 (70.0%)
------
------
</TABLE>
Shares Purchased(1) Total Consideration
------------------ -------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Shares 1,326,811 76.84 $590,158 22.78 $0.445
New Shares 400,000 23.16 2,000,000 77.22 $5.00
--------- ------- --------- ----- -----
1,726,811 100.00 $2,590,158 100.00 $1.50
--------- ------- --------- ----- -----
--------- ------- --------- ----- -----
(1) Assumes issuance and sale of 400,000 of the Company's Shares during this
Offering Period in addition to the 1,326,811 Company Shares currently
outstanding.
(2) Due to the need to meet an economic performance standard in order to
exercise warrants, their exercise is not viewed as probable and therefore,
their effect on the above is not reflected herein.
Dilution for $12,500,000 Offering
<TABLE>
<CAPTION>
Dilution For $2,000,000 Offering (1)
<S> <C> <C>
Initial public offering price per Share $ 5.00 (100.0%)
Net tangible book value per Share before offering $0.445 (8.9%)
Increase per Share attributable to new Shareholders 2.975 (59.5%)
-----
Pro forma net tangible book value per Share after offering 3.42 (68.4%)
------
Total dilution per Share to new Shareholders $ 1.58 (31.6%)
------
------
</TABLE>
The above does not assume the exercise of warrants reserved for the
underwritten since their exercise, at 120% of the Selling Price, would be
anti-dilutive.
Shares Purchased Total Consideration
---------------- -------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Shares 1,326,811 34.67 $590,158 4.51 $.445
-----
-----
New Shares 2,500,000 65.63 12,500,000 95.49 $5.00
--------- ------ ----------- ------ -----
-----
3,826,811 100.00 $13,090,158 100.00 $3.42
--------- ------ ----------- ------ -----
--------- ------ ----------- ------ -----
(1) Assumes issuance and sale of 2,500,000 of the Company's Shares during
this Offering Period in addition to the1,326,811 Company Shares currently
outstanding.
(2) Due to the need to meet an economic performance standard in order to
exercise warrants, their exercise is not viewed as probable and, therefore,
their effect on the above is not reflected herein.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 50,000,000
shares of $.001 par value common stock, the only class of stock outstanding
at this time (the "Shares") and (ii) 10,000,000 shares of $.001 par value
preferred stock, none of which stock is outstanding at this time. No Shares
held by 5% or greater Shareholders may be sold from the date of the
Prospectus until at least the $2,000,000 minimum offering is achieved.
Shareholders are entitled to one vote per Share on all matters to be voted
upon by Shareholders and, upon issuance in consideration of full payment, are
non-assessable. In the event of liquidation, dissolution or winding up of
the Company, the Shareholders are entitled to share ratably in all assets
remaining after payment of liabilities. Shares do not have cumulative voting
rights with respect to the election of directors and, accordingly, the
holders of more than 50% of the Shares could elect all the directors of the
Company. (See "Risk Factors -- Control By The Principal Shareholders.")
There are no redemption or sinking fund provisions or preemptive rights with
respect to the Shares, and Shareholders have no right to require the Company
to redeem or purchase Shares.
Dividend Rights
Each Share is entitled to dividends if, as and when dividends are
declared by the Company's Board of Directors. It is not the current
expectation of the Company to pay dividends.
Reverse Stock Split
In conjunction with the planned public offering, the Board of
Director proposed a (1) reverse split of the Company's common stock on the
basis of one new share of common stock for each 4.619302 shares of then
outstanding common stock (1,326,811 new shares) and (2) limitations on the
exercise of existing warrants. The principal objective of the reverse split
was to reduce the number of outstanding common shares prior to the IPO. The
Board of Directors believed that the total number of shares then outstanding
caused a disproportionately large dilutive effect on new investors in the
planned IPO and that the anticipated offering price of $5.00 per share would
be better supported with fewer shares prior to the IPO. On March 25, 1997,
the majority of the existing Shareholders approved this proposal. The
Shareholders have been reissued a number of Shares equal to the Shares
(4,801,589) being surrendered. Those Shares have been placed in escrow with
no voting or dividend rights while in escrow. Because the Shares escrowed
are issued contingent upon required performance standards being met, they
have no voting or dividend rights and are, while in escrow, not deemed to be
outstanding Shares.
The release of these Shares from escrow and their distribution to
the Shareholders and the exercise of the existing warrants in six annual
increments of 16.67% is contingent on the Company achieving certain required
performance standards. (See Footnote 4, "Shareholder's Equity - Reverse
Stock Split," to the Company's financial statements (Appendix I) with regard
to the definition of "Required Performance Standards.") In summary, such
"earn out" provisions require a market capitalization of at least ten and
provide a return of 40% for the first two years and 15% thereafter. There is
provision for Shares not released in prior years to be released in subsequent
years if the required performance standards cumulatively are met or exceeded.
At the end of six (6) years, Shares not "earned out" will be canceled and
Shareholders have no continuing rights or interest in the Shares previously
held in escrow. There is no assurance such "earn out" and associated
performance standards will be met; if they are, substantial additional Shares
will be issued to "old" Shareholders, thereby diluting the investments of
"new" Shareholders.
Anti-Takeover Statute
Section 203 of the Delaware General Corporation Law (the "DGCL")
generally prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless: (i) prior to the date of the business
combination, the transaction is approved by the board of directors of the
corporation; (ii) upon consummation of the transaction which resulted in the
Shareholder becoming an interested stockholder, the interested stockholder
owns at least 85% of the outstanding voting stock; or (iii) on or after the
date such Shareholder became an interested
53
<PAGE>
stockholder, the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. A "business combination"
includes mergers, certain asset sales and certain other transactions
resulting in a financial benefit to the Shareholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years, did own) 15% or more of the corporation's voting
stock. Section 203 of the DGCL applies to the Company since it has not
elected to opt out of coverage under Section 203 of the DGCL.
Directors' Liability
As authorized by Section 145 of the DGCL, each director or officer
of the Company will be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with the defense or settlement
of any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative in which he is involved by
reason of the fact that he is or was a director or officer of the Company;
such indemnification, of course, is conditioned upon such officer or director
having acted in good faith and in a manner that he reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, if he had no reasonable cause to believe
that his conduct was unlawful. If, however, any threatened, pending or
completed action, suit or proceeding is by or in the right of the Company,
the director or officer shall not be indemnified in respect to any claim,
issue or matter as to which he is adjudged to be liable to the Company unless
a court determines otherwise.
The Certificate of Incorporation of the Company provides that no
director of the Company shall be personally liable to the Company or any of
its Shareholders for monetary damages for any breach of fiduciary duty as a
director, except with respect to: (i) any breach of the director's duty of
loyalty to the Company or its Shareholders; (ii) for acts or omissions that
are not in good faith or involve intentional misconduct or a knowing
violation of the law; (iii) violation of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, such Certificate of Incorporation authorizes the Company to
indemnify any person to the fullest extent permitted by Sections 102(b)(7)
and 145 of the DGCL.
Preferred Stock
The Company's articles of incorporation also authorize 10,000,000
shares of preferred stock. The rights of any preferred stock issue will be
determined by the Board of Directors at the time a preferred series is
authorized.
The Company issued 1,394,500 warrants of the Company to holders of
HCC preferred stock on the basis of one warrant for each two HCC preferred
shares, exercisable at $.50 per Shares. The issuance of the Company's
common stock and warrants does not affect the rights of holders of HCC
preferred stock and warrants previously issued. The Company has agreed that
any future warrants for Shares will be exercisable only at prices greater
than or equal to the market value of the Shares on the date such warrants are
issued.
Transfer Agent
The Company initially will act as its own transfer agent and
registrar. However, no later than the closing for the Initial Offering
Period, the Company will engage an independent transfer agent/registrar for
the Shares.
PLAN OF DISTRIBUTION
The Shares are offered on a best efforts basis by Northridge Capital
Corporation, an SEC registered broker-dealer and a member firm of the NASD
(the "Managing Placement Agent"). The Managing Placement Agent will be paid
(out of Shares sold) at any closing 8% of the subscription amount. During
this Offering Period, whether the Initial or Continuous Offering Periods,
Shares will be sold at $5.00 (the "Selling Price"). If any Additional
Placement Agents
54
<PAGE>
(other SEC-registered, NASD member broker-dealer firms) are engaged to offer
Shares, they will be paid a negotiated portion of the 8% selling commission.
(In addition, the Managing Placement Agent will be reimbursed for its
expenses the greater of actual expenses or 2% of the proceeds of the
offering; a $50,000 due diligence fee; and stock purchase warrants entitling
the Managing Placement Agent Agreement to purchase at $8.25 per share, one
share for each ten shares sold in the offering.) In such capacity in
connection with this offering, the Managing and Additional Placement Agent(s)
are underwriters as defined by the Securities Act of 1933, as amended, and
the rules promulgated thereunder.
The Initial Offering Period will be up two (2) to nine (9) months
from the date of this Prospectus unless earlier terminated. Shares having as
an aggregate selling price of $12,500,000 are being offered pursuant to this
Registration Statement. Unless earlier terminated, the Initial Offering
Period will be up to two (2) months from the date hereof unless extended for
periods up to a total of seven (7) additional months. The Company is
offering a minimum of $2,000,000 up to a maximum of $12,500,000 of Shares.
The date that (1) subscriptions for a minimum of $2,000,000 in Shares have
been received and (2) the Company has closed the initial escrow on the
offering will mark the end of the Initial Offering Period. If a minimum of
$2,000,000 in Shares is not sold during the Initial Offering Period (as it
may be extended), investor funds will be promptly returned with all interest
earned thereon. Unless the minimum offering is not achieved, all interest
earned on subscriptions pending their month-end acceptance will be paid to
the Company, not the individual subscribers. Similarly, if the subscription
is rejected, in whole or in part (which is in the sole discretion of the
Company), the subscription funds or the rejected portion thereof will be
returned within 20 days to the subscriber without interest. The up to
$12,500,000 offering being made pursuant to this Registration Statement may
be extended for additional periods, once the Initial Offering Period is
concluded, which in the aggregate will not exceed 18 months from the date of
this Prospectus (defined herein as the "Continuous Offering Period").
The minimum purchase during Initial and Continuous Offering Periods
is $5,000 (except that the Company in its discretion may accept lesser
amounts); additional purchases by existing Shareholders may be made in the
amount of $1,000 or more. Subscriptions for Shares sold during the
Continuous Offering Period will continue to be escrowed (see"Escrow Account"
below) until accepted at the respective month-end or $250,000 in
subscriptions are received, whichever first occurs. Subject to pertinent
securities requirements, the Company expects to update periodically the
Prospectus after its initial nine (9) month Offering Period -- but no more
than 18 months in the aggregate from the date of this Prospectus -- and
continue the offering if, as expected, the $12,500,0000 maximum offering is
not achieved during that period; in no case will this offering extend for
more than two years from the date of this Prospectus nor will more than
$12,500,000 be raised by the Company under this current Registration
Statement.
Subscription Procedure
In order to purchase Shares:
(1) An investor must complete and execute a copy of the Subscription
Agreement and Power of Attorney (hereafter the "Subscription Agreement")
(Exhibit A).
(2) Checks (which should be at least $5,000 for initial purchases unless the
Company chooses to accept IRA accounts for less and additional purchases by
existing Shareholders may be in the amount of $1,000 or more) should be made
payable as follows: Heartland Communications & Management, Inc. -- Escrow
Account.
(3) The check and the Subscription Agreement should be mailed or delivered to
the Managing Placement Agent or Additional Placement Agent through whom your
subscription was solicited.
Each individual subscriber must represent and warrant in the
Subscription Agreement that he has either a net worth (exclusive of home,
furnishings and automobile) of at least $100,000 or a net worth (similarly
calculated) of at least $50,000 and an annual adjusted gross income of at
least $25,000. (See "Investment Requirements.") Under the securities laws of
certain states, residents of those states may be subject to higher standards
as stated in the Annex to the Subscription Agreement. In addition, the
subscriber must represent, among other things, that: (a) the subscriber has
received this Prospectus; and (b) the subscriber is (or is not) a citizen or
permanent resident of the United States.
55
<PAGE>
The management and any Placement Agent(s) must have reasonable
grounds to believe on the basis of information obtained from the Shareholder
concerning his investments, financial situation and needs, and any other
information known by the undersigned, that: (i) the purchaser is or will be
in a financial position appropriate to enable him to realize to a significant
extent the benefits described in the Prospectus; (ii) the purchaser has a net
worth sufficient to sustain the risks inherent to the Company, including
losses of investment and lack of liquidity; and (iii) the Company is
otherwise a suitable investment for the purchaser.
Escrow Account
All monies remitted by subscribers during the Initial Offering
Period will be deposited in an escrow account maintained by the Company at
George Mason Bank, McLean, Virginia, until the $2,000,000 minimum offering is
achieved. The bank is not guaranteeing that any interest will accrue on the
subscription funds deposited with it. To the extent practicable, the funds
held in the account during the Initial Offering Period will be invested at
the direction of the management in short-term U.S. Treasury securities and
other high quality interest-earning obligations. Unless the minimum is not
achieved, all interest earned during the Initial Offering Period on the
proceeds of the subscriptions held in such account maintained by the Company
with the escrow bank will be retained by the Company. (See "Application of
Proceeds" and "The Company--Management.") Subscriptions for Shares sold
during the Continuous Offering Period will continue to be escrowed (with all
interest earned thereon retained by the Company) until accepted at the
respective month-end or $250,000 in subscriptions are received, whichever
first occurs.
ERISA CONSIDERATIONS
Persons who contemplate purchasing Shares on behalf of Qualified
Plans are urged to consult with tax and ERISA counsel regarding the effect of
such purchase and, further, to determine that such a purchase will not result
in a prohibited transaction under ERISA, the Code or a violation of some
other provision of ERISA, the Code or other applicable law. The management
and the Company necessarily will rely on such determination made by such
persons, although no Shares will be sold to any Qualified Plans if management
believes that such sale will result in a prohibited transaction under ERISA
or the Code.
LEGAL MATTERS
The validity of Shares being offered by this Prospectus will be
passed upon for the Company by Duncan, Blum & Associates, Washington, D.C.
Certain legal matters will be passed upon for the Company by Reed Smith Shaw
& McClay, Washington, D.C. Certain legal matter will be passed upon for the
Managing Placement Agent by John W. Ringo, Esq., Roswell, Georgia.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports, which contain an explanatory paragraph regarding the
companies' abilities to continue as going concerns, appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
56
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "SEC") a Registration Statement on Form S-1 with respect to the
securities offered hereby. This Prospectus does not contain all the
information set forth in such Registration Statement, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC.
Reference is made to such Registration Statement, including the amendment(s)
and exhibits thereto, for further information with respect to the Company and
such securities. The Registration Statement can be inspected and copied at
the public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the SEC's following regional offices:
at Seven World Trade Center, 13th Floor, New York, New York 10048; and 500
West Madison, Suite 1400, Chicago, Illinois 60601. Copies of the
Registration Statement can be obtained from the Public Reference Section of
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Statements made in this Prospectus concerning the contents
of any documents referred to herein are not necessarily complete, and in each
instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement.
For further information with respect to the Company and the shares
of common stock offered hereby, reference is made to the Registration
Statement and the exhibits and the financial statements, notes and schedules
filed as a part thereof or incorporated by reference therein, which may be
inspected at the public reference facilities of the SEC, at the addresses set
forth above. Moreover, the Company has filed such materials electronically
with the SEC; accordingly, such materials can be accessed through the SEC's
web site that contains reports, proxy and information statements and other
information regarding registrants (http// www.sec.gov).
The Company is not currently subject to the informational and
periodic reporting requirements of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"). However, as a result of the offering
(assuming that the $2,000,000 minimum offering is achieved), the Company
will become subject to such requirements.
57
<PAGE>
APPENDIX I
FINANCIAL STATEMENTS
<PAGE>
Index to Financial Statements
Page
- --------------------------------------------------------------------------------
Heartland Communications & Management, Inc.
(A Development Stage Company and Successor Company)
Independent Certified Public Accountants' Report F-4
Balance sheets as of December 31, 1996
and September 30, 1997 (unaudited) F-6
Statements of operations for the period March 27, 1996
(date of formation) through December 31, 1996,
the period from March 27, 1996 (date of formation)
through September 30, 1996 (unaudited),
the nine months ended September 30, 1997 (unaudited)
and the period March 27, 1996 (date of formation)
through September 30, 1997 (unaudited) F-7
Statements of changes in shareholders' equity for the
period March 27, 1996 (date of formation) through
December 31, 1996 and the nine months ended
September 30, 1997 (unaudited) F-8
Statements of cash flows for the period March 27, 1996
(date of formation) through December 31, 1996,
the period from March 27, 1996 (date of formation)
through September 30, 1996 (unaudited), the nine
months ended September 30, 1997 (unaudited) and the
period March 27, 1996 (date of formation) through
September 30, 1997 (unaudited) F-9
Summary of accounting policies F-11
Notes to financial statements F-16
F-1
<PAGE>
Index to Financial Statements
Page
- --------------------------------------------------------------------------------
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Independent Certified Public Accountants' Report F-27
Balance sheets as of December 31, 1995 and 1996
and September 30, 1997 (unaudited) F-29
Statements of operations for the period
September 23, 1994 (date of formation) through
December 31, 1994, the years ended December 31, 1995
and 1996, the nine months ended September 30, 1996 and
1997 (unaudited) and the period June 23, 1994 (date of
formation) through September 30,1997 (unaudited) F-30
Statements of changes in shareholders' equity (deficit)
for the period June 23, 1994 (date of formation) through
December 31, 1994, the years ended December 31, 1995
and 1996, and the nine months ended
September 30, 1997 (unaudited) F-31
Statements of cash flows for the period June 23, 1994
(date of formation) through December 31, 1994, the
years ended December 31, 1995 and 1996, the nine
months ended September 30, 1996 and 1997 (unaudited) and
the period June 23, 1994 (date of formation)
through September 30, 1997 (unaudited) F-32
Summary of accounting policies F-34
Notes to financial statements F-40
F-2
<PAGE>
Index to Financial Statements
Page
- --------------------------------------------------------------------------------
ATB Productions, L.L.C.
(A Development Stage Company)
Independent Certified Public Accountants' Report F-55
Balance sheets as of December 31, 1995 and 1996
and September 30, 1997 (unaudited) F-57
Statements of operations for the years ended
December 31, 1995 and 1996, the nine months ended
September 30, 1996 and 1997 (unaudited) and
the period January 1, 1995 (date of formation)
through September 30, 1997 (unaudited) F-58
Statements of changes in Members' Capital (deficit)
for the years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1997
(unaudited) F-59
Statements of cash flows for the years ended
December 31, 1995 and 1996, the nine months ended
September 30, 1996 and 1997 (unaudited)
and the period January 1, 1995 (date of formation)
through September 30, 1997 (unaudited) F-60
Summary of accounting policies F-62
Notes to financial statements F-67
F-3
<PAGE>
Independent Certified Public Accountants' Report
To the Board of Directors and Shareholders
Heartland Communications & Management, Inc.
(A Development Stage Company and Successor Company)
We have audited the accompanying balance sheet of Heartland Communications &
Management, Inc. (A Development Stage Company and Successor Company) as of
December 31, 1996, and the related statements of operations, changes in
shareholders' equity (deficit) and cash flows for the period March 27, 1996
(date of formation) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit 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 our audit provides 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 Heartland Communications &
Management, Inc. (A Development Stage Company and Successor Company) as of
December 31, 1996 and the results of its operations and its cash flows for the
period March 27, 1996 (date of formation) through December 31, 1996 in
conformity with generally accepted accounting principles.
F-4
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has had no substantial operations
and has incurred significant operating losses and working capital deficits since
formation. In addition, the Company expects to fund development expenditures
and incur additional losses until its operations are able to generate sufficient
revenue and cash flows to meet anticipated expenditures and other cash
requirements. The Company does not currently have sufficient cash reserves to
cover such anticipated expenditures and cash requirements, necessitating
additional capital or financing. These factors, in addition to other factors
discussed in Note 2 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding these matters are also discussed in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
---------------------------------------
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-5
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Balance Sheets
- --------------------------------------------------------------------------------
September 30,
December 1997
31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Assets
Cash $ 88 $ 19,996
Accounts receivable from related parties 6,406 28,581
- --------------------------------------------------------------------------------
Total current assets 6,494 48,577
- --------------------------------------------------------------------------------
Note receivable from related party (Note 3) 172,780 169,280
Deferred offering costs (Notes 7 and 8) 618,690 290,715
- --------------------------------------------------------------------------------
Total assets $ 797,964 $ 508,572
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit)
Accounts payable $ 293,235 $ 533,006
Accrued payroll 8,970 130,849
Accounts payable to related parties (Note 8) 220,616 397,350
- --------------------------------------------------------------------------------
Total current liabilities 522,821 1,061,205
- --------------------------------------------------------------------------------
Commitments (Notes 5 and 8)
Shareholders' equity (deficit) (Notes 1, 4, 5 and 8)
Preferred stock, $.001 par value,
10,000,000 shares authorized; none issued
Common stock, $.001 par value, 50,000,000
shares authorized; 6,128,400 shares issued
at December 31, 1996 and March 31, 1997
and 1,326,811 shares outstanding at
December 31, 1996 and March 31, 1997 1,327 1,327
Additional paid-in capital 588,831 588,831
Deficit accumulated during the development stage (315,015) (1,142,791)
- --------------------------------------------------------------------------------
Total shareholders' equity (deficit) 275,143 (552,633)
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity (deficit) $ 797,964 $ 508,572
- --------------------------------------------------------------------------------
See accounting summary of accounting policies and notes to financial statements.
F-6
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period For the period
For the period March 27, 1996 March 27, 1996
March 27, 1996 (date of formation) For the nine (date of formation)
(date of formation) through months ended through
through September 30, September 30, September 30,
December 31, 1996 1997 1997
1996 (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Marketing commissions
received from
related party
(Note 3) $ 3,507 $ - $ 4,757 $ 8,264
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Salaries 165,084 66,976 113,777 278,861
General and
administrative 156,337 157,617 117,091 273,428
Write-off of offering
costs (Note 8) - - 618,690 618,690
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 321,421 224,593 849,558 1,170,979
- ------------------------------------------------------------------------------------------------------------------------------------
Operating loss (317,914) (224,593) (844,801) (1,162,715)
Interest income (Note 3) 2,899 739 17,025 19,924
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (315,015) $ (223,854) $ (827,776) $ (1,142,791)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average
common shares
outstanding 1,270,503 1,242,349 1,326,811 1,298,657
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (.25) $ (.18) $ (.62) $ (.88)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-7
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Changes in Shareholders' Equity (Deficit)
- --------------------------------------------------------------------------------
For the Period March 27, 1996 (date of formation) through December 31, 1996 and
the nine months ended September 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
Deficit
Common Accumulated
Subscribed Shares $0.001 Additional During the
Common Issued and Par Paid-in Development
Shares Outstanding Value Capital Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscription to common
shares by Heartland
Capital Corporation 1,030,086 - $1,030 $ 3,728 $ - $ 4,758
- ------------------------------------------------------------------------------------------------------------------------------------
Payment of subscription (1,030,086) 1,030,086 - - - -
Cancellation of shares - (1,030,086) (1,030) (3,728) - (4,758)
Spin-off - 1,030,086 1,030 3,728 4,758
Other issuance - 43,338 43 157 200
Exercise of warrants - 253,387 254 584,946 - 585,200
Net loss - (315,015) (315,015)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - 1,326,811 1,327 588,831 (315,015) 275,143
Net loss (unaudited) - - - - (827,776) (827,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) - 1,326,811 1,327 $ 588,831 $ (1,142,791) $(552,633)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-8
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
For the period For the period
For the period March 27, 1996 March 27, 1996
March 27, 1996 (date of formation) For the nine (date of formation)
(date of formation) through months ended through
through September 30, September 30, September 30,
December 31, 1996 1997 1997
1996 (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (315,015) $ (223,854) $ (827,776) $ (1,142,791)
Adjustments to reconcile
net loss to net cash
used in operations
Increase in accounts receivable
from related parties (6,406) (248) (22,175) (28,581)
Increase in accounts payable 293,235 90,926 239,771 533,006
Increase in accrued payroll 8,970 2,323 121,879 130,849
(Increase) reduction in
deferred offering costs (618,690) (122,807) 327,975 (290,715)
Increase in accounts payable
to related parties 220,616 - 176,734 397,350
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) operating activities (417,290) (253,660) 16,408 (400,882)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used
in) investing activities
(Increase) decrease in
Loans to related party (172,780) (65,500) 3,500 (169,280)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities (172,780) (65,500) 3,500 (169,280)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
For the period For the period
For the period March 27, 1996 March 27,1996
March 27, 1996 (date of formation) For the nine (date of formation)
(date of formation) through months ended through
through September 30, September 30, September 30,
December 31, 1997 1997 1997
1996 (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities
Increase in subscription
receivable and other
issuance $ 4,958 $ 4,958 $ - $ 4,958
Proceeds from exercise
of warrants 585,200 585,000 - 585,200
Net cash provided by
financing activities 590,158 589,958 - 590,158
Increase (decrease) in cash 88 270,798 19,908 19,996
Cash and cash equivalents,
beginning of period - - 88 -
Cash and cash equivalents,
end of period $ 88 $ 270,798 $ 19,996 $ 19,996
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-10
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
The Company and Heartland Communications & Management, Inc.
Nature of ("HCMI" or the "Company") was formed on March
Business 27, 1996 to be a broad-based communications and
management business, including developing,
producing and syndicating advertising-supported
broadcast programs and print products. The
accompanying financial statements include the
financial statements of HCMI as of December 31,
1996 and the period March 27, 1996 (date of
formation) through December 31, 1996 and the
period March 27, 1996 (date of formation)
through September 30, 1996 (unaudited) and as of
September 30, 1997, and for the nine months then
ended. Since HCMI's activities to this point
have been organizational and devoted to
financial planning and raising capital, HCMI's
activities have been accounted for as those
of a "development stage enterprise" as set forth
in Statement of Financial Accounting Standards
(SFAS) No. 7.
On May 17, 1996, Heartland Capital Corporation
(HCC) paid its $4,758 stock subscription and
HCMI ("Successor Company") was simultaneously
assigned certain development and contract rights
and obligations by HCC ("Predecessor Company")
(see Note 1). Also, HCMI is an affiliate of ATB
Productions, L.L.C. ("ATB"), with which it
shares common, but not identical, ownership, and
to which it provides marketing services.
Risks and HCMI is in the development stage. Consequently,
Uncertainties HCMI's activities will be subject to the risks
inherent in a new business enterprise, including
among others, limited capital, uncertain market
acceptance and the inability to obtain
financing. Additionally, HCMI faces
substantial competition from a number of well
established, well financed companies. HCMI's
principal source of revenue, a participation in
advertising revenue, is often cyclical and
dependent upon general economic conditions,
rising in good economic times and declining in
economic downturns. HCMI believes it has
properly identified the risks in the environment
in which it operates and plans to implement
strategies to effectively reduce the financial
impact of these risks.
F-11
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Use of The preparation of financial statements in
Estimates accordance with generally accepted accounting
principles requires HCMI to make certain
estimates and assumptions particularly as it
relates to the recoverability of assets and
disclosure of contingent assets and liabilities.
Actual results could differ from those
estimates.
Transfers All transfers among affiliates are recorded
Between using the historical carrying value.
Affiliates
Accounts HCMI provides a reserve for doubtful accounts
Receivable based on a specific review of the expected
collectibility of individual outstanding
accounts.
Deferred Direct, incremental costs incurred with respect
Offering to the HCMI offering of common stock are
Costs deferred and included as an asset in the
accompanying balance sheets until the proceeds
of the offering are received, whereupon these
costs will be recognized as a reduction to the
respective capital accounts. If the offering is
not completed or the offering terms are
substantially revised, the deferred offering
costs will be expensed. Indirect costs relating
to the offering are expensed when incurred. If
either direct, incremental costs or indirect
costs relating to the offering are incurred by
HCC, such costs are deferred or expensed,
respectively, by HCMI with the net unpaid amount
reflected as part of the Accounts Payable to
related parties (see Note 8).
Income HCMI uses the asset and liability method of
Taxes accounting for income taxes. Deferred tax
assets and liabilities are recognized for the
estimated future tax consequences attributable
to differences between the financial statement
and income tax bases. The recognition of net
deferred tax assets is reduced, if necessary, by
a valuation allowance for the amount of any tax
benefits that, based on available evidence, are
not expected to be realized.
F-12
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Revenues Marketing commissions are recognized as
commercials are broadcast and related
advertising revenues are received.
Reverse Stock On March 26, 1997, the shareholders approved a
Split reverse stock split of HCMI's common stock. The
reverse stock split has been reflected
retroactively in the accompanying financial
statements to March 27, 1996 (date of
formation).
Net Loss Per Net loss per share is based on the weighted
Share average number of shares of common stock and
common stock equivalents outstanding during each
period, as adjusted for the effect of the
reverse stock split.
Interim The accompanying interim financial statements as
Financial of September 30, 1997 and for the nine months
Statements then ended and for the period March 27, 1996
(date of formation) through September 30, 1996
are unaudited but, in the opinion of management,
reflect all adjustments (consisting primarily of
normal recurring adjustments) necessary for a
fair presentation of the results of operations
for the period presented. The results for the
nine months ended September 30, 1997 are not
necessarily indicative of the results to be
obtained for the full fiscal year.
Fair Value of In accordance with the requirements of Statement
Financial of Financial Accounting Standards (SFAS) No.
Instruments 107, "Disclosure About Fair Value of Financial
Instruments," HCMI must disclose the fair value
of its financial instruments as of December 31,
1996 and September 30, 1997. In the opinion of
management, the fair values of HCMI's financial
instruments as of December 31, 1996 and
September 30, 1997 are not materially different
from the carrying amounts shown in the
accompanying financial statements.
F-13
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Recent In October 1995, SFAS No. 123, "Accounting for
Accounting Stock-Based Compensation," was issued. SFAS No.
Pronouncements 123 establishes a fair value method for
accounting for stock-based compensation plans
either through recognition or disclosure. HCMI
intends to adopt the employee stock-based
compensation provisions of SFAS No. 123 by
disclosing the pro forma net income and pro
forma net income per share amounts, assuming the
fair value method is adopted at the date it
grants stock options to officers, employees and
directors. The adoption of this standard will
not impact HCMI's results of operations,
financial position or cash flows.
On March 3, 1997, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earning per Share
(SFAS 128)." SFAS 128 provides a different
method of calculating earnings per share than is
currently used in accordance with APB Opinion
15. SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic
earnings per share include no dilution and is
computed by dividing income available to common
shareholders by the weighted average number of
common shares outstanding for the period.
Diluted earnings per share reflect the potential
dilution of securities that could share in the
earnings of an entity, similar to existing fully
diluted earnings per share. Using the
principles set forth in SFAS 128, basic earnings
per share would not be different from reported
primary earnings per share.
Statement of Financial Accounting Standards No.
129, Disclosure of Information about Capital
Structure ("SFAS 129") effective for periods
ending after December 15, 1997, establishes
standards for disclosing information about an
entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and
privileges of various securities outstanding
(stock, options, warrants, preferred stock, debt
and participation rights) including dividend and
liquidation preferences, participants rights,
call prices and dates, conversions or exercise
prices and redemptions requirements. Adoption
of SFAS 129 will have no effect on HCMI as it
currently discloses the information specified.
F-14
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards
Board issued two new disclosure standards.
Results of operations and financial position
will be unaffected by implementation of these
new standards.
Statements of Financial Accounting Standards
(SFAS) 130, "Reporting Comprehensive Income",
establishes standards for reporting and display
of comprehensive income, it components and
accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners and
distributions to owners. Among other
disclosures, SFAS 130 requires that all items
that are required to be recognized under current
accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same
prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a
Business Enterprise", establishes standards for
the way that public enterprises report
information about operating segments in annual
financial statements and requires reporting of
selected information about operating segments in
interim financial statements issued to the
public. It also establishes standards for
disclosures regarding products and services,
geographic areas, and major customers. SFAS 131
defines operating segments as components of an
enterprise about which separate financial
information is available that is evaluated
regularly by the chief operating decision maker
in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for
financial statements for periods beginning after
December 15, 1997 and require comparative
information for earlier years to be restated.
Due to the recent issuance of these standards,
management has been unable to fully evaluate the
impact, if any, they may have on future
financial statement disclosures.
F-15
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
1. As part of its merchant banking operations, HCC
Reorganization identifies investment opportunities which can be
and Transfer of developed into viable operations. Several
Certain Rights opportunities were identified in 1994, 1995 and
1996, including talk radio, a youth oriented
newspaper, a newspaper insert aimed at sports
enthusiasts and an investment fund management
company. The talk radio venture was furthest
along in the development process, with HCC
having provided a line of credit as well as
marketing expertise to ATB. The other ventures
identified are only development options and are
intended to be pursued only if funding is
achieved and appropriate due diligence,
supporting the feasibility of the acquisitions,
has been completed.
HCC determined that these ventures could not be
adequately developed without additional capital
and, to that end, on May 17, 1996, HCC assigned
its option and, in the case of ATB, its contract
rights to HCMI, its wholly-owned subsidiary on
that date. On May 18, 1996, HCC spun off HCMI
via a dividend to HCC shareholders, with HCMI
effectively replicating the HCC capital
structure by issuing a share of its common stock
for each share of HCC common and preferred stock
outstanding as of May 18, 1996. Warrants to
purchase HCMI stock were granted to holders of
non-contingent HCC stock purchase warrants, and
warrants were issued to the HCC preferred
shareholders, as of May 18, 1996. The contracts
and option rights transferred to HCMI have no
carrying value because the cost of developing,
or servicing, the rights are expected to require
a substantial infusion of capital. It is HCMI's
intention to obtain the necessary capital
through an initial public offering (IPO) of its
common stock (See Note 8).
2. Going As shown in the accompanying financial
Concern statements, HCMI incurred a net loss of $315,015
and $1,142,791 during the period March 27, 1966
(date of formation) through December 31, 1996
and for the nine months ended September 30,
1997, respectively. At December 31, 1996 and
September 30, 1997, HCMI had a working capital
deficit of $516,327 and $1,012,628,
respectively. As of December 31, 1996 and
September 30, 1997, HCMI had also expended
$618,690 and $290,715 for direct incremental
offering costs which have been deferred in the
accompanying balance sheets and whose recovery
is dependent on the success of its IPO. HCMI
also has a significant
F-16
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
receivable of $172,780 as of December 31, 1996
and $169,280 as of September 30, 1997, from ATB
which, in turn, is also a development stage
company and whose most recent audit report,
dated September 19, 1997, expressed concern
about it's "ability to continue as a going
concern". Furthermore, HCMI expects to fund
development expenditures and incur losses until
it is able to generate sufficient income and
cash flows to meet such expenditures and other
requirements. HCMI does not currently have
sufficient cash reserves to cover such
anticipated expenditures and cash requirements.
These factors raise substantial doubt about
HCMI's ability to continue as a going concern.
HCMI and HCC have been evaluating financing
alternatives as part of their long-term business
plans. These alternatives include loan
arrangements for working capital needs, HCMI's
exercise of warrants, HCC's sale of preferred
stock and warrants and other alternatives, such
as the formation of HCMI, including the transfer
thereto of many of HCC's development options,
with HCMI, in turn, undertaking an IPO of a
portion of its common stock. To preserve
operating funds, HCC and HCMI have developed a
strategic plan which provides for reductions of,
and deferrals of payments for, expenditures and
a prioritization of development options.
The financial statements do not include any
adjustments relating to the recoverability and
classification of recorded assets or the amounts
and classification of liabilities that might be
necessary should HCMI be unable to complete its
proposed public offering and continue as a going
concern.
3. Effective January 1, 1995, HCC entered into a
HCC Marketing marketing agreement with ATB ("the HCC
and Line of Agreement") whereby HCC provides marketing
Credit services on behalf of ATB. Such services
Agreements include presenting programs to sponsors on a
worldwide basis, negotiating sponsorship
agreements, etc. In return for receiving the
marketing services, ATB is obligated to pay HCC
40% of its gross advertising cash receipts and
5% of its non-advertising gross receipts. The
agreement was transferred from HCC to HCMI on
May 17, 1996. Revenues recorded by HCMI from
the date of transfer through December 31, 1996
and for the nine months ended September 30, 1997
amount to $3,507
F-17
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
and $4,757, respectively. The HCC Agreement
automatically terminates on January 1, 1999,
unless extended by mutual agreement, and it is
terminable at earlier dates under certain
specified conditions. In the event of
termination for whatever reason, the amounts due
under the HCC Agreement for sponsorship existing
at the time of termination shall remain due and
payable, notwithstanding the termination (if
certain other conditions are met), for a period
ending the later of the automatic termination of
the HCC Agreement or two years after the date of
other termination. Revenues recognized by HCC
under the HCC Agreement aggregated $647 and
$2,847 during 1995 and until transfer in the
year ended December 31, 1996, respectively.
On January 15, 1995, HCC executed an unsecured
line of credit agreement with ATB (the "Credit
Agreement") which provides ATB with a standby
line of credit in the amount of $360,000.
Borrowings under the Credit Agreement bear
interest at 8% per annum, with payment of
interest being deferred until January 15, 1997,
whereupon monthly interest payments will be
required. Through September 30, 1997, interest
payments of $12,950 and $185 have been made to
HCMI and HCC, respectively. Any principal and
interest outstanding must be repaid on December
31, 1999. During 1996, HCMI began co-funding
this Credit Agreement with HCC. As of December
31, 1996 and September 30, 1997, HCMI had
advanced $172,780 and $169,280, respectively,
while HCC had advanced $338,695 and $431,145 as
of December 31, 1996 and September 30, 1997,
respectively. Although the total advances
($511,475 and $600,425 as of December 31, 1996
and September 30, 1997, respectively), are in
excess of the Credit Agreement's standby line of
credit amount ($360,000), the total advances are
governed by the Credit Agreement including
interest rates, due dates, etc. Interest income
earned by HCMI on its share of the outstanding
loan amounted to $2,899 and $10,310 during the
period March 27, 1996 (date of formation)
through December 31, 1996 and the nine months
ended September 30, 1997, respectively.
Interest income earned by HCC on its share of
the outstanding loans amounted to $3,364,
$22,970 and $24,387 for the years ended December
31, 1995 and 1996 and the nine months ended
September 30, 1997, respectively.
F-18
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
4. Shareholders' Preferred Stock
Equity
The total number of shares of stock that HCMI
has the authority to issue is 60,000,000
consisting of 10,000,000 shares of Preferred
Stock, par value $.001 per share, and 50,000,000
shares of Common Stock, par value $.001 per
share. The Board of Directors of HCMI is
authorized to issue shares of Preferred Stock in
series, to establish the number of shares to be
included in each series and to fix the
designations, powers, preferences and rights of
the shares of each such series. To date, no
series has been authorized.
Common Stock
In conjunction with HCMI's formation as a
subsidiary of HCC, HCC subscribed to 1,030,086
shares of HCMI common stock on March 27, 1996.
On May 17, 1996, HCC contributed the original
par value of those shares ($4,758) to HCMI in
cash in full payment of its subscription
receivable and the 1,030,086 shares of common
stock were issued to HCC. In conjunction with
HCMI's spinoff to the shareholders of HCC, on
May 18, 1996, HCMI retired those shares and
issued 1,030,086 shares of common stock as
follows: 426,280 shares to the existing common
shareholders of HCC and 603,806 shares to the
preferred shareholders of HCC and 3,727,914
shares were issued into escrow on behalf of the
HCC shareholders.
In addition, HCMI issued 1,394,500 warrants to
the HCC Preferred Shareholders who held
contingent HCC warrants on the basis of 1
warrant for each two HCC Preferred Shares. Each
warrant shall entitle the holder to purchase an
additional share of Common Stock for $.50.
During May 1996, HCMI notified these warrant
holders of its intent to do an initial public
offering ("IPO") stating that the holders had
until July 6, 1996 to exercise their warrants at
$.50 per share versus $4 per share thereafter
(80% of the expected IPO price of $5 per share).
On July 19, 1996, HCMI extended this warrant
exercise period until July 23, 1996. Through
July 23, 1996, warrants to purchase 253,387
after-split shares (1,170,400 pre-split shares)
were exercised for proceeds of $585,200.
F-19
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Warrants to purchase 1,573,500 shares of HCMI
common stock were also granted on May 18, 1996
to the holders of non-contingent HCC stock
purchase warrants. Additionally, on April 17,
1996, HCMI granted HCC warrants to purchase
1,236,000 shares of its common stock for $.50
per common share.
Outstanding Warrants
A summary of the outstanding warrants as of
December 31, 1996 and September 30, 1997 to
purchase HCMI Common Stock is as follows:
<TABLE>
<CAPTION>
Original Exercise
Warrant Date Date of Price
Holder Issued Expiration* Shares Per Share
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HCC
non-contingent
warrant holders May 18, 1996 May 17, 2001 190,000 $ .001
900,000 $ .10
483,500 $ .50
---------
1,573,500
Issued to
HCC Preferred
Shareholders May 18, 1996 December 31, 1996 224,100 $ .50
HCC April 17,1996 April 16, 2001 1,236,000 $ .50
---------
3.033,600
---------
---------
</TABLE>
*The terms of these warrants, and the contingent warrants discussed below, have
been modified in the reverse stock split which was approved in March 1997.
F-20
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Contingent Warrants
HCMI Common Stock which is contingently issuable as of
December 31, 1996 and September 30, 1997 upon the occurrence
of a specified event is as follows:
Event Requiring Shares of
Stock Issuance Common Stock
-------------------------------------------------------------
Employment Performance
(See Note 5) 75,000
-------------------------------------------------------------
Total 75,000
-------------------------------------------------------------
-------------------------------------------------------------
Stock Option Plan
On March 27, 1996, HCMI's incorporators reserved 600,000
shares of Common Stock for a Stock Option Plan.
Conditions of grants, terms, exercise prices, etc. are
yet to be determined by the Board of Directors. The
shareholders would be required to approve the plan prior
to granting options.
Reverse Stock Split
In conjunction with the planned IPO ("IPO"), the Board of
Directors of HCMI proposed a (1) reverse split of HCMI's
Common Stock on the basis of one new share of common
stock to shareholders for each 4.6190302 shares of
presently outstanding Common Stock (1,326,811 new shares)
and (2) a limitation on the exercise of existing
warrants. The principal objective of the reverse split
was to reduce the number of outstanding Common Shares
prior to the IPO. The Board of Directors believed that
the total number of shares then outstanding caused a
disproportionately large dilutive effect on new investors
in the planned IPO and that the anticipated offering
price of $5 per share would be better supported with
fewer shareholders prior to the IPO.
F-21
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
On March 26, 1997, the majority of the Common Shareholders
approved this proposal.
The shareholders will also be reissued a number of shares
equal to the shares being surrendered (4,801,589 shares).
Those shares will be placed in escrow with no voting or
dividend rights while in escrow. The release of these
shares from escrow and their distribution to the
shareholders and the exercise of the existing warrants,
both in normal annual increments of 16.67%, is contingent
on HCMI achieving the following:
HCMI generates an amount of income before
extraordinary items but after the deduction for
minority interests (the "Recurring Results of
Operations") that, when multiplied by a market
capitalization factor of ten (10), would result in a
product sufficient in size (the "Required Value") to
(1) hypothetically return capital of $5 per share
(the "Capital") and (2) hypothetically provide a
return of 40% per year (compounded monthly) on the
Capital for the first two years, and then 15% per
year (compounded monthly) thereafter, on the sum of
(a) all common shares then outstanding and (b) the
(i) increase in common shares caused by the assumed
release from escrow of the 16.67% of the escrowed
stock that is then eligible for release, (ii) any
carryforward shares and (iii) other warrants or
options probable of being exercised, including the
16.67% of existing warrants that is then eligible
for exercise.
Issuance of shares from escrow in the future may result in
the recognition of compensation expense.
F-22
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
5. Employment
Agreements HCMI has employment agreements (the "Agreements") with three
officers and employees. The Agreements provide for base
annual salaries aggregating $180,000 and permit
participation in an annual bonus pool, the amount and
conditions of which shall be determined by HCMI's Board of
Directors. In addition, the Agreements provide that these
employees are eligible to annually receive options to buy up
to 100,000 shares of Common Stock at $.10 per share with
terms, other than price, to be determined by the Board of
Directors. No options have been granted yet. One of the
Agreements also provides for the issuance of 75,000 shares
of common stock to the employee if he is employed by HCMI
for three years from May 1, 1996. Any options awarded under
such plans will be charged to compensation expense to the
extent fair value of the underlying stock exceeds the
related exercise prices. The Agreements are effective as of
May 1, 1996, have a term of three years and provide for
termination for cause with a cessation in compensation
payments. If terminated by HCMI without cause, or by the
employees with cause, prior to the end of their term, the
Agreements require payments of base salary to be continued
from the date of termination through the end of the original
term of the Agreements.
In addition, the Board of Directors has agreed to annually
provide certain directors with options to buy up to 12,500
shares of Common Stock per director. Terms, including
price, are yet to be determined by the Board of Directors.
6. Income taxes HCMI has no provision for income taxes for the period March
27, 1996 (date of formation) through December 31, 1996 due
to a net operating loss generated in that period. At
December 31, 1996, HCMI has net operating loss carryforwards
of approximately $100,000 on a tax basis, which expire in
2011.
F-23
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
A reconciliation of the income tax benefit at the statutory
rate to the amount actually recorded is as follows:
Period Ended
December 31, 1996
-------------------------------------------------------------
Income tax benefit at statutory rate $ (99,755)
Valuation allowance related to deferred
tax asset 99,755
-------------------------------------------------------------
Income tax benefit $ -
-------------------------------------------------------------
-------------------------------------------------------------
Deferred income taxes result from temporary differences
which are the result of provisions of the tax laws that
either require or permit certain items of income or expense
to be reported in different periods for financial statement
and income tax reporting purposes. The following is a
summary of the deferred income taxes for 1996.
Period Ended
December 31, 1996
-------------------------------------------------------------
Deferred tax assets
Net operating loss carryforward $ 40,000
Cash basis accounting for income
tax purposes 60,000
-------------------------------------------------------------
100,000
Valuation allowance (100,000)
-------------------------------------------------------------
Net deferred tax asset $ -
-------------------------------------------------------------
-------------------------------------------------------------
Generally accepted accounting principles require that a
valuation allowance be recorded against deferred tax assets
which are not likely to be realized. Specifically, HCMI
established the valuation allowance due to the uncertain
nature of the ultimate realization.
F-24
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
HCMI did not record an income tax provision or
benefit in the accompanying financial statements
for the nine months ended September 30, 1997
because of the existence of net operating
losses. HCMI does not expect to provide any
income tax provision or benefit for the year
ending December 31, 1997 because HCMI expects a
net loss for the year ending December 31, 1997.
7. Other One of HCMI's shareholders was/is a partner in
Related laws firms which provide services to HCMI.
Party Amounts recorded for legal services provided by
Transactions these firms in conjunction with the public
offering amounted to $106,834 and $167,655 as of
December 31, 1996 and September 30, 1997,
respectively. Another HCMI shareholder is the
principal stockholder of a company that provides
professional services to HCMI. Amounts recorded
for professional services provided by this
company to HCMI in conjunction with the public
offering amounted to $54,286 and $74,063 as of
December 31, 1996 and September 30, 1997,
respectively. These amounts are contained in
deferred offering costs in the accompanying
balance sheets.
8. Proposed HCMI intends to offer 2,500,000 shares of Common
Initial Stock in a public offering at $5 per share, or
Public an aggregate of $12,500,000 before deducting a
Offering selling commission of 8% of the gross proceeds
raised, and other offering costs including a
$50,000 due diligence fee and a nonaccountable
expense reimbursement of 2% of the gross
proceeds of the offering. If shares providing a
minimum of $2,000,000 of gross proceeds are not
sold during the initial offering period, as
defined, investors' funds will be returned. The
arrangement with the underwriter is on a best
efforts basis.
HCMI also expects to sell, at the termination of
the Offering, to the underwriter for an
aggregate purchase price of $100, warrants
entitling the underwriter to purchase one share
of HCMI stock for each ten shares of Common
Stock which have been sold in the IPO (for the
minimum offering of 400,000 shares, 40,000
warrants will be issued and for the maximum
offering of 2,500,000 shares, 250,000 warrants
will be issued). The warrants will be
exercisable for a period of 4 years commencing
12 months after the
F-25
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
date of the Prospectus. The exercise price of
the warrants shall be 165% of the per share
offering price.
In accordance with Securities and Exchange
Commission (SEC) Staff Accounting bulletin (SAB)
Topic No. (1)(B), the financial statements of
subsidiaries are required to include expenses
incurred by the subsidiary's parent on the
subsidiary's behalf. In conjunction with the
HCMI public offering, HCC has incurred direct
and indirect costs, such as salaries, rent, etc.
all of which have been assigned and/or allocated
to HCMI in the accompanying financial statements
with the net unpaid amount reflected by HCMI as
accounts payable to related parties. At
December 31, 1996 and September 30, 1997, the
net unpaid amount aggregated $220,616 and
$397,350, respectively. HCC's and HCMI's
financial statements reflect approximately
$300,000 and $150,000 of such costs from March
27, 1996 (date of information) through December
31, 1996 and during the nine months ended
September 30, 1997. such costs have either been
either specifically identified or, where
specific identification was not possible, have
been allocated using proportional cost
allocation. Management is of the opinion that
such methods result in a reasonable presentation
of such costs. Furthermore, management believes
that such costs approximate the amounts that
would have been incurred by HCMI on a stand
alone basis.
By the completion of the public offering, it is
expected that such costs could aggregate
$600,000. It is the intent of HCMI to reimburse
HCC for these costs, or at least a portion
thereof, on a sliding scale basis. Any amount
not reimbursed will be reflected as an
investment in HCMI by HCC.
In January 1997, the Company substantially
revised the terms of its proposed sale of common
stock. Accordingly, the Company wrote off the
deferred offering costs of $618,690 related to
the prior offering in the period ended September
30, 1997.
F-26
<PAGE>
Independent Certified Public Accountants' Report
To the Board of Directors and Shareholders
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
We have audited the accompanying balance sheets of Heartland Capital
Corporation (A Development Stage Company and Predecessor Company) as of
December 31, 1995 and 1996 and the related statements of operations, changes
in shareholders' equity (deficit) and cash flows for the period June 23, 1994
(date of formation) through December 31, 1994 and the years ended December
31, 1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
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 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 Heartland Capital
Corporation as of December 13, 1995 and 1996 and the results of its
operations and its cash flows for the period June 23, 1994 (date of
formation) through December 31, 1994 and the years ended December 31, 1995
and 1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred
significant operating losses and working capital deficits since formation. In
addition, the Company expects to fund development expenditures and incur
additional losses until its operations are able to generate sufficient
revenues to cover such expenditures and losses. The Company does not
currently have sufficient cash reserves to cover
F-27
<PAGE>
such anticipated expenditures and cash requirements, necessitating additional
capital or financing. These factors, in addition to other factors discussed
in Note 2 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
regarding these matters are also discussed in Note 2. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ BDO Seidman, LLP
---------------------
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-28
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Balance Sheets
<TABLE>
<CAPTION>
September 30,
December 31, -------------
-------------------------- 1997
1995 1996 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 19,687 $ 1,251 $ 2,802
Accounts and notes receivable from related parties (Note 1 and 10) 2,963 224,110 400,844
Notes receivable--other (Note 11) -- -- 59,156
Receivables from employees -- 7,408 7,457
- ------------------------------------------------------------------------------------------------------------------
Total current assets 22,650 232,769 470,259
- ------------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of $687 and
$1,203 as of December 31, 1996 and September 30, 1997 3,025 2,748 2,233
Note receivable from related party (Note 3) 144,850 338,695 431,145
Accrued interest receivable principally from related party 5,878 31,163 60,452
Other assets 8,397 -- --
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 184,800 $ 605,375 $ 964,089
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit)
Accounts payable $ 105,800 $ 42,391 $ 142,770
Accrued salaries 140,152 75,560 75,560
Accrued expenses 2,357 27,024 27,024
Notes payable to related parties (Note 6) 100,000 109,284 478,644
Accrued interest payable to related parties (Note 6) 7,870 10,524 47,487
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 356,179 264,783 771,485
- ------------------------------------------------------------------------------------------------------------------
Commitments (Note 8)
Shareholders' equity (deficit) (Notes 1, 5, and 10)
Preferred stock, $.001 par value, 10,000,000 shares authorized:
Series A 12% Noncumulative convertible preferred stock, 3,600,000
shares authorized, at December 31, 1996 and 1995; 1,372,000
shares and 2,789,000 shares issued and outstanding at
December 31, 1995 and 1996 1,372 2,789 --
Common stock, $.001 par value, 50,000,000 shares authorized:
1,565,000, 2,169,000 shares and 4,958,000 shares outstanding at
December 31, 1995, and 1996 and September 30, 1997, respectively 1,565 2,169 4,958
Additional paid-in capital 638,908 1,582,003 1,582,003
Deficit accumulated during the development stage (813,224) (1,246,369) (1,394,357)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (171,379) 340,592 192,604
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 184,800 $ 605,375 $ 964,089
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-29
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Statements of Operations
<TABLE>
<CAPTION>
For the period For the period
June 23, 1994 For the nine June 23, 1994
(date months ended (date of
of formation) For the For the September 30, formation)
through year ended year ended ------------------------ through September 30,
December 31, December 31, December 31, 1996 1997 1997
1994 1995 1996 (Unaudited) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Marketing
commission
received from
related party
(Note 3) $ -- $ 647 $ 2,847 $ 10,913 $ -- $ 3,494
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses
Salaries (Note
5) 112,374 209,885 156,279 3,487 -- 478,538
General and
administrative
(Notes 8 and
9) 56,826 127,727 121,936 221,710 90,795 397,284
Write-off of working
capital advances
(Note 4) 42,172 180,955 82,451 60,309 49,190 354,768
Program costs (Note
5) -- 49,900 -- -- -- 49,900
Depreciation -- -- 688 454 515 1,203
- ---------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 211,372 568,467 361,354 285,960 140,500 1,281,693
- ---------------------------------------------------------------------------------------------------------------------------
Operating loss (211,372) (567,820) (358,507) (275,047) (140,500) (1,278,199)
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense,
net of interest
income of $ -- in
1994, $4,775 in
1995, $23,492 in
1996, $18,115 and
$29,474 in the
nine months
ended September 30,
1996 and 1997,
respectively and
$57,741 from June
23, 1994 (date of
formation)
through September 30,
1997 (Notes 3, 5
and 6) (8,342) (25,690) (69,880) (3,973) (7,488) (111,400)
- ---------------------------------------------------------------------------------------------------------------------------
Net loss $ (219,714) $ (593,510) $ (428,387) $ (279,020) $ (147,988) $ (1,389,599)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average
common shares
outstanding 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000
- ---------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (.03) $ (.07) $ (.05) $ (.03) $ (.02) $ (.17)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-30
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Statements of Changes in Shareholders' Equity (Deficit)
For the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A 12%
Noncumulative
Convertible
Preferred Stock Common Stock Deficit
------------------------ --------------------------- Accumulated
Issued and Issued and Additional Development
Outstanding $.001 Outstanding $.001 Paid-in Treasury During the
Shares Par Value Shares Par Value Capital Stock Development Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994 -- $ -- 2,000,000 $ 2,000 $ -- $ -- $ (219,714) $(217,714)
Repurchase of com-
mon stock -- -- -- -- -- (700) -- (700)
Retirement of com-
mon stock -- -- (700,000) (700) -- 700 -- --
Sale of common
stock -- -- 180,000 180 89,820 -- -- 90,000
Issuance of common
stock for
services -- -- 85,000 85 27,445 -- -- 27,530
Issuance of warrants
for services -- -- -- -- 94,810 -- -- 94,810
Sale of preferred
stock, net of
offering costs of
$257,795 1,372,000 1,372 -- -- 426,833 -- -- 428,205
Net loss -- -- -- -- -- -- (593,510) (593,510)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1995 1,372,000 1,372 1,565,000 1,565 638,908 -- (813,224) (171,379)
Issuance of common
stock for
services -- -- 404,000 404 201,596 -- -- 202,000
Issuance of
dividend -- -- -- -- -- -- (4,758) (4,758)
Sale of preferred
stock, net of
offering costs of
$65,384 1,417,000 1,417 -- -- 641,699 -- -- 643,116
Issuance of common
stock for
reduction of
liability -- -- 200,000 200 99,800 -- -- 100,000
Net loss -- -- -- -- -- -- (428,387) (428,387)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1996 2,789,000 2,789 2,169,000 2,169 1,582,003 -- (1,246,369) 340,592
Conversion of pre-
ferred stock (2,789,000) (2,789) 2,789,000 2,789
Net loss
(unaudited) -- -- -- -- -- -- (147,988) (147,988)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30,
1997 (unaudited) -- $ -- 4,958,000 $ 4,958 $1,582,003 $ -- $(1,394,357) $ 192,604
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-31
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the
period
June 23,
For the period For the 1994
June 23, 1994 nine months (date of
(date For the For the ended September formation)
of formation) year ended year ended 30, through
through December December ------------------------ September
December 31, 31, 31, 1996 1997 30, 1997
1994 1995 1996 (Unaudited) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss $ (219,714) $(593,510) $(428,387) $(279,020) $(147,988) $(1,389,599)
Adjustments to reconcile
net loss to net cash
provided by operations
Depreciation -- -- 688 454 515 1,203
Stock and warrants issued
for compensation -- 212,340 302,000 404 -- 514,340
Increase in
receivables (1,800) (7,041) (228,555) (67,611) (176,783) (414,179)
(Increase) decrease in
prepaid expense (6,902) 6,902 -- (25,000) -- --
Increase in accrued
interest -- -- (25,285) -- (29,289) (54,574)
(Increase) decrease in
other assets (27,500) 19,103 8,397 3,639 -- --
Increase (decrease) in
accounts payable 44,502 61,298 (63,409) 6,011 100,379 142,770
Increase (decrease) in
accrued salaries 105,000 35,152 (64,592) (65,152) -- 75,560
Increase in accrued
expenses -- 2,357 24,667 (2,357) -- 27,024
Increase in accrued
interest payable to
related parties 4,486 3,384 2,653 3,323 36,963 47,486
- ----------------------------------------------------------------------------------------------------------
Net cash used in
operating activities (101,928) (260,015) (471,823) (425,309) (216,203) (1,049,969)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of equipment -- (3,025) (410) (410) -- (3,435)
Loan to related party -- (144,850) (193,845) (190,845) (92,450) (431,145)
Loan to others -- -- -- -- (59,156) (59,156)
- ----------------------------------------------------------------------------------------------------------
Net cash used in
investing activities -- (147,875) (194,255) (191,255) (151,606) (493,736)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing
activities
Sale (retirement) of
common stock, net of
issuance costs 2,000 (700) -- -- -- 1,300
Sale of preferred stock,
net of issuance
costs -- 428,205 643,116 643,116 -- 1,071,321
Proceeds from related
party loans 100,000 29,600 9,284 -- 369,360 508,244
Principal repayments to
related parties -- (29,600) -- (10,716) -- (29,600)
Dividends -- -- (4,758) -- -- (4,758)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 102,000 427,505 647,642 632,400 369,360 1,546,507
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-32
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the
period
June 23,
For the period For the 1994
June 23, 1994 nine months (date of
(date For the For the ended September formation)
of formation) year ended year ended 30, through
through December December ------------------------ September
December 31, 31, 31, 1996 1997 30, 1997
1994 1995 1996 (Unaudited) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
cash and cash
equivalents 72 19,615 (18,436) 15,836 1,551 $ 2,802
Cash and cash
equivalents, beginning
of period -- 72 19,687 19,687 1,251 --
- ----------------------------------------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 72 $ 19,687 $ 1,251 $ 35,523 $ 2,802 2,802
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures
of Cash Flow
Information
Interest paid $ 3,856 $ 12,111 $ -- $ 18,774 -- $ 15,967
- ----------------------------------------------------------------------------------------------------------
Noncash investing and
financing activities
consisted of the
following:
Issuance of common stock
for services $ -- $ 85 $ -- $ -- $ -- $ 85
Issuance of stock for
reduction of
liability -- -- -- 100,000 -- 100,000
Conversion of accrued
salaries to notes
payable -- -- -- 60,000 -- 60,000
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-33
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Company and Nature Heartland Capital Corporation ("HCC") was incorporated on June 23,
of Business 1994 as a Delaware corporation. HCC provides merchant banking,
marketing and consulting services to companies primarily engaged in
the electronic and print media industries. HCC also provides
consulting and support services to not-for-profit organizations,
assisting certain organizations by planning start-up operations, and
advancing temporary working capital. To date, HCC has not generated
significant revenues from its operations, and a majority of its
activities have been devoted to developing its own programs and
starting up operations. Accordingly, HCC's activities have been
accounted for as those of a "development stage enterprise" as set
forth in Statement of Financial Accounting Standards ("SFAS") No. 7.
Heartland Communications and Management, Inc. ("HCMI") was formed on
March 27, 1996 as a wholly owned subsidiary of HCC with HCC
subscribing to HCMI's common stock. On May 17, 1996, HCC
("Predecessor Company") paid its $4,758 stock subscription and
simultaneously assigned certain of its development and contract
rights and obligations to HCMI ("Successor Company") (see Note 1).
HCC is also related to another entity, ATB Productions, L.L.C.
("ATB"), with which it shares common, but not identical, ownership
and to which it provides marketing services and a line of credit.
Risks and While HCC has had limited operations, it is still in the development
Uncertainties stage and has not had a significant history of operations.
Consequently, HCC's activities will be subject to the risks inherent
in a new business enterprise, including among others, limited
capital, uncertain market acceptance and the inability to obtain
additional financing. Additionally, HCC faces substantial
competition from a number of well established, well financed
companies. HCC's principal source of revenues, advertising, is often
cyclical and dependent upon general economic conditions, rising in
good economic times and declining in economic downturns. In
addition, HCC has significant transactions with, including
significant receivables from, related parties who are likewise in
the development stage and subject to the same risks and
uncertainties as HCC. HCC believes it has properly identified the
risks in
</TABLE>
F-34
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
the environment in which it operates and implemented strategies to
effectively reduce the financial impact of these risks on HCC.
Use of Estimates The preparation of financial statements in accordance with generally
accepted accounting principles requires HCC to make certain
estimates and assumptions particularly as it relates to the
valuation of receivable and disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
Property and Equipment Additions to property and equipment are recorded at cost and include
all major renewals and betterments. Maintenance, repairs and minor
replacements are expensed as incurred. Depreciation expense is
provided on the straight line basis over the five year estimated
life of the related assets.
Revenues Marketing commissions are recognized as commercials are broadcast
and the related advertising revenues are received.
Advances of Temporary As part of its services to not-for-profit organizations, HCC makes
Working Capital working capital advances which call for repayment. Due to the
start-up nature of these not-for-profit entities and the uncertainty
regarding the ultimate collectibility of the working capital
advances, HCC expenses these advances as funded. Repayment, if
received, will be recorded as income when received. Also, interest
income related to the working capital advances is recorded as
received.
Income Taxes HCC uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement and income tax bases. The
recognition of net deferred tax assets is reduced, if necessary, by
a valuation allowance for the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
</TABLE>
F-35
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Net Loss Per Share Net loss per share is based on the weighted average number of shares
of common stock equivalents outstanding during each period, as
adjusted for the effects of the application of Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
83. Pursuant to SEC SAB No. 83, "cheap" stock and warrants issued
(that is, stock or warrants issued for consideration or with
exercise prices below the initial public offering ("IPO") price)
within a year prior to the initial filing, or in contemplation of,
of the IPO must be treated as outstanding for all reported periods.
Accordingly, the following equivalent shares have been assumed to be
outstanding, and are used in computing net loss per share, for all
periods:
</TABLE>
<TABLE>
<S> <C>
"Cheap" Stock
Common shares 2,169,000
- --------------------------------------------------------------------
Convertible Preferred Stock 2,789,000*
- --------------------------------------------------------------------
"Cheap" Warrants
Outstanding as of December 31, 1996 (including 125,000
shares subject to contingent warrants) 1,698,500
Available upon conversion of convertible preferred
stock 1,394,500*
- --------------------------------------------------------------------
3,093,000
- --------------------------------------------------------------------
Total weighted average shares considered to be
outstanding for all periods 8,051,000
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* As of September 30, 1997, the convertible preferred stock outstanding
has been reflected as converted into common stock on a one-for-one
basis and the 1,394,500 warrants issuable, upon conversion, on a
two-for-one basis, are deemed as outstanding warrants versus
contingent warrants. There is no effect on the total equivalent
shares since such preferred shares and warrants were deemed
equivalent shares even before conversion.
</TABLE>
F-36
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Furthermore, both contingent and outstanding warrants
are included in the determinations of equivalent
shares. Accordingly, the number of equivalent shares
is the same in total at December 31, 1996 and
September 30, 1997.
Cash Equivalents HCC considers all highly liquid investments purchased with initial
maturities of 90 days or less to be cash equivalents.
Accounts Receivable HCC provides a reserve for doubtful accounts based on a specific
review of the expected collectibility of individual outstanding
accounts.
Fair Value of In accordance with the requirements of SFAS No. 107, "Disclosure
Financial Instruments About Fair Value of Financial Instruments," HCC must disclose the
fair value of its financial instruments. In the opinion of
management, the fair values of the HCC's financial instruments
as of December 31, 1995 and 1996 and September 30, 1997 are not
materially different from the carrying amounts shown in the
accompanying financial statements.
Interim Financial The accompanying interim financial statements for the nine months
Statements ended September 30, 1996 and 1997 are unaudited but, in the opinion of
management, reflect all adjustments (consisting primarily of normal
recurring adjustments) necessary for a fair presentation of the
results of operations for the periods presented. The results for the
nine months ended September 30, 1997 are not necessarily indicative of
the results to be obtained for the full fiscal year.
Recent Accounting In October 1995, SFAS No. 123, "Accounting for Stock-Based
Pronouncements Compensation," was issued. SFAS No. 123 establishes a fair value
method for accounting for stock-based compensation plans either
through recognition or disclosure. HCC intends to adopt the
employee stock-based compensation provisions of SFAS No. 123 by
disclosing the pro forma net income and pro forma net income per
share amounts assuming the fair value method was
</TABLE>
F-37
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
adopted January 1, 1995. The adoption of this standard will not
impact HCC's results of operations, financial position or cash flows.
On March 3, 1997, SFAS No. 128, "Earnings per Share (SFAS 128)".
SFAS 128 provides a different method of calculating earnings per
share than is currently used in accordance with APB Opinion 15. SFAS
128 provides for the calculation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed
by dividing income available to common shareholders by weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing
fully diluted earnings per share. Using the principles set forth in
SFAS 128, basic earnings per share would not be different from
reported earnings per share.
Statement of Financial Accounting Standards No. 129, disclosure of
Information about Capital Structure ("SFAS 129") effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various
securities outstanding (stock, options, warrants, preferred stock,
debt and participation rights) including dividend and liquidation
preferences, participants rights, call prices and dates, conversions
or exercise prices and redemptions requirements. Adoption of SFAS 129
will have no effect on HCC as it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosures standards. Results of operations and financial position
will be unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", established standards for reporting and display
of comprehensive income, it components and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items
that are required to be
</TABLE>
F-38
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise",
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements
and requires reporting of selected information about operating segment
in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial
statement disclosures.
</TABLE>
F-39
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Reorganization and As part of its merchant banking operations, HCC identifies
Transfer of Certain investment opportunities which can be developed into viable
Rights operations. In 1994, 1995 and 1996, HCC identified several
opportunities, including talk radio, a youth oriented newspaper, a
newspaper insert aimed at sports enthusiasts and an investment fund
management company. The talk radio venture was furthest along in the
development process, with HCC having provided a line of credit as
well as marketing expertise to ATB (see Note 3). The other ventures
identified to date are only development options and are intended to
be pursued only if funding is obtained (see below) and appropriate
due diligence, supporting the feasibility of the acquisitions, has
been completed.
HCC has determined that these ventures can not be adequately
developed without additional capital and, to that end, on May 17,
1996, HCC assigned its option (and in the case of ATB, its contract)
rights to HCMI, formerly a wholly owned subsidiary. The contract and
option rights transferred to HCMI have no carrying value because
developing or servicing the rights is expected to require a
substantial infusion of capital. It is HCMI's intention to obtain
the necessary capital through an initial public offering of its
common stock. On May 18, 1996, HCC spun off HCMI via a dividend to
the HCC stockholders with HCMI cancelling the shares that had been
issued to HCC and effectively replicating the HCC capital structure by
issuing a share of HCMI common stock to each HCC common and preferred
shareholder for each share of HCC common and preferred stock outstanding.
Warrants to purchase HCMI stock at $.50 per share were granted to holders
of non-contingent HCC stock purchase warrants, and warrants were issued
to the HCC preferred shareholders, on May 18, 1996. Additionally, on
April 17, 1996, HCMI granted HCC warrants to purchase 1,236,000 shares
of its common stock for $.50 per share.
During March 1997 the HCMI stockholders, in conjunction with the
contemplated HCMI public offering, approved a reverse stock split of
HCMI's common stock on the basis of one new share of HCMI common
stock for each 4.6190302 shares of presently outstanding HCMI
shares. The balance of 3.6190302 shares will be surrendered to HCMI
and replaced by an equal number of shares placed in escrow with no
voting or dividend rights while in escrow. The release of these
shares from escrow and the exercise
</TABLE>
F-40
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
of the outstanding warrants will be dependent on HCMI achieving a
specified level of profitability. The principal purpose of the
reverse split was to reduce the number of outstanding HCMI
Common Shares prior to the public stock offering.
2. Going Concern As shown in the accompanying financial statements, HCC incurred a
net loss of $428,387 in 1996 and $147,988 for the nine months ended
September 30, 1997 and has incurred losses since formation resulting in
an accumulated deficit of $1,246,369 and $1,394,357 at December 31,
1996 and September 30, 1997, respectively. At December 31, 1996 and
September 30, 1997, HCC had working capital deficits of $32,014 and
$301,226, respectively. Furthermore, HCC expects to incur additional
losses and fund other expenditures until it is able to generate
sufficient income to cover operating expenses and other
expenditures. HCC does not currently have sufficient cash reserves
to cover such anticipated losses and other expenditures. HCC also
has significant receivables of $593,968 and $892,441 as of December
31, 1996 and September 30, 1997, respectively from HCMI and ATB who, in
turn, are both development stage companies. In addition, HCMI's and ATB's
most recent audit reports, dated April 25, 1997 and September 19, 1997,
respectively, expressed concern about their "ability to continue as a
going concerns". These factors raise substantial doubt about HCC's
ability to continue as a going concern.
HCC has been evaluating financing and capitalization alternatives in
its long-term business plan. These alternatives included the sale of
the 12% Preferred Stock and warrants, and other alternatives, such as
the formation of HCMI, including the transfer thereto of many of HCC's
development options with HCMI, in turn, undergoing an IPO of common
stock. To preserve operating funds, HCC has developed a strategic plan
which provides for the reduction of expenditures and a prioritization
of development options.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets or the
amounts and classification of liabilities that might be necessary
should HCC be unable to continue as a going concern.
</TABLE>
F-41
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
3. HCC Marketing and Effective January 1, 1995, HCC entered into a marketing agreement
Line of Credit with ATB ("the HCC Agreement") whereby HCC will provide marketing
Agreements services on behalf of ATB. In return for receiving the marketing
services, ATB is obligated to pay HCC 40% of its gross advertising
cash receipts and 5% of its non-advertising gross receipts. This
agreement was assigned to HCMI by HCC on May 17, 1996. The HCC
Agreement automatically terminates on January 1, 1999 unless
extended by mutual agreement, and it is terminable at earlier dates
under certain specified conditions. In the event of termination for
whatever reason, the amounts due under the HCC Agreement for
sponsorship existing at the time of termination shall remain due and
payable, notwithstanding the termination (if certain other
conditions are met), for a period ending the later of the automatic
termination date of the HCC Agreement or two years after the date of
other termination. Revenues recognized by HCC under the HCC
Agreement aggregated $647, and $2,847 during 1995 and 1996, respectively.
After the assignment of the contract, HCMI recognized $3,507 and $4,757 of
revenues under this agreement during the period March 27, 1996 (date
of formation) through December 31, 1996 and the nine months ended
September 30, 1997, respectively.
On January 15, 1995, HCC executed an unsecured line of credit
agreement with ATB (the "Credit Agreement") which provides ATB with
a standby line of credit in the amount of $360,000. Borrowings under
the Credit Agreement bear interest at 8% per annum, with payment of
interest deferred until January 15, 1997, whereupon monthly interest
payments will be required. Through September 30, 1997, interest payments
of $12,950 and $185 have been made to HCMI and HCC, respectively. Any
principal and interest outstanding on the line of credit must be repaid on
December 31, 1999. During 1996, HCMI began co-funding this Credit
Agreement with HCC. As of December 31, 1996 and September 30, 1997, HCC
had advanced $338,695 and $431,145, respectively, while HCMI had
advanced $172,780 and $169,280, respectively. Although the total
advances $511,475 and $600,425 as of December 31, 1996 and September 30,
1997, respectively are in excess of the standby line of credit
amount ($360,000), the total advances are governed by the Credit
Agreement including interest rates, due dates, etc. Interest income
on the line of credit for HCC amounted to $3,364, $22,970 and $24,387
for the years ended December 31, 1995 and 1996 and the nine
</TABLE>
F-42
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
months ended September 30, 1997, respectively. Interest income earned
by HCMI on its share of the outstanding loan amounted to $2,899 and
$10,310 during the period March 27, 1996 (date of formation) through
December 31, 1996 and the nine months ended September 30, 1977,
respectively.
4. Funding and In 1994, 1995, 1996 and during the nine months ended September 30,
Services Provided 1997 HCC provided management assistance and funding to
to Not-for-Profit not-for-profit organizations. These organizations are separate
Organizations entities and their operations are not reflected in the accompanying
financial statements. In 1994, 1995 and 1996, HCC advanced a total
of $42,172, $180,955 and $82,451, respectively, to these
organizations. For the nine months ended September 30, 1997, such
advances amounted to $49,190. These amounts are reflected as
"Write-off of working capital advances" in the accompanying
Statements of Operations. Included in these amounts was $50,000 in
1995 that was paid to ATB on behalf of one of these nonprofit
organizations for advertising on a radio program produced by ATB.
5. Shareholders' Preferred Stock
Equity
The total number of shares of stock that HCC has the authority to
issue is 60,000,000, consisting of 10,000,000 shares of preferred
stock, par value $.001 per share, and 50,000,000 shares of common
stock, par value $.001 per share. The preferred stock may be issued
from time to time in one or more series. The Board of Directors of
HCC is empowered to provide for the issuance of shares of preferred
stock in series, to establish the number of shares to be included in
each series and to fix the designations, powers, preferences and rights
of the shares in each such series.
On January 6, 1995, the Board of Directors created a series of
Noncumulative Convertible 12% Preferred Stock, par value, $.001 per
share to consist of 1,800,000 shares. On September 18, 1995, the
number of authorized shares of the Convertible 12% Preferred Stock
was increased to 3,600,000. The series was designated the "Series A
12% Noncumulative Convertible Preferred Stock" (the "12% Preferred
Stock").
</TABLE>
F-43
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
The 12% Preferred Stock was senior in right to all shares of HCC's
common stock. With the written consent of a least a majority of the
shareholders of the 12% Preferred Stock, HCC could have issued one
or more series of preferred stock with right, rank and priority
senior to the 12% Preferred Stock.
Beginning April 1, 1996, the 12% Preferred Stock was entitled to
receive, when and as declared by HCC's Board of Directors,
noncumulative cash dividends at the rate of $.06 per share per
annum. Accrued dividends on the 12% Preferred Stock shall be paid
before any dividends shall be paid upon the Common Stock and before
any repurchase, retirement or other acquisition of any shares of
Common Stock. No such dividends have been declared.
In the event of the voluntary or involuntary liquidation,
dissolution or winding up of HCC, the holders of the 12% Preferred
Stock were entitled, before any payment with respect to Common
Stock, to receive in cash for their shares from the assets of HCC
then available for distribution a proportional amount, as defined,
up to $.50 for each share of 12% Preferred Stock plus any unpaid and
accrued dividends.
On March 31, 1997, each share of 12% Preferred Stock automatically
converted into one share of common stock. At any time prior to
March 31, 1997, the Holder could have converted the 12% Preferred
Shares into common stock. In addition to the one-for-one conversion,
the Holder shall, upon conversion, receive a purchase warrant for one
share of common stock for each two shares of the 12% Preferred Stock
converted. Each warrant shall entitle the holder to purchase an additional
share of common stock for (i) $.50 up to and including 20 days after the
Company notifies the Holder that it has signed a letter of intent with an
underwriter to do an initial public offering of HCC's common stock
or (ii) 80% of the initial public offering price for a period of one
year subsequent to the effective date of a registration statement
filed for the sale of HCC's common stock. Between the two dates (20
days after notification and the effective day of the Registration
Statement), the 12% Preferred Stock could not be converted into
common stock. The 12% Preferred Stock would have been automatically
converted into common stock immediately prior to the completion of
any public sale of stock.
</TABLE>
F-44
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
On January 16, 1996, HCC entered into an agreement with an
underwriter to sell the 12% Preferred Stock. In 1995 and 1996,
2,789,000 shares of the 12% Preferred Stock, at a price of $.50 per
share, had been sold, for total proceeds of $1,394,500, and the
offering was terminated.
Effective March 31, 1997, the 2,789,000 shares of outstanding 12%
Preferred Stock has been reflected as converted into common stock on
a one-for-one basis and the 1,394,500 purchase warrants issuable
upon conversion, on a one-for-two basis, are deemed as outstanding
warrants whereas they formerly had been deemed contingent warrants.
Common Stock/Warrants
On June 23, 1994, HCC's three founding investors purchased 2,000,000
shares of HCC common stock (the "Common Stock") at a price of $.001
per share, for a total of $2,000. The founding investors also
received warrants (expiring June 23, 1999) to purchase 900,000
shares of the Company's Common Stock at $.10 per share. Two of the
founding investors were employed by the Company in senior management
positions.
In 1995, one of the two employees (the "Selling Employee") left the
Company and the remaining employee (the "Purchasing Employee")
agreed to purchase the Selling Employee's common stock (700,000
shares) and warrants (to purchase 350,000 shares) for $75,000. As
part of this sale, the Selling Employee also waived his rights to
approximately $100,000 of unpaid compensation. The Purchasing Employee
then entered into an agreement with HCC to sell HCC the 700,000 shares
of common stock purchased from the Selling Employee for $75,000. The
Purchasing Employee retained ownership of the warrants to purchase
350,000 shares of the Company's common stock. Because the $75,000 cost
of acquiring the 700,000 shares was in excess of the par value of the
shares (the amount at which originally issued), the excess cost ($74,300)
has been reflected as compensation expense (to the Selling Employee) in
the accompanying Statement of Operations in 1995.
</TABLE>
F-45
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
On May 3, 1995, HCC issued warrants to purchase 100,000 shares of
common stock to a radio talk show host (otherwise unaffiliated with
HCC) as partial consideration for his doing the show. These warrants
are exercisable for a five year period and have an exercise price of
$.001 per share. These warrants were recorded as programs costs
based on a comparable value of $.50 per share resulting in $49,900
of program costs in 1995.
On July 24, 1995, 180,000 shares of common stock were sold to a
company assisting with the private placement of the Preferred
Stock. The amount paid was $.001 per share, for a total of $180.
The shares were recorded based on a comparable value of $.50 per
share, resulting in additional offerings costs of $89,820. Also,
on July 24, 1995, HCC issued warrants to purchase 90,000 shares of
Common Stock in conjunction with the sale of 180,000 shares of the
Company's common stock. The warrants allow the holder to purchase
the HCC's common stock for $.001 per share for five years. The
warrants were recorded based on a comparable value of $.50 per
share resulting in $44,910 of additional offering costs.
Common Stock/Warrants Issued For Services Rendered
Certain employees, officers, lenders, board members and contractors
(the "Suppliers") were issued common stock in partial consideration
for services rendered or for loans made to the Company. In 1995, a
total of 85,000 shares were issued. During 1996, a total of 404,000
shares were similarly issued. Related expense (interest, compensation,
etc., based on a comparable value of $.50 per share, of $27,445 and
$201,596 has been recognized in the accompanying Statements of
Operations for the year ended December 31, 1995 and 1996, respectively.
Along with the 404,000 shares of common stock issued during 1996,
warrants to purchase 333,500 shares of common stock were also
issued. HCC also issued warrants to purchase 60,000 shares of common
stock to two employees who had loaned money to HCC. These warrants
were issued on January 29, 1996, are exercisable for a five year
period and have an exercise price of $.50 per share.
</TABLE>
F-46
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Additionally, on January 29, 1996, HCC issued to an underwriter
warrants to purchase 90,000 share of common stock at $.50 per
share, contingent on the underwriter raising at least $1,350,000 in
the private placement of HCC's preferred stock. As of April 19,
1996, the goal was met and the warrants were issued and are
exercisable for a five year period. The underwriter also will
receive, in addition to normal sales commissions, an additional 2%
of all capital raised in excess of $1,350,000.
In 1995, HCC entered into an agreement with the placement agent of
its 12% Preferred Stock allowing HCC to convert $100,000 of
outstanding fees due to the placement agent into common stock at a
price of $.50 per share. On March 31, 1996, HCC issued 200,000
shares of common stock in lieu of paying $100,000 to the placement
agent and recorded such shares based on the amount of the liability
relieved ($100,000).
</TABLE>
F-47
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Outstanding Warrants
A summary of the outstanding warrants as of
September 30, 1997 described above is as follows:
</TABLE>
<TABLE>
<CAPTION>
Shares
Warrant Date Date Under Exercise
Holder Issued Expires Warrant Price
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------
Founders June 23, 1994 June 22, 1999 900,000 $ .10
Show Host May 3, 1995 May 2, 2000 100,000 $ .001
Underwriter July 24, 1995 July 23, 2000 90,000 $ .001
January 28,
Underwriter January 29,1996 2001 90,000 $ .50
Suppliers January 29, January 28,
(with stock) 1996 2001 333,500 $ .50
Suppliers
(without January 29, January 28,
stock) 1996 2001 60,000 $ .50
---------
1,573,500 --
Conversion of
Preferred
Stock 1,394,500 $ .50
---------
Total 2,968,000 --
---------
</TABLE>
<TABLE>
<S> <C>
In 1995, HCC entered into agreements with two contract service
providers to issue warrants if various performance goals were met.
The goals that have been established are specifically measurable and
performance-based which, if met in whole or in part, would result in
the issuance of warrants to purchase up to 125,000 of common stock
at prices of $.001 per share (50,000 shares) and $.40 per share
(75,000 shares). The warrants, if issued, would have an exercise
term of five years. Compensation expense will be recorded based on a
comparable value of $.50 per share, less the warrant exercise price,
if such warrants are issued.
</TABLE>
F-48
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Contingent Warrants
A summary of warrants as of September 30, 1997 described
above under which shares are contingently issuable upon
the occurrence of specified events is as follows:
</TABLE>
Event Requiring
Warrants Exercise Price
Issuance Shares Under Warrants Per Share
- -------------------------------------------------------------------------------
Employment Performance 75,000 $.40
Employment Performance 50,000 $.001
- -------------------------------------------------------------------------------
Total 125,000 --
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
6. Notes Payable On June 1, 1994, HCC entered into a promissory note agreement with
an officer who is also a director. Under the terms of the note
agreement, HCC borrowed $100,000, at a rate of 14.875% per annum.
The note is now payable on demand. The balance of the note as of
December 31, 1996 and September 30, 1997 was $49,284 and $418,644,
respectively.
On February 1, 1995, HCC executed a promissory note with an officer
who is also a director. Under the terms of the note, HCC borrowed
$14,600, at a stated interest rate of 13.75% per annum, and repaid
the amount borrowed during 1995. As additional consideration for
making the note, HCC also agreed to issue 30,000 shares of common
stock and provide warrants to purchase an additional 15,000 shares
of common stock at $.50 per share. Such share have been valued based
on a comparable value of $.50 per share resulting in increased
interest expense of $14,970, or an overall effective interest rate
of 106% per year.
</TABLE>
F-49
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
On May 8, 1995, HCC executed a promissory note agreement with
another director. Under the terms of the note agreement, HCC
borrowed $15,000, at a rate of 14.875% per annum, and repaid
the amount borrowed during 1995. In consideration for making
the note, HCC also agreed to issue the director 30,000 shares
of common stock and provide warrants to purchase an additional
15,000 shares of common stock at $.50 per share. Such shares have
been valued based on a comparable value of $.50 per share resulting
in increased interest expense of $14,970, or an overall effective
interest rate of $105% per year.
On January 20, 1996, HCC executed a promissory note agreement with
another officer who is also a director. Under the terms of the Note
agreement, HCC converted $60,000 of accrued compensation into a
$60,000 note payable, with an interest rate of 14.875% per annum.
The note is payable on the earlier of July 20, 1996 or the date that
the Company, through its equity capital development on behalf of
HCMI, raises in excess of $1,000,000. In consideration for making
the note, HCC also agreed to issue the employee 120,000 shares of
common stock and provide warrants to purchase an additional 120,000
shares of common stock at $.50 per share. Such shares have been
valued based on a comparable value of $.50 per share resulting in
increased interest expense of $59,880 or an overall effective
interest rate of 105% per year.
All of these notes are unsecured. Interest expense on these notes
aggregated $7,750, $15,495 and $93,372 and $5,656 and $36,962 during
the period June 23, 1994 through December 31, 1994, 1995, 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
7. Income Taxes HCC has no provision for income taxes in 1994, 1995 or 1996 due to
net operating losses generated in those periods. At December 31,
1996, the Company has net operating loss carryforwards of
approximately $680,000 on a tax basis, which expire through 2011.
Due to the recent sale of preferred stock, the utilization of these
net operating losses is limited to approximately $65,000 annually.
</TABLE>
F-50
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
A reconciliation of the income tax benefit at the statutory rate to
the amount actually recorded is as follows:
</TABLE>
<TABLE>
<CAPTION>
Period Year Year
Ended Ended Ended
December 31, December 31, December 31,
1994 1995 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
Income tax benefit at statutory rate $ (76,900) $ (207,729) $ (149,935)
Valuation allowance related to deferred
tax asset 76,900 207,729 149,935
- ------------------------------------------------------------------------------------
Income tax benefit $ -- $ $
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Deferred income taxes result from temporary differences which are
the result of provisions of the tax laws that either require or
permit certain items of income or expense to be reported in
different periods for financial statement and income tax reporting
purposes. The following is a summary of the deferred income taxes
for 1994, 1995 and 1996:
</TABLE>
<TABLE>
<CAPTION>
Period Year Year
Ended Ended Ended
December 31, December 31, December 31,
1994 1995 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforward $ 40,000 $ 145,000 $ 258,400
Cash basis accounting for income tax
purposes 45,000 130,000 39,200
- ------------------------------------------------------------------------------------
85,000 275,000 297,600
Valuation allowance (85,000) (275,000) (297,600)
- ------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
- ------------------------------------------------------------------------------------
</TABLE>
F-51
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Generally accepted accounting principles require that a valuation
allowance be recorded against deferred tax assets which are not
likely to be realized. Specifically, the Company established the
valuation allowance due to the uncertain nature of the ultimate
realization.
HCC did not record an income tax provision or benefit in the
accompanying financial statements for the nine months ended
September 30, 1997 because of the existence of net operating
losses. HCC does not expect to provide any income tax provision
or benefit for the year ending December 31, 1997 because HCC
expects a net loss for the year ending December 31, 1997.
8. Leases HCC leased office space and furniture from a company controlled by a
Board member under operating leases cancelable on sixty days notice.
Net rent expense under operating leases was $4,400, $10,200 and
$8,375 in 1994, 1995 and 1996, respectively, and $4,200 for the
nine months ended September 30, 1996.
9. Other Related Party One of HCC's shareholders is a current and former partner in law
Transactions firms which provides legal services to HCC. Amounts recorded for
legal services provided by these firms were $-, $3,959, $11,754,
$14,878 and $71,972 for 1994, 1995, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
Another of HCC's shareholders who is also a director of HCC is the
principal stockholder of a company that provides professional
services to HCC. Amounts recorded for professional services provided
by this Company were $2,250, $5,766, $50,668, $20,390 and $12,178 for
1994, 1995, 1996 and the nine months ended September 30, 1996 and 1997,
respectively.
</TABLE>
F-52
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. HCMI Initial HCMI intends to offer $2,500,000 shares of Common Stock
Public Offering in a public offering at $5 per share, or an
aggregate maximum of $12,500,000, including a
selling commission of 8% on all shares sold, a
$50,000 due diligence fee and a nonaccountable
expense allowance of 2% the gross proceeds.
Sales of HCMI shares are to be made on a best
efforts basis. If shares providing a minimum of
$2,000,000 of proceeds are not sold during the
initial offering period, as defined, investors'
funds are expected to be returned.
In accordance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB)
Topic No. (1)(B), the financial statements of
subsidiaries are required to include expenses
incurred by the subsidiary's parent on the
subsidiary's behalf. In conjunction with the
HCMI public offering, HCC has incurred direct
and indirect costs, such as salaries, rent,
etc. all of which have been assigned and/or
allocated to HCMI in the accompanying financial
statements with the net unpaid amount reflected
by HCC as accounts receivable from related
parties. At December 31, 1996 and September 30,
1997, the net unpaid amount aggregated
$220,616 and $397,350, respectively.
HCC's and HCMI's financial statements reflect
approximately $300,000 and $150,000 of such
costs from March 27, 1996 (date of information)
through December 31, 1996 and during the nine
months ended September 30, 1997. Such costs
have either been specifically identified or,
where specific identification was not possible,
have either been allocated using proportional cost
allocation. Management is of the opinion that
such methods result in a reasonable presentation
of such costs. Furthermore, management believes
that such costs approximate the amounts that
would have been incurred by HCMI on a stand
alone basis.
By the completion of the public offering, it is
expected that such costs could aggregate
$600,000. It is the intent of HCMI to reimburse
HCC for these costs, or a least a portion
thereof, on a sliding scale basis. Any amount
not reimbursed will be reflected as an
investment in HCMI by HCC.
</TABLE>
F-53
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Notes to Financial Statements
(Unaudited as to September 30, 1996 and 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
11. Other Loans On March 25, 1997, HCC advanced funds under loan
agreements. The balances of such loans as of
September 30, 1997 are as follows:
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
ATB Media, Inc. $ 44,356
Supershield 14,800
- ----------------------------------------------------------------------
$ 59,156
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
These loans bear interest at the rate of 15% per
annum and are payable the earlier of (1) one
year from the date of disbursement or (2) upon
the breaking of escrow for capital raising
activities of each entity. Interest income
earned on these loans during the nine months
ended September 30, 1997 aggregated $3,355 for
ATB Media, Inc. and $1,432 for Supershield.
ATB Media, Inc. a wholly owned subsidiary of
ATB, is presently in the process of acquiring
four licenses for AM radio stations in the
states of Washington and California. Supershield
intends to sell to homeowners and install a
product to significantly reduce harmful
ultraviolet rays received through windows. HCC
will earn fees for arranging the financing for
the station acquisitions and will receive a
share of station revenue through its contractual
relationship with ATB (see Note 3).
</TABLE>
F-54
<PAGE>
Independent Certified Public Accountants' Report
To the Members
ATB Productions, L.L.C.
(A Development Stage Company)
We have audited the accompanying balance sheets of ATB Productions, L.L.C. (A
Development Stage Company) as of December 31, 1995 and December 31, 1996, and
the related statements of operations, changes in members' capital (deficit),
and cash flows for the years ended December 31, 1995 and December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 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 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 ATB Productions, L.L.C. (A
Development Stage Company) as of December 31, 1995 and December 31, 1996, and
the results of its operations and its cash flows for the years ended December
31, 1995 and December 31, 1996 in conformity with generally accepted
accounting principles.
F-55
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred net losses in 1995 and
1996 and has an accumulated deficit from formation through December 31, 1996.
In addition, the Company expects to incur additional losses until its
operations are able to generate sufficient revenues to cover operating
expenses. The Company does not currently have sufficient cash reserves to
cover such expenses, necessitating additional capital or financing. At
December 31, 1996, the Company had negative working capital, as well as
significant noncurrent liabilities. These factors, in addition to other
factors discussed in Note 1 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are discussed in Note 1. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ BDO Seidman, LLP
-------------------------
BDO Seidman, LLP
Washington, D.C.
September 19, 1997
F-56
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Balance Sheets
- --------------------------------------------------------------------------------
December 31, December 31, September 30,
1995 1996 1997
(unaudited)
------------- ------------- ---------------
Assets
Cash and cash equivalents $ 1,560 $ 2,657 $ -
Accounts receivable 3,200 5,414 7,664
Prepaid expenses - 4,600 -
Other current assets - 3,000 3,000
- --------------------------------------------------------------------------------
Total current assets 4,760 15,671 10,664
- --------------------------------------------------------------------------------
Property and equipment, net of
accumulated depreciation of
$40, $2,140 and $4,177 as of
December 31, 1995, December 31,
1996 and September 30, 1997,
respectively 4,784 16,318 12,191
- --------------------------------------------------------------------------------
Total assets $ 9,544 $ 31,989 $ 22,855
- --------------------------------------------------------------------------------
Liabilities and Members' Deficit
Current liabilities
Accounts payable - trade $ 31,349 $ 28,264 $ 181,914
Accounts payable to related
parties 647 647 647
Note payable to Member - Manager
(related party)(Note 2) 1,557 - -
Deferred revenue 1,400 - -
- --------------------------------------------------------------------------------
Total current liabilities 34,953 28,911 182,561
Accrued interest payable
to related parties (Note 3) 5,878 31,777 53,340
Long-term note payable to HCC
and HCMI (Note 3) 144,850 511,475 600,425
- --------------------------------------------------------------------------------
Total liabilities 185,681 572,163 836,326
- --------------------------------------------------------------------------------
Commitments (Notes 2, 3 and 4)
Members' deficit (Notes 2 and 3)
Members' capital contribution
(100 member units authorized,
issued and outstanding) 42,500 42,500 42,500
Deficit accumulated during
the development stage (218,637) (582,674) (855,971)
- --------------------------------------------------------------------------------
Total members' deficit (176,137) (540,174) (813,471)
- --------------------------------------------------------------------------------
Total liabilities
and members' deficit $ 9,544 $ 31,989 $ 22,855
- --------------------------------------------------------------------------------
See accompanying summary of accounting polices and
notes to financial statements.
F-57
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the nine January 1, 1995
months ended (date of formation)
For the For the -------------------------- through
year ended year ended September 30, September 30,
December December 1996 1997 1997
31, 1995 31, 1995 (unaudited) (unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advertising and Operational Revenues
including revenues from a related
party of $50,000 and $19,744
in 1995 and 1996 (Note 3) $ 62,940 $ 130,695 $ 144,155 $ 63,629 $ 257,264
- ---------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Broadcast costs 152,056 236,938 153,713 140,762 529,756
Salaries to Members
(related parties) 71,572 106,107 81,067 76,061 253,740
General and administrative
expenses (Notes 3 and 4) 52,331 123,629 79,225 83,076 259,036
Depreciation 40 2,100 1,500 2,455 4,595
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 275,999 468,774 315,505 302,354 1,047,127
- ---------------------------------------------------------------------------------------------------------------------------
Operating loss (213,059) (338,079) (171,350) (238,725) 789,863
- ---------------------------------------------------------------------------------------------------------------------------
Other income
Gain on sale of property
and equipment -- -- -- (126) (126)
Interest expense, net of $400 and $0
interest income in 1995 and 1996 and
the nine months ended September 30,
1997, to related parties (Note 3) 5,578 25,958 16,696 34,698 66,234
- ---------------------------------------------------------------------------------------------------------------------------
Net loss (218,637) (364,037) (188,046) (273,297) (855,971)
Members' deficit, beginning of period -- (218,637) (218,637) (582,674) --
- ---------------------------------------------------------------------------------------------------------------------------
Members' deficit, end of period $(218,637) $(582,674) $(406,683) $(855,971) $ (855,971)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Membership
Units Outstanding 100 100 100 100 100
- ---------------------------------------------------------------------------------------------------------------------------
Net loss per membership unit $ (2,186) $ (3,641) $ (1,880) $ (2,733) $ (8,560)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-58
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Statements of Changes in Members' Capital (Deficit)
For the period January 1, 1995 (date of formation) through September 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
Initial cash contributions (Note 2) $ 42,500
Net loss for year ended December 31, 1995 (218,637)
- --------------------------------------------------------------------------
Balance, December 31, 1995 (176,137)
Net loss for year ended December 31, 1996 (364,037)
- --------------------------------------------------------------------------
Balance, December 31, 1996 (540,174)
Net loss for the nine months ended September 30, 1997
(unaudited) (273,297)
- --------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) $ (813,471)
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-59
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the nine January 1, 1995
months ended (date of formation)
For the For the -------------------------- through
year ended year ended September 30, September 30
December 31, December 31, 1996 1997 1997
1995 1996 (unaudited) (unaudited) (unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net Loss $(218,637) $(364,037) $(188,046) $(273,297) $(855,971)
Adjustment to reconcile net loss to
net cash provided by operations
Depreciation 40 2,100 1,500 2,455 4,595
Gain on sale of property and
equipment -- -- -- (126) (126)
(Increase) decrease in accounts
receivable (3,200) (2,214) (50,419) (2,250) (7,664)
(Increase) decrease in prepaids -- (4,600) (6,727) 4,600 --
Increase (decrease) in accounts
payable 31,996 (3,085) 71,124 153,650 182,561
Increase in accrued interest
payable 5,878 25,899 (5,878) 21,563 53,340
Increase in deferred revenue 1,400 (1,400) 11,230 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (182,523) (347,337) (167,216) (93,405) (623,265)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing
activities
Sale (Purchase) of property and
equipment (4,824) (13,634) (5,345) 1,798 (16,660)
Advances to related parties -- (3,000) -- -- (3,000)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,824) (16,634) (5,345) 1,798 (19,660)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-60
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the nine January 1, 1995
months ended (date of formation)
For the For the ---------------------- through
year ended year ended September 30, September 30,
December December 1996 1997 1997
31, 1995 31, 1996 (unaudited) (unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities
Issuance of members units 42,500 -- -- -- 42,500
Proceeds from notes payable to
related parties 171,407 366,625 190,845 88,950 626,982
Principal repayments to
related parties (25,000) (1,557) (1,557) -- (26,557)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 188,907 365,068 189,288 88,950 642,925
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents 1,560 1,097 16,727 (2,657) --
Cash and Cash equivalents,
beginning of period -- 1,560 1,560 2,657 --
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash equivalents
end of period $ 1,560 $ 2,657 $ 18,287 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of
Cash Flow Information
Cash interest paid $ 100 $ -- $ -- $ 13,135 $ 13,235
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-61
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- ------------------------------------------------------------------------------
The Company and ATB Productions, L.L.C. ("ATB") was formed on
Nature of Business April 19, 1995 as a Virginia Limited Liability
Company, as successor to a sole proprietorship
of the same name that was formed January 1,
1995. The accompanying financial statements
include the financial position, the results of
operations and the cash flows of both ATB and
its predecessor sole proprietorship. Under its
operating agreement, ATB restricts its
activities principally to the businesses of
producing radio shows. To this point, ATB has
not generated significant revenue from its
operations, and a majority of its activities
have been devoted to developing programs and
starting up production. Accordingly, ATB's
activities have been accounted for as those of a
"development stage enterprise" as set forth in
Statement of Financial Accounting Standards
("SFAS") No. 7.
ATB is related to two separate companies,
Heartland Capital Corporation ("HCC") and
Heartland Communications & Management, Inc.
("HCMI") through common, although not identical,
ownership and through marketing and borrowing
agreements (See Notes 2 and 3).
Risk and While ATB has had limited operations, it is
Uncertainties still in the development stage. Consequently,
ATB's activities will be subject to the risks
inherent in a new business enterprise including,
among others, limited capital, uncertain market
acceptance and the inability to obtain
additional financing. Additionally, ATB faces
substantial competition from a number of
well-established, well financed companies. ATB's
principal source of revenues, advertising, is
often cyclical and dependent upon general
economic conditions, rising in good economic
times and declining in economic downturns. In
addition, ATB is highly dependent upon its
affiliates, which are likewise in the
development stage, for services and financing.
ATB believes it has properly identified the
risks in the environment in which it operates
and has implemented strategies to effectively
reduce the financial impact of these risks.
F-62
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- -------------------------------------------------------------------------------
Use of Estimates The preparation of financial statements in
accordance with generally accepted accounting
principles requires ATB to make certain estimates
and assumptions, particularly as it relates to the
valuation of accounts receivable and disclosure of
contingent assets and liabilities. Actual results
could differ from these estimates.
Revenues and ATB recognizes advertising and operational
Expenses revenues as commercials or programs are broadcast
and related services are rendered. Prepayments
received on service contracts are deferred and
recognized as revenue when the related advertising/
program is broadcast.
Amounts payable to HCC and HCMI under ATB's
marketing agreement are recognized as expense at
the time the related revenues are recorded as
earned.
Accounts ATB provides a reserve for doubtful accounts
Receivable based on specific review of the expected
collectibility of individual outstanding accounts.
Income Taxes As a Limited Liability Corporation, ATB is
treated as a partnership for federal and state
income tax purposes. Consequently, ATB's earnings
and losses are recognized in the individual income
tax returns of ATB's Members (investors) in
accordance with the operating agreement.
Therefore, no provision for income taxes has been
reflected in the accompanying financial statements.
Net Loss Per Unit Net loss per membership unit has been computed
based on the weighted average of 100 investment
units outstanding during the year ended December
31, 1995 and 1996, the nine months ended September
30, 1996 and 1997 and the period January 1, 1995
(date of formation) through September 30, 1997.
F-63
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Cash Equivalents ATB considers all highly liquid investments
purchased with initial maturities of 90 days or
less to be cash equivalents.
Property and Additions to property and equipment are recorded
Equipment at cost and include all major renewals and
betterments. Maintenance, repairs and minor
replacements are expensed as incurred.
Depreciation expense is provided on the straight
line basis over the five year estimated life of
the related assets.
Interim Financial The accompanying interim financial statements
Statements for the nine months ended September 30, 1996 and
1997 are unaudited but, in the opinion of
managements, reflect all adjustments (consisting
primarily of normal recurring adjustments)
necessary for a fair presentation of the results of
the period presented. The results of the nine
months ended September 30, 1997 are not necessarily
indicative of the results to be obtained for the
full fiscal year.
Fair Value of In accordance with the requirements of SFAS No.
Financial 107, "Disclosure About Fair Value of Financial
Instruments Instruments," the Company must disclose the fair
value of its financial instruments as of December
31, 1996, and September 30, 1997. In the opinion of
management, the fair values of ATB's financial
instruments are not materially different from the
carrying amounts shown in the accompanying
financial statements.
Recent Accounting In October 1995, SFAS No. 123. "Accounting for
Pronouncements Stock-Based Compensation." was issued. SFAS No. 123
establishes a fair value method for accounting for
stock-based compensation plans either through
recognition or disclosure. ATB intends to adopt
the employee stock-based compensation provisions of
SFAS No. 123 by disclosing the pro forma net
income per share amounts, assuming the fair value
method is adopted at the date it grants stock
options to officers, employees and
F-64
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
-------------------------------------------------
directors. The adoption of this standard will
not impact ATB's results of operations,
financial position or cash flow.
On March 3, 1997, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earning per Share
(SFAS 128)." SFAS 128 provides a different
method of calculating earnings per share than is
currently used in accordance with APB Opinion
15. SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic
earnings per share include no dilution and is
computed by dividing income available to common
shareholders by the weighted average number of
common shares outstanding for the period.
Diluted earnings per share reflect the potential
dilution of securities that could share in the
earnings of an entity, similar to existing fully
diluted earnings per share. Using the principles
set forth in SFAS 128, basic earnings per share
would not be different from reported primary
earnings per share.
Statement of Financial Accounting Standards No.
129, Disclosure of Information about Capital
Structure ("SFAS 129") effective for periods
ending after December 15, 1997, establishes
standards for disclosing information about an
entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and
privileges of various securities outstanding
(stock, options, warrants, preferred stock, debt
and participation rights) including dividend and
liquidation preferences, participants rights,
call prices and dates, conversions or exercise
prices and redemptions requirements. Adoption
of SFAS 129 will have no effect on ATB as it
currently discloses the information specified.
In June 1997, the Financial Accounting Standards
Board issued two new disclosures standards.
Results of operations and financial position
will be unaffected by implementation of these
new standards.
F-65
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Summary of Accounting Policies
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Statements of Financial Accounting Standards
(SFAS) 130, "Reporting Comprehensive Income",
established standards for reporting and display
of comprehensive income, it components and
accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners and
distributions to owners. Among other
disclosures, SFAS 130 requires that all items
that are required to be recognized under current
accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same
prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a
Business Enterprise", establishes standards for
the way that public enterprises report
information about operating segments in annual
financial statements and requires reporting of
selected information about operating segment in
interim financial statements issued to the
public. It also establishes standards for
disclosures regarding products and services,
geographic areas, and major customers. SFAS 131
defines operating segments as components of an
enterprise about which separate financial
information is available that is evaluated
regularly by the chief operating decision maker
in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for
financial statements for periods beginning after
December 15, 1997 and require comparative
information for earlier years to be restated.
Due to the recent issuance of these standards,
management has been unable to fully evaluate the
impact, if any, they may have on future
financial statement disclosures.
F-66
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- -------------------------------------------------------------------------------
1. Going Concern As shown in the accompanying financial
statements, ATB incurred a net loss of $218,637
and $364,037 in 1995 and 1996, respectively and
has incurred losses since formation, resulting
in an accumulated deficit of $855,971 as of
September 30, 1997. At September 30, 1997, ATB
had negative working capital, as indicated by
current liabilities exceeding current assets by
$171,917 as well as $653,765 of noncurrent
liabilities. Furthermore, ATB expects to incur
additional losses until it is able to generate
sufficient income to cover operating expenses.
ATB does not currently have sufficient cash
reserves to cover such anticipated losses.
Borrowings under ATB's line of credit with HCC
and HCMI (see Note 3) amount to $600,425 at
September 30, 1997 leaving $ 0 available for
future use. And HCC and HCMI, in turn, have
similar problems with significant operating
deficits and working capital deficiencies,
raising substantial doubt as to their own
ability to continue as a going concern as well
as their ability to further fund the line of
credit and provide marketing services to ATB.
These factors raise substantial doubt about
ATB's ability to continue as a going concern.
According to ATB's long-term business plan, ATB
has been evaluating financing and capitalization
alternatives with HCC and HCMI. These
alternatives include the sale of preferred stock
and warrants by HCC and other alternatives, such
as the formation of HCMI and the transfer
thereto of many of HCC's development options,
including the ATB contract, with HCMI, in turn,
undergoing an initial public offering of its
common stock. Additionally, ATB continues to
expand the radio shows it produces and
broadcasts in an attempt to increase its own
revenues. Further, to preserve operating funds,
ATB has developed a strategic plan which
provides for the reduction of expenditures and a
prioritization of development options.
The financial statements do not include any
adjustments relating to the recoverability and
classification of recorded assets or the amounts
and classification of liabilities that might be
necessary should ATB be unable to continue as a
going concern.
F-67
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
2. Operating ATB's operations are governed by the Operating
Agreement Agreement (the "Agreement") which sets forth the
rights and responsibilities of the investors and
others, defined as "Members", entering into the
Agreement. As part of the Agreement, members
contributed $42,500 in cash to the capital of
ATB. Members have sharing ratios in proportion
to units owned which do not necessarily relate
to the capital contributed. Key provisions of
the Agreement are as follows:
- One member was named the "Member-Manager",
with rights, up to certain limits, to
contractually bind ATB, without consent of
ATB's remaining Members.
- The Member Manager is entitled to compensation
in the amount of $5,000 per month for
management of ATB.
- Net profits and losses are to be apportioned
among the Members in proportion to their
sharing ratios. Member are responsible for
any income taxes relating to apportioned
profits and losses.
- No distributions to Members may be made unless,
after the distribution, ATB's assets will be
in excess of liabilities.
- A Member dissociating from ATB will be paid
the product of (i) the Member's sharing ratio
and (ii) the greater of ATB's (a) net book
value or (b) appraised fair market value.
- ATB's term of operations will end on December
31, 2050, unless the term is either extended
or ended sooner via amendment to the Agreement.
F-68
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
3. HCC Marketing and Effective January 1, 1995, ATB entered into a
Line of Credit marketing agreement with HCC ("HCC Agreement")
Agreements whereby HCC will provide marketing services on
behalf of ATB. Services under the HCC agreement
include presenting programs to prospective
sponsors on a worldwide basis, negotiating
sponsorship agreements, etc. In return for
providing the marketing services, ATB is
obligated to pay HCC 40% of its gross
advertising cash receipts and 5% of its
non-advertising gross receipts. On May 18, 1996,
HCC assigned the HCC agreement to HCMI. The HCC
Agreement automatically terminates on January 1,
1999, unless extended by mutual agreement, and
is terminable at earlier dates under certain
specified conditions. In the event of
termination for whatever reason, the amount due
under the HCC agreement for sponsorship existing
at the time of termination shall remain due and
payable, notwithstanding the termination, (if
certain other conditions are met), for a period
ending the later of the automatic termination
of the HCC Agreement or two years after the date
of other termination. Revenues recorded by HCMI
from the date of transfer through December 31,
1996 and for the nine months ended September 30,
1997 amounted to $3,507 and $4,757,
respectively. Revenues recorded by HCC under the
HCC Agreement aggregated $647 and $2,847 during
1995 and until transfer in the year ended
December 31, 1996.
Additionally, ATB received $50,000 and $19,744
in advertising revenue from HCC in 1995, and
1996, respectively, which was not subject to the
HCC agreement.
On January 15, 1995, ATB executed an unsecured
line of credit agreement with HCC (the "Credit
Agreement") which provides ATB with a standby
line of credit in the amount of $360,000.
Borrowings under the Credit Agreement bear
interest at a fixed rate of 8% per annum, with
payment of interest on any borrowings being
deferred until January 15, 1997, whereupon
monthly interest payments will be required. As
of September 30, 1997, ATB has made $12,950 and
$185 of interest payments to HCMI and HCC,
respectively. Any principal and interest
outstanding on the line of credit must be repaid
on December 31, 1999. During 1996, HCMI began
co-funding this Credit Agreement with HCC. As of
December 31, 1996 and September 30, 1997, HCMI
had advanced $172,780 and $169,280,
F-69
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- -------------------------------------------------------------------------------
respectively, while HCC had advanced $338,695
and $431,145 as of December 31, 1996 and
September 30, 1997, respectively. Although the
total advances ($511,475 and $600,425 as of
December 31, 1996 and September 30, 1997,
respectively), are in excess of the Credit
Agreement's standby line of credit amount
($360,000), the total advances are governed by
the Credit Agreement including interest rates,
due dates, etc. During the year ended December
31, 1995, the average amounts borrowed under the
Credit Agreement were $42,000 and the maximum
amount of month-end borrowing during the period
was $144,850. During the year ended December 31,
1996, the average amount borrowed under the
credit agreement was $259,950 and the maximum
amount of month-end borrowing during the period
was $511,475. During the nine months ended
September 30, 1997, an additional $88,950 was
borrowed under this Credit Agreement.
Interest expense under the Credit Agreement
aggregated $3,364, $25,958 and $34,698 during
1995, 1996 and the nine months ended September
30, 1996, respectively.
On March 30, 1995, ATB executed a promissory
note agreement with a Member who is also an
officer of HCC and HCMI. Under the terms of the
note agreement, ATB borrowed $20,000 from the
Member on March 30, 1995, repaying it 15 days
later, at an interest rate of 8% per annum. As
additional consideration, the Member received
eight investment units in ATB.
On May 29, 1995, ATB borrowed $5,000 from
another Member, who is also a director of HCC,
repaying the balance on June 12, 1995 plus $100
in interest and fees.
On December 15, 1995, ATB executed a note
agreement with its Member-Manager (who is also
an officer of HCC and HCMI) whereby ATB borrowed
$1,557 at an interest rate of 8% per annum,
payable on a monthly basis. The balance was
repaid during 1996.
Interest expense on these notes payable to
members aggregated $167, $0, and $0 for 1995,
1996 and the nine months ended September 30,
1997, respectively.
F-70
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
Long-term notes payable as of December 31, 1995,
December 31, 1996 and September 30, 1997 consist
of the following:
<TABLE>
<CAPTION>
December December September
31, 1995 31, 1996 30, 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowing under
Credit Agreement $ 144,850 $ 511,475 $ 600,425
Note payable to
Managing Member 1,557 -- --
-------------------------------------------------------------------------
146,407 511,475 600,425
-------------------------------------------------------------------------
Less current portion 1,557 -- --
-------------------------------------------------------------------------
$ 144,850 $ 511,475 $ 600,425
-------------------------------------------------------------------------
</TABLE>
4. Lease ATB leases office space and furniture from a
Commitments Member (who is also a director of HCC) under an
operating lease cancelable on sixty days notice.
Net rent expense under this lease was $12,425
for 1995, $29,500 for 1996 and $21,750 for the
nine months ended September 30, 1997.
F-71
<PAGE>
ATB Productions, L.L.C.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited as to September 30, 1997 and 1996)
- --------------------------------------------------------------------------------
5. Tax For income tax purposes, ATB reports on the cash
Losses basis whereby (1) certain revenue and the
related assets are recorded when received rather
than when earned and (2) certain costs are
deducted when paid rather than when incurred. A
reconciliation of the financial statement net
loss to the income tax loss follows:
<TABLE>
<CAPTION>
For the nine
months ended
September 30,
------------------------
1996 1997
1995 1996 (unaudited) (unaudited)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial statement
net loss $(218,637) $(364,037) $(188,046) $(273,297)
Adjustments
Accrual to cash
conversion 30,196 (19,001) 55,404 174,897
Other temporary
differences 7,572 6,750 -- --
--------------------------------------------------------------------------
Income tax loss $(180,869) $(376,288) $(132,642) $ (98,400)
--------------------------------------------------------------------------
</TABLE>
F-72
<PAGE>
APPENDIX II
SCHEDULE 15G
IMPORTANT INFORMATION ON PENNY STOCKS
This statement is required by the U.S. Securities and Exchange Commission
the ("SEC") and contains important information on penny stocks. Your
broker-dealer is required to obtain your signature to show that you have
received this statement before your first trade in a penny stock. You are
urged to read this statement before signing the Subscription Agreement and
Power of Attorney and before making a purchase or sale of a penny stock.
Penny Stocks Can Be Very Risky.
- Penny stocks are low-priced shares of small companies not traded on an
exchange or quoted on NASDAQ. Prices often are not available. Investors in
penny stocks often are unable to sell stock back to the dealer that sold them
the stock. Thus, you may lose your investment. Be cautious of newly issued
penny stock.
- Your salesperson is not an impartial advisor but is paid to sell you
the stock. Do not rely on the salesperson, but seek outside advice before
you buy any stock. If you have problems with a salesperson, contact the
firm's compliance officer or the regulators listed below.
Information You Should Get.
- Before you buy penny stock, federal law requires your salesperson to
tell you the "offer" and the "bid" on the stock, and the "compensation" the
salesperson and the firm receive for the trade. The firm also must mail a
confirmation of these prices to you after the trade.
- You will need this price information to determine what profit, if any,
you will have when you sell your stock. The offer price is the wholesale
price at which the dealer is willing to sell stock to other dealers. The bid
price is the wholesale price at which the dealer is willing to buy the stock
from the other dealers. In its trade with you, the dealer may add a retail
charge to these wholesale prices as compensation (called a "markup" or
"markdown").
- The difference between the bid and the offer price is the dealer's
"spread." A spread that is large compared with the purchase price can make a
resale of a stock very costly. To be profitable when you sell, the bid price
of your stock must rise above the amount of this spread and the compensation
charged by both your selling and purchasing dealers. If the dealer has no
bid price, you may not be able to sell the stock after you buy it, and may
lose your whole investment.
II-1
<PAGE>
Brokers' Duties And Customer's Rights And Remedies.
- If you are a victim of fraud, you may have rights and remedies under
state and federal law. You can get the disciplinary history of a salesperson
or firm from the NASD at 1-800-289-9999, and additional information from your
state securities official, at the North American Securities Administrators
Association's central number: (202) 737-0900. You also may contact the SEC
with complaints at (202) 272-7440.
FURTHER INFORMATION
THE SECURITIES BEING SOLD TO YOU HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION. MOREOVER, THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR THE MERITS OF THIS TRANSACTION
NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN ANY
PROSPECTUS OR ANY OTHER INFORMATION PROVIDED BY AN ISSUER OR A BROKER OR
DEALER.
Generally, penny stock is a security that:
- is priced under five dollars;
- is not traded on a national stock exchange or on NASDAQ (the NASD's
automated quotation system for actively traded stocks);
- may be listed in the "pink sheets" or the NASD OTC Bulletin Board;
and/or
- is issued by a company that has less than $5 million in net tangible
assets and has been in business less than three years, or by a company that
has under $2 million in net tangible assets and has been in business for at
least three years, or by a company that has revenues of $6 million for 3
years.
Use caution when investing in penny stocks:
(1) Do not make a hurried investment decision. High-pressure sales
techniques can be a warning sign of fraud. The salesperson is not an
impartial advisor, but is paid for selling stock to you. The salesperson
also does not have to watch your investment for you. Thus, you should think
over the offer and seek outside advice. Check to see if the information
given by the salesperson differs from other information you may have. Also,
it is illegal for salespersons to promise that a stock will increase in value
or is risk-free, or to guarantee against loss. If you think there is a
problem, ask to speak with a compliance official at the firm and, if
necessary, any of the regulators referred to in this statement.
(2) Study the company issuing the stock. Be wary of companies that have no
operating history, few assets, or no defined business purpose. These may be
sham or "shell" corporations. Read the prospectus for the company carefully
before you invest. Some dealers fraudulently solicit investors' money to buy
stock in sham companies, artificially inflate the stock prices, then cash in
their profits before public investors can sell their stock.
II-2
<PAGE>
(3) Understand the risky nature of these stocks. You should be aware that
you may lose part or all of your investment. Because of large dealer
spreads, you will not be able to sell the stock immediately back to the
dealer at the same price it sold the stock to you. In some cases, the stock
may fall quickly in value. New companies, whose stock is sold in an "initial
public offering," often are riskier investments. Try to find out if the
shares the salesperson wants to sell you are part of such an offering. Your
salesperson must give you a "prospectus" in an initial public offering, but
the financial condition shown in the prospectus of new companies can change
very quickly.
(4) Know the brokerage firm and the salespeople with whom you are dealing.
Because of the nature of the market for penny stock, you may have to rely
solely on the original brokerage firm that sold you the stock for prices and
to buy the stock back from you. Ask the National Association of Securities
Dealers, Inc. (the "NASD") or your state securities regulator, which is a
member of the North American Securities Administrators Association, Inc. (the
"NASAA"), about the licensing and disciplinary record of the brokerage firm
and the salesperson contacting you. The telephone numbers of the NASD and
NASAA are listed on the first page of this document.
(5) Be cautious if your salespersons leaves the firm. If the salesperson who
sold you the stock leaves his or her firm, the firm may reassign your account
to a new salesperson. If you have problems, ask to speak to the firm's
branch office manager or a compliance officer. Although the departing
salesperson may ask you to transfer your stock to his or her new firm, you do
not have to do so. Get information on the new firm. Be wary of requests to
sell your securities when the salesperson transfers to a new firm. Also, you
have the right to get your stock certificate from your selling firm. You do
not have to leave the certificate with that firm or any other firm.
YOUR RIGHTS
Disclosures to you. Under penalty of federal law, your brokerage firm must
tell you the following information at two different times -- before you agree
to buy or sell a penny stock and after the trade, by written confirmation:
- The bid and offer prices quotes for penny stock, and the number of
shares to which the quoted prices apply. The bid and offer quotes are the
wholesale prices at which dealers trade among themselves. These prices give
you an idea of the market value of the stock. The dealer must tell you these
price quotes if they appear on an automated quotation system approved by the
SEC. If not, the dealer must use its own quotes or trade prices. You should
calculate the spread, the difference between the bid and offer quotes, to
help decide if buying the stock is a good investment.
A lack of quotes may mean that the market among dealers is not active.
It thus may be difficult to resell the stock. You should be aware that the
actual price charged to you for the stock may differ from the price quoted to
you for 100 shares. You should therefore determine, before you agree to a
purchase, what the actual sales price (before the markup) will be for the
exact number of shares you want to buy.
II-3
<PAGE>
- The brokerage firm's compensation for the trade. A markup is the
amount a dealer adds to the wholesale offer price of the stock and a markdown
is the amount it subtracts from the wholesale bid price of the stock as
compensation. A markup/markdown usually serves the same role as a broker's
commission on a trade. Most of the firms in the penny stock market will be
dealers, not brokers.
- The compensation received by the brokerage firm's salesperson for the
trade. The brokerage firm must disclose to you, as a total sum, the cash
compensation of your salesperson for the trade that is known at the time of
the trade. The firm must describe in the written confirmation the nature of
any other compensation of your salesperson that is unknown at the time of the
trade.
In addition to the items listed above, your brokerage firm must send to you:
- Monthly account statements. In general, your brokerage firm must send
you a monthly statement that gives an estimate of the value of each penny
stock in your account, if there is enough information to make an estimate.
If the firm has not bought or sold any penny stocks for your account for six
months, it can provide these statements every three months.
- A Written Statement of Your Financial Situation and Investment Goals.
In general, unless you have had an account with your brokerage firm for more
than one year, or you have previously bought three different penny stocks
from that firm, your brokerage firm must send you a written statement for you
to sign that accurately describes your financial situation, your investment
experience and your investment goals, and that contains a statement of why
your firm decided that penny stocks are a suitable investment for you. The
firm also must get your written consent to buy the penny stock.
Legal remedies. If penny stocks are sold to you in violation of your rights
listed above, or other federal or state securities laws, you may be able to
cancel your purchase and get your money back. If the stocks are sold in a
fraudulent manner, you may be able to sue the persons and firms that caused
the fraud or damages. If you have signed an arbitration agreement, however,
you may have to pursue your claim through arbitration. You may wish to
contact an attorney. The SEC is not authorized to represent individuals in
private litigation.
However, to protect yourself and other investors, you should report any
violations of your brokerage firm's duties listed above and other securities
laws to the SEC, the NASD, or your state securities administrator at the
telephone numbers on the first page of this document. These bodies have the
power to stop fraudulent and abusive activity of salespersons and firms
engaged in the securities business. Or you can write to the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549; the NASD at 1735 K Street, N.W.,
Washington, D.C. 20006; or NASAA at 555 New Jersey Avenue, N.W., Suite 750,
Washington, D.C. 20001. NASAA will give you the telephone number of your
state's securities agency. If there is any disciplinary record of a person
or a firm, the NASD, NASAA or your state securities regulator will send you
this information if you ask for it.
II-4
<PAGE>
MARKET INFORMATION
The market for penny stocks. Penny stocks usually are not listed on an
exchange or quoted on the NASDAQ system. Instead, they are traded between
dealers on the telephone in the "over-the-counter" market. The NASD's OTC
Bulletin Board also will contain information on some penny stocks. At times,
however, price information for these stocks is not publicly available.
Market domination. In some cases, only one or two dealers, acting as "market
makers," may be buying or selling a given stock. You should first ask if a
firm is acting as a broker (your agent) or as a dealer. A dealer buys stock
itself to fill your order or already owns the stock. A market maker is a
dealer who holds itself out as ready to buy and sell stock on a regular
basis. If the firm is a market maker, ask how many other market makers are
dealing in the stock to see if the firm (or group of firms) dominates the
market. When there are only one or two market makers, there is a risk that
the dealer or group of dealers may control the market in that stock and set
prices that are not based on competitive forces. In recent years, some
market makers have created fraudulent markets in certain penny stock, so that
stock prices rose suddenly, but collapsed just as quickly, at a loss to
investors.
Mark-ups and mark-downs. The actual price that the customer pays usually
includes the mark-up or mark-down. Markups and markdowns are direct profits
for the firm and its salespeople, so you should be aware of such amounts to
assess the overall value of the trade.
The "spread." The difference between the bid and offer price is the spread.
Like a mark-up or mark-down, the spread is another source of profit for the
brokerage firm and compensates the firm for the risk of owning the stock. A
large spread can make a trade very expensive to an investor. For some penny
stock, the spread between the bid and offer may be a large part of the
purchase price of the stock. Where the bid price is much lower than the
offer price, the market value of the stock must rise substantially before the
stock can be sold at a profit. Moreover, an investor may experience
substantial losses if the stock must be sold immediately.
Example: If the bid is $0.04 per share and the offer is $0.10 per
share ,the spread (difference) is $0.06, which appears to be a small
amount. But you would lose $0.06 on every share that you bought for $0.10
if you had to sell that stock immediately to the same firm. If you had
invested $5,000 at the $0.10 offer price, the market maker's repurchase
price, at $0.04 bid, would be only $2,000; thus you would lose $3,000, or
more than half of your investment, if you decided to sell the stock. In
addition, you would have to pay compensation (a "mark-up," "mark-down" or
commission) to buy and sell the stock.
In addition to the amount of the spread, the price of your stock must rise
enough to make up for the compensation that the dealer charged you when it
first sold you the stock. Then, when you want to resell the stock, a dealer
again will charge compensation, in the form of a markdown. The dealer
subtracts the markdown from the price of the stock when it buys the stock
from you. Thus, to make a profit, the bid price of your stock must rise
above the amount of the original spread, the markup
II-5
<PAGE>
and the markdown.
Primary offerings. Most penny stocks are sold to the public on an ongoing
basis. However, dealers sometimes sell these stocks in initial public
offerings. You should pay special attention to stocks of companies that have
never been offered to the public before, because the market for these stocks
is untested. Because the offering is on a first-time basis, there is
generally no market information about the stock to help determine its value.
The federal securities laws generally require broker-dealers to give
investors a "prospectus," which contains information about the objectives,
management and financial condition of the issuer. In the absence of market
information, investors should read the company's prospectus with special care
to find out if the stocks are a good investment. However, the prospectus is
only a description of the current condition of the company. The outlook of
the start-up companies described in a prospectus often is very uncertain.
For more information about penny stocks, contact the Office of Filings,
Information and Consumer Services of the U.S. Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, (202) 272-7440.
II-6
<PAGE>
APPENDIX III
HOULIHAN
FAIRNESS OPINION
III-1
<PAGE>
HOULIHAN VALUATION ADVISORS
- --------------------------------------------------------------------------------
VALUATION & CAPITAL CONSULTANTS
<TABLE>
<S> <C>
LOS ANGELES
2029 Century Park East
Suite 2890
Los Angeles, CA 90067
(310) 859-8990
Toll Free (800) 977-8099 April 18, 1997
To the Board of Directors
ORANGE COUNTY of Heartland Communications & Management, Inc.
650 Town Center Drive
Suite 660 We understand that Heartland Communications & Management, Inc. (hereinafter
Costa Mesa, CA 92626 sometimes referred to as "HCMT" or the "Company"), a development stage company, is
(714) 668-0171 offering up to 4,000,000 shares of common stock in an initial public offering ("IPO") for a
price of $5.00 per share (the "Offering Price"). The existing capitalization of the
Company Consists of 6,128,400 shares issued with 1,326,811 shares outstanding. The
SAN FRANCISCO 4,801,589 difference between shares issued and shares outstanding relates to shares
444 Market Street placed in escrow as a result of a one for 4.6190302 share reverse stock split. Shares held
15th Floor in escrow have no voting or dividend rights and will not only be released to existing
San Francisco, CA 94105 shareholders in annual increments over a six year period upon the occurence of HCMI
(415) 891-0853 achieving certain minimum performance standards.
The IPO is being made on a best-efforts basis and is subject to a $2,000,000 minimum and
SALT LAKE CITY a $20,000,000 maximum. The proceeds of the IPO will be used to fund contemplated
111 East Hamilton investments in certain ventures, including the National Sports Weekly ("NSW"), Xpress
Suite 1220 Magazine for Teens ("Xpress"), the Heartland Radio Network ("HRN"), the Alvery
Salt Lake City, UT 84111 Bartlett Fund Management Co. ("ABFM"), and other unidentified communications
(801) 222-3200 company acquisitions, as well as fund anticipated integrated communications management
and marketing services. Only HRN, which in turn has certain contractual arrangements
with ATB Productions, L.L.C. ("ATB"), has any current operations. All other potential
DENVER investments and ventures identified to date are only developmental options.
1200 17th Street
Suite 7630 The Board of Directors of the Company has requested our opinion (the "Opinion") as to
Denver, CO 80202 the fairness of the Offer Price from a financial point of view to the public shareholders of
(303) 572-1400 the Company.
In connection with this Opinion, we have made such reviews, analyses and inquiries as
CHICAGO necessary and appropriate under the circumstances. Among other things, we have:
79 South La Salle Street
Suite 1126 1) reviewed a draft of the Heartland Communications & Management, Inc.
Chicago, IL 60603 Prospectus, dated April __, 1997;
(312) 739-1303
2) visited HCMI's corporate headquarters in McClean, Virginia and met with certain
members of the management of the Company to discuss the proposed operations,
ATLANTA financial condition and future prospects of the Company;
1400 Circle 75 Parkway
Suite 1400
Atlanta, GA 30324
(770) 951-4810
</TABLE>
III-2
<PAGE>
To The Board of Directors of Page 2
Heartland Communications & Management, Inc.
April 18, 1997
3) reviewed audited balance sheets for the Company as of March 27, 1996, the
date of formation, and the Company's unaudited financial statements for
the approximate six month period ended September 30, 1996, the latest
financial statements made available to us;
4) reviewed audited financial statements for Heartland Capital Corporation
("HCC"), the predecessor company to HCMI, for the approximate six month
period from June 23, 1994, the date of formation, to December 31, 1994
and for the year ended December 31, 1995, as well as HCC's unaudited
financial statements for the nine month period ended September 30, 1996,
the latest financial statements made available to us;
5) reviewed financial forecasts and cash flow projections for HCMI,
including its existing operations and potential future projects, giving
effect to the IPO for the five year period following the close of IPO;
6) reviewed the respective business plans for NSW, Xpress and ABFM;
7) reviewed the National Sports Magazine Venture Amended and Restated
Agreement and the Teen Magazine Venture Amended and Restated Agreement by
and between Xpress Ventures, Inc., the licensor of the intellectual
property rights of NSW and Xpress, and HCMI, dated April 1, 1996, and the
Investment Agreement, dated May 17, 1996, by and between ABFM and HCMI;
8) reviewed a draft of the Proxy Statement sent to existing shareholders,
dated January 16, 1997;
9) reviewed certain publicly available financial data in relation to
comparable companies and the industries in which HCMI has existing and
proposed operations; and
10) conducted other such studies, analyses and inquiries as we have deemed
appropriate.
HCMI is in the early stage of development and has no history of operations.
HCMI's operations to date have been primarily organizational and devoted to
financial planning and raising capital. To the extent that the Company
implements its business plan, the Company will be subject to risks inherent
in a new business enterprise, including, among others, limited capital,
uncertain market acceptance, and the potential inability to obtain financing.
In addition, the Company's future success will depend upon many factors,
including those which may be beyond its control and not predictable at this
time. The Opinion expressed herein should not be construed by any party as
investment advice nor does the Opinion address the Company's underlying
business decision to effect the contemplated investments and transactions. An
investment in HCMI is highly speculative and involves substantial risk and no
assurances can be made that any of the proposed ventures will ever generate
positive cash flow.
III-3
<PAGE>
To The Board of Directors of Page 3
Heartland Communications & Management, Inc.
April 18, 1997
Since HCMI is a development stage company and has a limited history of
operations, we have necessarily relied on potential future operations and
projected results. We have also relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to us
have been reasonably prepared and reflect the best currently available
estimates of the future financial results and condition of the Company.
Projections and financial forecasts are subject to a number of factors and
uncertainties which will cause actual results to differ from forecasted
results, and such differences may be material. We have relied upon and
assumed that the projections adequately reflect the amount of capital
required to fully fund the various investment options.
Because of the need for capital to develop opportunities, our Opinion is
necessarily based on the assumption that adequate capital is provided in the
IPO to fully fund proposed operations. In order to adequately fund all
proposed operations and avoid excessive dilution to public shareholders, the
Company will need to raise substantially more than the minimum offering of
$2,000,000.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company, and we assume no
responsibility with respect to it. We further assume that there has been no
material change in the Company's financial condition since the date of the
most recent financial statements in our possession. We have not made any
physical inspection or independent appraisal of any of the other properties
or assets of the Company. Our opinion is necessarily based on business,
economic, market and other conditions at the date of this letter.
Based upon the foregoing and in reliance thereon, it is our opinion that the
Offer Price to the public shareholders is fair from a financial point of view.
This Opinion is furnished solely for the benefit of the addressees above and
may not be relied upon by any other person without the express, written
consent of Houlihan Valuation Advisors. This Opinion is delivered to you
subject to the conditions, scope of engagement, limitations and understanding
set forth in this Opinion and subject to the understanding that the
obligations of HVA are solely corporate obligations, and no officer,
director, employee, agent, shareholder or controlling person of HVA shall be
subjected to any personal liability whatsoever to any person, nor will any
such claim be asserted by or on behalf of the Company or affiliates.
HOULIHAN VALUATION ADVISORS
/s/ Houlihan Valuation Advisors
III-4
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
1320 Old Chain Bridge Road -- Suite 220
McLean, Virginia 22101
By executing this Subscription Agreement and Power of Attorney
(hereafter, the "Subscription Agreement") of Heartland Communications &
Management, Inc. (hereafter, the "Company"), the undersigned purchaser
(hereafter, the "Purchaser") hereby irrevocably subscribes for shares of
common stock ("Shares") in the Company. Purchaser herewith encloses the sum
of $___________ ($5,000 initial minimum unless the Company accepts IRA
accounts for less while additional purchases by existing Shareholders may be
in the amount of $1,000 or more). Subscriptions, whether checks or wire
transfers, should be made payable to Heartland Communications & Management,
Inc. -- Escrow Account. If this Subscription Agreement is accepted, the
Purchaser agrees to contribute the amount enclosed to the Company.
Purchaser represents that he, she or it has (i) a net worth of at least
$100,000 (exclusive of home, furnishings and automobiles) or (ii) a net
worth (similarly calculated) of at least $50,000 and an annual adjusted
gross income of at least $25,000. Certain states may impose greater net
worth or net income requirements, as set forth in the attached Annex to this
Subscription Agreement. Purchaser represents that he meets these financial
requirements and that he is of legal age. Purchaser is urged to review
carefully the responses, representations and warranties he is making herein.
Purchaser agrees that this subscription may be accepted or rejected in whole
or in part by the Company in its sole and absolute discretion.
READ THIS PROSPECTUS CAREFULLY BEFORE YOU SUBSCRIBE. CONTAINED HEREIN ARE
DISCLOSURES CONCERNING VARIOUS RISKS, CONFLICTS, FEES AND EXPENSES RELATING
TO OR TO BE PAID BY THE COMPANY. YOU SHOULD BE AWARE THAT THE DISCLOSURES
MADE MAY BE USED AS A DEFENSE IF PROCEEDINGS ARE BROUGHT BY SHAREHOLDERS
RELATING TO THE COMPANY.
Representations and Warranties
Purchaser makes the following representations and warranties in order to
permit the Company to determine his suitability as a purchaser of Shares:
(1) The undersigned has received the Company's Prospectus and the exhibits
thereto.
(2) The undersigned acknowledges that he has received and read the attached
Appendix II, Schedule 15G, "Important Information On Penny Stocks."
(3) The undersigned understands that the Company has made all documents
pertaining to the transactions described in the Company's Prospectus
available to the undersigned in making the decision to purchase the Shares
subscribed for herein.
(4) The undersigned is reminded that:
(a) The Shares are speculative investments, the purchase of which involves
a high degree of risk of loss of the entire investment of the undersigned
in the Company.
(b) S/he is encouraged to discuss the proposed purchase with her/his
attorney, accountant or a Purchaser Representative (as defined under the
Securities Act of 1933, as amended) or take the opportunity to do so, and
is satisfied that s/he has had an adequate opportunity to ask questions
concerning the Company, the Shares and the offering described in the
Prospectus.
A-1
<PAGE>
(c) No federal or state agency has passed upon the adequacy or accuracy of
the information set forth in the Prospectus or made any finding or
determination as to the fairness of the investment, or any recommendation
or endorsement of the Shares as an investment.
(d) S/he must not be dependent upon a current cash return with respect to
her/his investment in the Shares. S/he understands that distributions are
not required (and are not expected) to be made.
(e) The Company is not a "tax shelter" and the specific tax consequences to
her/him relative to as an investment in the Company will depend on her/his
individual circumstances.
(5) If the Shares are being subscribed for by a pension or profit-sharing
plan, the undersigned independent trustee represents that s/he has reviewed
the plan's portfolio and finds (considering such factors as diversification,
liquidity and current return and projected return of the portfolio) this
purchase to be a prudent investment under applicable rules and regulations,
and acknowledges that no representation is made on behalf of the Company that
an investment in the Company by such plan is suitable for any particular plan
or constitutes a prudent investment thereby. Moreover, the undersigned
independent trustee represents that s/he understands that income generated by
the Company may be subject to tax, that s/he is authorized to execute such
subscription on behalf of the plan or trust and that such investment is not
prohibited by law or the plan's or trust's governing documents.
The undersigned understands and agrees that this subscription may be
accepted or rejected by the Company in whole or in part, in its sole and
absolute discretion. The undersigned hereby acknowledges and agrees that
this Subscription Agreement shall survive (i) non-material changes in the
transactions, documents and instruments described in the Prospectus, (ii)
death or disability of the undersigned and (iii) the acceptance of this
subscription by the Company. By executing this Subscription Agreement below,
the undersigned (i) acknowledge the accuracy of all statements and (ii)
appoints the management of the Company to act as his true and lawful attorney
to file any documents or take any action required by the Company to carry out
its business activities.
The foregoing information which the undersigned has provided to the
Company is true and accurate as of the date hereof and shall be true and
accurate as of the date of the undersigned's admission as a Shareholder. If
in any respect such representations, warranties or information shall not be
true and accurate at any time prior to the undersigned's admission as a
Shareholder, s/he will give written notice of such fact to the Company,
specifying which representation, warranty or information is not true and
accurate and the reason therefor.
By executing this Subscription Agreement, the undersigned certifies, under
penalty of perjury:
(1) That the Social Security Number or Taxpayer Identification Number
provided below is correct; and
(2) That the IRS has never notified him that s/he is subject to 20% backup
withholding, or has notified her/him that s/he is no longer subject to such
backup withholding. (Note: If this part (2) is not true in your case, please
strike out this part before signing.)
(3) The undersigned is a U.S. citizen or resident, or is a domestic
corporation, partnership or trust, as defined in the Internal Revenue Code of
1986, as amended. (Note: If this part (3) is not true in your case, please
strike out this part before signing.)
(4) That the undersigned acknowledges and agrees that this information may be
disclosed to the Internal Revenue Service by the Company and that any false
statement contained herein is punishable by fine, imprisonment or both. The
undersigned will notify the Company within sixty (60) days of the date upon
which any of the information contained herein becomes false or otherwise
changes in a material manner, or the undersigned becomes a foreign person.
The undersigned agrees to update this information whenever requested by the
Company. Under penalties of perjury, the undersigned declares that the
undersigned has examined the information contained herein and to the best of
the undersigned's knowledge and belief, it is true, correct and complete, and
that the undersigned has the authority to execute this Subscription Agreement.
A-2
<PAGE>
This Subscription Agreement and the representations and warranties
contained herein shall be binding upon the heirs, executors, administrators
and other successors of the undersigned. If there is more than one signatory
hereto, the obligations, representations, warranties and agreements of the
undersigned are made jointly and severally.
The undersigned is the following kind of entity (please check):
________ Individual ________ IRA
________ Joint Account - JTWROS ________ Pension Plan
________ Joint Account - TENCOM ________ Trust
________ UGMA (Gift to Minor) ________ Non-Profit Organization
________ Partnership ________ Employee of NASD member firm
________ Corporation ________ Other (Specify)
Dated this ____ day of __________ of 199__
Mr./Ms.________________________________ ________________________________
Purchaser's Name Social Security or Tax ID#
Mr./Ms.________________________________ ________________________________
Name of Second Purchaser Date of Birth of First Purchaser
________________________________________ (_______)________________________
Street Address of First Purchaser Business Phone (Day)
________________________________________ (_______)________________________
City State and Zip Code Home Phone
________________________________________ _________________________________
Signature of First Purchaser Signature of Second Purchaser
(Individual, Custodian or Officer or
Partner of Entity)
NOTE: If a joint subscription, please indicate whether joint tenants with
right of survivorship (JTWROS) or tenants in common (TENCOM). Each joint
tenant or tenant in common must sign in the space provided. If purchaser is
a trust, partnership, corporation or other business association, the signing
trustee, partner or officer represents and warrants that he/she/it has full
power and authority to execute this Subscription Agreement on its behalf. If
Purchaser is a trust or partnership, please attach a copy of the trust
instrument or partnership agreement. If Purchaser is a corporation, please
attach certified corporate resolution authorizing signature.
TO BE COMPLETED BY REGISTERED REPRESENTATIVE
The undersigned certifies that s/he has informed the Purchaser of all
pertinent facts relating to the liquidity and marketability of the Shares as
set forth in the Prospectus. In addition, the undersigned has reasonable
grounds to believe on the basis of information obtained from the Purchaser
concerning his investment objectives, other investments, financial situation
and needs, and any other information known by the undersigned, that: (i) the
Purchaser is or will be in a financial position appropriate to enable her/him
to realize to a significant extent the benefits described in the Prospectus;
(ii) the Purchaser has a fair market net worth sufficient to sustain the
risks inherent in the Company, including losses of investment and lack of
liquidity; and (iii) the Company is otherwise a suitable investment for the
Purchaser.
Accepted by:
__________________________________________
_____________________, Authorized Officer
_____________________(Name of Registered Broker-Dealer)
A-3
<PAGE>
ANNEX TO
SUBSCRIPTION AGREEMENT
AND
POWER OF ATTORNEY
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
SUPPLEMENTAL SUBSCRIPTION REQUIREMENTS
The purchase of Shares in Heartland Communications & Management, Inc. may
be made only by persons who have (i) a net worth of at least $100,000
(exclusive of home, furnishings and automobiles) or (ii) net worth (similarly
calculated) of at least $50,000 and an annual gross income of at least
$25,000. Subscribers in the following states, in which Shares may be
qualified for sale, are subject to greater net worth (similarly calculated),
annual income and other financial requirements as shown below:
I understand that the investment requirements, as to net worth ("NW")
(exclusive of home, furnishings and automobiles) and past and anticipated
annual income ("AI") or annual taxable income ("TI") set forth below opposite
the state in which I purchase, apply to my subscription:
California $500,000 NW* or $250,000 NW* and $65,000 AI
Idaho $500,000 NW* or $250,000 NW* and $65,000 AI
Iowa $500,000 NW or $250,000 NW and $65,000 AI
Michigan $100,000 NW* or $50,000 NW* and $25,000 AI
North Carolina $225,000 NW or $60,000 NW and $60,000 AI
Oregon $500,000 NW* or $250,000 NW* and $65,000 AI
Virginia $100,000 NW or $50,000 NW and $50,000 AI
* In addition, my investment in Shares of the Company will represent no more
than 10% of my net worth.
A-4
<PAGE>
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
in connection with the offering covered by this Prospectus. If given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Managing Placement Agent. This Prospectus
does not constitute as an offer to sell, or a solicitation of an offer to
buy, the common stock in any jurisdiction where, or to any person to whom, it
is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Descriptive Title Page
- ----------------- -----
Investment Requirements................................
Prospectus Summary.....................................
Summary Financial Data.................................
Pro Forma Financial....................................
Information............................................
Introductory Statement: Who Should Invest..............
Risk Factors...........................................
Conflicts Of Interest..................................
Fiduciary Responsibility Of The Company's Management...
The Company............................................
Selected Financial Data................................
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations...................
Application Of Proceeds................................
Absence Of Public Market And Dividend Policy...........
Capitalization.........................................
Dilution...............................................
Description Of Capital Stock...........................
Plan Of Distribution...................................
ERISA Considerations...................................
Legal Matters..........................................
Experts................................................
Available Information..................................
Appendix I (Financial Statements)......................
Appendix II (Schedule 15G, "Important Information
On Penny Stocks").....................................
Appendix III (Fairness Opinion)........................
Exhibit A-Subscription Agreement AndPower Of Attorney..
$12,500,000 of Shares of
Common Stock
HEARTLAND
COMMUNICATIONS
& MANAGEMENT, INC.
---------------------
PROSPECTUS
---------------------
December _______, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the approximate amount of the fees
and expenses paid by the Registrant and affiliates as described in the
Prospectus.
<TABLE>
Approximate Amount
------------------------------
Minimum (1) Maximum(2)
<S> <C> <C>
Securities and Exchange Commission
registration fee . . . . . . . . . . . . . . . . . . . . . . $ 8,610 $ 8,610
Due diligence fee. . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Non-accountable expense reimbursements . . . . . . . . . . . . 40,000 250,000
National Association of Securities
Dealers, Inc. filing fee . . . . . . . . . . . . . . . . . . 2,500 2,500
Printing expenses . . . . . . . . . . . . . . . . . . . . . . 45,000 45,000
Brokerage commissions . . . . . . . . . . . . . . . . . . . . 160,000 1,000,000
HCC indirect expense reimbursement(3). . . . . . . . . . . . . - 412,500
Accounting fees and expense. . . . . . . . . . . . . . . . . . 25,000 125,000
Blue Sky filing fees . . . . . . . . . . . . . . . . . . . . . 16,250 16,250
Legal (including Blue Sky) fees and expenses . . . . . . . . . 15,000 200,000
Escrow expenses. . . . . . . . . . . . . . . . . . . . . . . . 750 750
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . 1,890 1,890
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . $365,000 $ 2,112,500
</TABLE>
(1) Costs if the minimum amount of $2,000,000 is raised.
(2) Costs if the maximum amount of $12,500,000 is raised.
(3) HCC has incurred costs (both direct and indirect, such as salaries
and apportioned rent) relating to the Company's public offering. By the
completion of the public offering, it is expected that such costs will
aggregate approximately $600,000. Those amounts have been charged to the
Company and are reflected as due to HCC in the Company's balance sheet.
It is the intent of the Company to reimburse the net unpaid amount
thereof to HCC for these costs, or at least a portion thereof, as
reflected in the above table.
Item 14. Indemnification of Directors and Officers
Reference is made to "Fiduciary Responsibility of the Company's
Management" and "Description of Capital Stock" contained in the
Prospectus relating to the indemnification of the Registrant's officers,
directors, stockholders, employees and affiliates. The Registrant is
prohibited from indemnifying its affiliates for liabilities resulting
from violations or alleged violations of the Securities Act of 1933 or
any state securities laws in connection with the issuance or sale of the
shares of common stock, except in the case of successful defense of an
action in which such violations are alleged, and then only if a court
approved such
S-1-1
<PAGE>
indemnification after being apprised of relevant regulatory positions on
indemnification.
Section 8 of the Managing Placement Agent Agreement (Exhibit 1.1 to
the Registration Statement) provides for the indemnification of the
Registrant and its affiliates by the Selling Agent(s), under certain
circumstances. Section 7 of the Selected Dealer Agent(s) Agreement
(Exhibit 1.2 to the Registration Statement) provides for indemnification
of the Selling Agents and Registrant by the Additional Selling Agents
under certain circumstances.
Item 16. Financial Statements and Exhibits
(a)(1) Financial Statements -- Included in Prospectus:
(i) Heartland Communications & Management, Inc.
Independent Certified Public Accountants' Report.
Balance Sheets as of December 31, 1996 and September 30,
1997 (unaudited).
Statements of Operations for the Period March 27, 1996
(Date of Formation) through December 31, 1996, the period
from March 27, 1996 (Date of Formation) through September
30, 1996 (unaudited), the Nine Months Ended September 30,
1997 (unaudited) and the Period March 27, 1996 (Date for
Formation) through September 30, 1997 (unaudited).
Statements of Changes in Shareholders' Equity for the
Period March 27, 1996 (Date of Formation) through December
31, 1996 and for the Nine Months Ended September 30, 1997
(unaudited).
Statement of Cash Flows for the Period March 27, 1996
(Date of Formation) through December 31, 1996, the period
from March 27, 1996 (date of formation through September
30, 1996(unaudited), the Nine Months Ended September 30,
1997 (unaudited) and the Period from March 27, 1996 (Date
of Formation) through September 30, 1997 (unaudited).
Notes to Financial Statements.
(ii) Heartland Capital Corporation
Independent Certified Public Accountants' Report.
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited).
Statements of Operations for the Period June 23, 1994
(Date of Formation) through December 31, 1994, the Years
Ended December 31, 1995 and 1996, the Nine Months Ended
September 30, 1996 and 1997 (unaudited) and the Period
June 23,
S-1-2
<PAGE>
1994 (Date of Formation) through September 30, 1997
(unaudited).
Statements of Changes in Shareholders' Equity for the
Period June 23, 1994 (Date of Formation) through December
31, 1994, the Years Ended December 31, 1995 and 1996 and
the Nine Months Ended September 30, 1997 (unaudited).
Statements of Cash Flows for the Period June 23, 1994
(Inception) through December 31, 1994, the Years Ended
December 31, 1995 and 1996, the Nine Months Ended
September 30, 1996 and 1997 (unaudited), and the Period
June 23, 1995 (Date of Formation) through September 30,
1997 (unaudited).
Notes to Financial Statements.
(iii)ATB Productions, L.L.C.
Independent Certified Public Accountants Report
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited).
Statements of Operations for the Years Ended December 31,
1995 and 1996, the Nine Months Ended September 30, 1996
and 1997(unaudited) and the Period January 1, 1995 (Date
of Formation) through September 30, 1997 (unaudited).
Statement of Changes in Members' Capital (Deficit) for the
Years Ended December 31, 1995 and 1996 and the Nine Months
Ended September 30, 1997 (unaudited).
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996, the Nine Months Ended September 30, 1996
and 1997 (unaudited) and the Period January 1, 1995 (Date
of Formation) through September 30, 1997 (unaudited).
Notes to Financial Statements.
(a)(2) Included Separately from Prospectus: Consent of Independent
Public Accountants.
Schedules are omitted for the reason that all required
information is contained in the financial statements included
in the Prospectus.
(b) Exhibits:
1.1 Managing Placement Agent Agreement between the
Registrant and Northridge Capital Corporation.
1.2 Form of Selected Dealer Agreement between Northridge
Capital Corporation and certain Additional Selling
Agents.
S-1-3
<PAGE>
* 3.1 Certificate of Incorporation.
* 3.2 Amendments to Certificate of Incorporation.
* 3.3 Bylaws of Registrant
* 3.4 Form of stock certificate
3.5 Subscription Agreement and Power of Attorney
(attached to the Prospectus as Exhibit A).
5.1 Opinion of Counsel as to the legality of the Shares.
* 10.1 Executed Escrow Agreement among the Registrant, the
Selling Agent and George Mason Bank, McLean, Virginia
(the Escrow Agent).
* 10.2 Employment Agreement between Registrant and Gerald
Garcia. (No longer applicable since Mr. Garcia is no
longer Chairman and President and the terms of his
employment have materially changed; see Exhibit
10.68.)
* 10.3 Employment Agreement between Registrant and Michael
L. Foudy.
* 10.4 Employment Agreement between Registrant and Bradford
W. Baker.
* 10.5 Employment Agreement between Registrant and Bradley
B. Niemcek.
* 10.6 Assignment Agreement between Registrant and Heartland
Capital Corporation.
* 10.61 Amended and Restated Teen Magazine Venture Agreement
between Heartland Capital Corporation and Xpress
Ventures, Inc.
* 10.611 License Agreement between Xpress Ventures, Inc. and
Gerald Garcia and Bradford W. Baker.
* 10.62 Amended and Restated National Sports Magazine Venture
Agreement between Heartland Capital Corporation and
Xpress Ventures, Inc.
S-1-4
<PAGE>
* 10.63 Representation Agreement between Heartland Capital
Corporation and ATB Productions, L.L.C.
* 10.64 Amended and Restated Agreement between Registrant and
Alvery Bartlett Fund Management Co. (no longer
applicable since such funding agreement has been
terminated -- see Exhibit 10.67).
* 10.65 Revised Supplemental Solicitation Materials.
* 10.66 Credit Agreement between Heartland Capital
Corporation and ATB Productions, L.L.C.
* 10.67 Termination Agreement between Alvery Bartlett Fund
Management and Heartland Capital Corporation.
10.68 Employment Agreement between Registrant and Gerald
Garcia (replacing the former Agreement, Exhibit
10.2).
10.69 Barter Trade Agreement between ICON International,
Inc. and Registrant.
24.1 Consent of Counsel.
24.2 Consent of Independent Certified Public Accountants.
* These exhibits were filed in the July 26, 1996 Registration
Statement and/or Pre-effective Amendment No. 1 thereto filed July 28,
1997 and, since changes thereto are not material, are not filed herewith
and are hereby incorporated by reference.
UNDERTAKINGS
A. Certificate
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
B. Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) 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 (the "1933 Act"); (ii) reflect in
the Prospectus any facts or events which, together, represent a
fundamental change in the information in the Registration
Statement; and (iii) include any additional or changed material
information on the plan of distribution.
S-1-5
<PAGE>
(2) For determining liability under the 1933 Act, treat each
post-effective amendment as a new Registration Statement of the
securities offered and the offering of the securities at the
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove form registration any
of the securities that remain unsold at the end of the
offering.
C. Request for Acceleration of Effective Date
The Registrant may elect to request acceleration of the effective
date of the Registration Statement under rule 461 of the 1933 Act.
D. Indemnification
Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise,
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1993 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 1933 Act and will be governed by the final adjudication of such
issue.
E. Rule 430A
The undersigned Registrant will:
(1) For determining any liability under the Act, treat the
information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and
contained in the form of a Prospectus filed by the Registrant
under Rule 424(b) (1) or (4) or 497 (h) under the Act as part
of this Registration Statement as of the time the Commission
declared it effective
(2) For any liability under the 1933 Act, treat each post-effective
amendment that contains a form of the Prospectus as a new
Registration Statement for the securities offered in the
Registration Statement, and that the offering of the securities
at that time as the initial bona fide offering of those
securities.
S-1-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused
this Pre-Effective Amendment No. 2 to the Registration Statement to be
signed on its behalf by the Undersigned, thereunto duly authorized, in
the City of McLean, and State of Virginia, on the 28th day of November,
1997.
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
By: /s/ Michael L. Foudy
Michael L. Foudy, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in
his respective capacity as officer and/or director of the Registrant on
the date indicated.
Signatures Title Date
---------- ----- ----
/s/Michael L. Foudy President, CEO November 28, 1997
-------------------- and Director
Michael L. Foudy
/s/Bradford W. Baker Treasurer November 28, 1997
--------------------
Bradford W. Baker
/s/Linda G. Moore Assistant Treasurer, November 28, 1997
-------------------- Chief Financial and
Linda G. Moore Accounting Officer
/s/ Ron Alexenburg Director November 28, 1997
--------------------
Ron Alexenburg
/s/ Thomas Burgum Director November 28, 1997
--------------------
Thomas Burgum
/s/Kirby Ralston Director November 28, 1997
--------------------
Kirby Ralston
/s/ B. Eric Sivertsen Director November 28, 1997
--------------------
B. Eric Sivertsen
S-1-7
<PAGE>
EXHIBIT 1.1
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
MANAGING PLACEMENT AGENT AGREEMENT
December ___, 1997
Northridge Capital Corporation
625 Colonial Park Drive -- Suite 102
Roswell, Georgia 30075
Gentlemen:
Heartland Communications & Management, Inc. ("HCMI") hereby confirms its
agreement with Northridge Capital Corporation (the "Selling Agent") as
described as follows:
Section 1. Introduction. HCMI desires to retain the Selling Agent as
its best efforts managing placement agent in connection with the offering by
HCMI of up to 2,500,000 shares of common stock, $.001 par value per share
(the "Shares"), in connection with its proposed $12,500,000 public offering
(the "Offering"). Specifically, the Selling Agent will act as managing
placement agent on a best efforts basis for the sale of the Shares in the
Offering. By and through this Agreement, HCMI confirms the retention of the
Selling Agent to assist in such capacity during the Offering.
The Form S-1 Registration Statement was filed July 26, 1996 with, and
must be approved by, the Securities and Exchange Commission (the "SEC") which
Registration Statement (and the related Prospectus) , as amended, must be
declared effective by the SEC pursuant to the Securities Act of 1933 (the
"Securities Act"). Copies of the Prospectus, as authorized for use and
declared effective by the SEC, will be delivered to the Selling Agent
promptly after the SEC Order of Effectiveness issues.
Unless otherwise defined herein, capitalized terms used herein shall have
the same meanings ascribed to them in the Prospectus.
Section 2. Selling Agent.
(a) Appointment as Selling Agent. HCMI hereby appoints the Selling
Agent as its managing placement agent to offer and sell the Shares on a best
efforts basis pursuant to the Prospectus and any amendments or supplements
thereto, and in compliance with the terms and conditions thereof and of this
Agreement. Specifically, HCMI will offer exclusively through the Selling
Agent, on a best-efforts basis, and/or selected dealers chosen by the Selling
Agent, a minimum of four hundred thousand (2,500,000) Shares and a maximum of
two million five hundred thousand (2,500,000) Shares at five dollars ($5) per
share. (Such commitment is subject to receipt of a fairness opinion
described in Section 15, "Termination," and the Registration Statement being
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declared effective by the SEC.) Subject to the $12,500,000 maximum during
the Initial and Continuous Offering Period as defined in the Prospectus (up
to 18 months from the Effective Date (defined below) of the Registration
Statement and associated Prospectus), unless earlier terminated by HCMI, the
Selling Agent will use its best efforts to sell the Shares at the $5.00 per
share Selling Price. All subscriptions for Shares will be deposited with
George Mason Bank and maintained in the name of Heartland Communications &
Management, Inc. -- Escrow Account (hereafter the "Escrow Account") until
such subscriptions are accepted at the end of the Initial Offering Period and
during the Continuous Offering Period. Funds in such Escrow Account will be
held during the Initial Offering Period until the minimum subscription of
$2,000,000 is accepted (at which time the funds will be released to HCMI as
more fully described in the Prospectus). If the $2,000,000 minimum is
achieved during the Initial Offering Period, the Offering will continue at
the election of HCMI and with the consent of the Selling Agent for up to 18
months from the date of the Prospectus (the "Continuous Offering Period").
HCMI authorizes the Selling Agent and the Selling Agent agrees to
use its best efforts to offer and sell the Shares pursuant to the
Registration Statement and Prospectus and in compliance with the terms and
conditions thereof and of this Agreement. The Selling Agent may appoint
registered broker-dealers (the "Additional Selling Agents") to offer and sell
Shares. Commencing on the effective date (the "Effective Date") of the
Registration Statement, the Selling Agent and the Additional Selling Agents
(if any) will attempt to sell the Shares, at a price equal to $5.00 per
share, for a period (such period, including any extension thereof as
hereinafter provided, being herein called the "Initial Offering Period") of
two (2) months from the Effective Date (or for a period of up to seven (7)
additional months if extended by HCMI, unless all Shares having an aggregate
Selling Price of $12,500,000 registered with the SEC have previously been
subscribed for).
If at least 400,000 Shares have been subscribed for and accepted
during the Initial Offering Period, HCMI may, with the consent of the Selling
Agent, continue to offer Shares at the $5.00 per share Selling Price during
the balance (the "Continuous Offering Period") of this up to eighteen (18)
month Offering Period. The offering will terminate (i) if subscriptions for
at least 400,000 shares have not been received within the Initial Offering
Period as defined or (ii) at any time by written notice by HCMI to the
Selling Agent, provided the Selling Agent is compensated for all sales
accepted by HCMI.
The Selling Agent may designate as an Additional Selling Agent (i )
any person who is a member of the National Association of Securities Dealers,
Inc. (the "NASD") or (ii) any foreign person who is not a member of the NASD
and who agrees that it will make no offer or sale of Shares within the United
States, its territories or possessions or to persons who are U.S. citizens or
residents, and in making offers and sales of Shares, will comply with the
Rules of Fair Practice of the NASD including, but not limited to Sections 8,
24, 25 and 36 of Article III to the NASD By-Laws, provided, that any such
person as a condition to selection as an Additional Selling Agent, shall
enter into a Selected Dealer Agreement substantially in the form attached as
Exhibit A.
(b) Undertakings. The Selling Agent will use its best efforts to
find eligible persons to purchase the Shares on the terms stated herein and
in the Prospectus and any amendments or supplements thereto. It is
understood that the Selling Agent has no commitment with regard to the sale
of the Shares. The Selling Agent represents that it will comply fully with
all applicable laws
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<PAGE>
and the rules of the NASD, the SEC and of state securities administrators of
the several states and various other jurisdictions in which it offers to sell
Shares.
During this Offering Period, the Selling Agent will promptly upon
receipt deliver all cash and checks received from subscribers for Shares to
the Escrow Agent for deposit in the HCMI Escrow Account. Such cash or
checks will be accompanied by one executed copy of the Subscription Agreement
and Power of Attorney for each subscription obtained, properly completed and
executed in the form of Exhibit A to the Prospectus (the "Subscription
Documents"). Promptly after receipt of the Subscription Documents by the
Selling Agent, an interim receipt will be mailed by the Selling Agent to each
subscriber for the amount deposited. All subscription checks received during
this Offering Period will be held in the Escrow Account until accepted at the
Initial and each Subsequent Closing.
Counsel for the Selling Agent shall make all required filings with
the National Association of Securities Dealers, Inc. (the "NASD"). All
corporate proceedings undertaken by HCMI and other legal matters which relate
to the Offering and other related transactions shall be satisfactory in all
material respects to counsel for the Placement Agent. The Registration
Statement and all amendments thereto shall be approved by counsel to the
Selling Agent prior to filing with the SEC (which approval shall not be
unreasonably withheld).
Section 3. Retention of the Selling Agent; Compensation; Sale and
Delivery of the Shares. Subject to the terms and conditions herein set
forth, HCMI hereby engages the Selling Agent to (a) act as the Selling Agent
in connection with the Offering and (b) to use its best efforts to solicit
subscriptions and purchase orders for the Shares. The Selling Agent is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc. (the "NASD").
The obligations of the Selling Agent pursuant to this Agreement shall
continue through completion or termination of the Offering, but in no event
shall extend later than eighteen (18) months from the Effective Date of the
Registration Statement. All fees due to the Selling Agent, but unpaid, will
be payable at that time.
The Selling Agent and any broker-dealer group assembled and managed by
the Selling Agent shall transmit promptly all checks directly to the Escrow
Agent after receipt by the Selling Agent or such Additional Selling
Agent/broker-dealer. If all conditions precedent to the consummation of the
Offering are satisfied, the Escrow Agent agrees to issue or have issued the
Shares sold in the Offering on the Initial Closing Date (as hereinafter
defined) against payment to HCMI; provided, however, that the Initial (any
Subsequent) Closing may not occur until the conditions specified in Section 8
hereof shall have been complied with to the reasonable satisfaction of the
Selling Agent and its counsel. The release of Shares against payment
therefor shall be made on the date and at the place acceptable to HCMI and
the Selling Agent. The date upon which HCMI shall release and deliver the
Shares sold in the Offering in accordance with the terms hereof relating to
the Initial Offering Period is herein referred to as the "Initial Closing
Date." HCMI shall release and deliver the Shares sold during the Continuous
Offering Period at each Subsequent Closing Date (typically at month-end or,
if earlier, when subscriptions for at least $250,000 are accepted).
The Selling Agent shall receive the following for its services hereunder
at each closing:
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<PAGE>
(i) a selling commission of 8% of the gross subscriptions on all Shares
sold (the parties hereto acknowledging that compensation payable to
any member of the selling group shall be determined between the
Selling Agent and each Additional Selling Agent/ selected dealer
pursuant to individual Selected Dealer Agreement(s));
(ii) warrants as outlined in Section 4 below; and
(iii) reimbursement for its expenses on a non-accountable basis in the
amount of two percent (2 %) of gross proceeds of the Offering.
Except as provided above, all out-of-pocket expenses incurred by the Selling
Agent in connection with the Offering, including travel, communications,
postage and legal fees and expenses, will be absorbed by the Selling Agent.
Nonetheless, the Company has agreed to pay a $50,000 due diligence fee on or
before December ____, 1997 (but in no case later than when the Registration
Statement is declared effective.)
Other than as described as above, HCMI will pay all costs and expenses
incident to the offering, sale and delivery of the Shares including, but not
limited to, all fees and expenses of filing with regulatory agencies and the
NASD; all Blue Sky fees and expenses; all auditing and accounting fees; all
promotion (including those associated with "road shows" and related travel
and entertainment) and printing costs, including costs of printing the
Registration Statement and the placement agent documents, Blue Sky memoranda
and as many Prospectuses as HCMI and the Selling Agent deem reasonably
necessary; and, with the exclusion of Houlihan Evaluation Advisors, Inc., the
cost and expenses of any other firm or professional service organization it
may employ in connection with the advisory services set forth herein.
Section 4. Warrants. Upon termination of the Offering, HCMI will sell
to the Selling Agent Common Stock Purchase Warrants (the "Warrants") for an
aggregate purchase price of one hundred dollars ($100), entitling the Selling
Agent to purchase one share of HCMI's common stock for each ten Shares of
common stock which have been sold in the Offering (i.e. for the minimum
offering of 400,000 Shares, 40,000 warrants will be issued and, for the
maximum offering of 2,500,000 Shares, 250,000 warrants will be issued). The
Warrants shall be nonexercisable for a period of twenty-four (24) months
following the date of the definitive Prospectus. However, if HCMI merges or
reorganizes in such a way as to terminate the Warrants, the Warrants may be
exercised immediately prior to such action. The Warrants will be exercisable
for a period of four (4) years, such period to commence twelve (12) months
after the date of the definitive Prospectus and if the Warrants are not
exercised during this term, they shall by their terms automatically expire.
The exercise price of the Warrants shall be one hundred and sixty five
percent (165%) of the per share offering price (for example, a $8.25 exercise
price if the public offering price is $5). HCMI will set aside and at all
times have available sufficient number of Shares of its common stock to be
issued upon the exercise of the Warrants to be sold to the Selling Agent.
The Warrants will not be transferable to anyone for a period of twelve (12)
months after the date of the definitive Prospectus, except to officers of the
Selling Agent.
In the event that the outstanding shares of common stock of HCMI are at
any time increased or decreased or changed into or exchanged for a different
number or kind of share or other security of HCMI or of another corporation
through reorganization, merger, consolidation, liquidation,
4
<PAGE>
recapitalization, stock split, combination of shares or stock dividends
payable with respect to such common stock, appropriate adjustments in the
number and kind of such securities then subject to this Warrant shall be made
effective as of the date of such occurrence so that the Selling Agent's
position upon exercise will be the same as it would have been had it owned,
immediately prior to the occurrence of such events, the common stock subject
to this Warrant. Such adjustment shall be made successively whenever any
event listed above shall occur and HCMI will notify the Selling Agent of each
such adjustment. Any fraction of a share resulting from any adjustment shall
be eliminated and the price per share of the remaining shares subject to this
Warrant adjusted accordingly.
Subject to the other provisions of this Warrant, the rights represented
by this warrant may be exercised by (i) surrender of this Warrant at the
principal executive office of HCMI (or such other office or agency of HCMI,
as it may designate by notice in writing to HCMI appearing on the books of
HCMI); (ii) payment to HCMI of the exercise price for the number of shares
specified together with applicable stock transfer taxes, if any; and (iii)
delivery to HCMI of a statement by the Selling Agent (in a form acceptable to
HCMI and its counsel) that such shares are being acquired by the Selling
Agent for investment and not with a view to their distribution or resale. In
lieu of any cash payment required for the exercise of this Warrant, unless
otherwise prohibited by law, the Selling Agent shall have the right at any
time and from time to time to exercise this Warrant in full or in part (i) by
receiving from HCMI the number of shares of common stock otherwise issuable
upon such exercise less the number of shares of common stock having an
aggregate Current Market Price on the date of exercise equal to the exercise
price per share multiplied by the number of shares for which this Warrant is
being exercised and/or by delivering to HCMI the number of shares of common
stock having an aggregate Current Market Price on the date of exercise equal
to the exercise price multiplied by the number of shares of common stock for
which this Warrant is being exercised. The term "Current Market Price" shall
mean (a) if the common stock is traded on the NASDAQ National Market ("NNM")
or on a national securities exchange, the per share closing price of the
common stock on the date of exercise of the Warrant or (b) if the common
stock is traded in the over-the-counter market and not in the NNM or a
national securities exchange, the average of the per share closing bid prices
of the common stock on the thirty (30) consecutive trading days immediately
preceding the date in question, as reported by the NASDAQ Small Cap Market
(or an equivalent generally accepted reporting service if quotations are not
reported on the NASDAQ Small Cap Market). The closing price referred to in
clause (a) above shall be the last reported sale price or, in case no such
reported sale takes place on such day, the average of the reported closing
bid and asked prices, in either case in the NNM or on the principal stock
exchange on which the common stock is then listed. For purposes of clause
(b) above, if trading in the common stock is not reported by the NASDAQ Small
Cap Market, the bid price referred to in said clause shall be the lowest bid
price as reported in the NASDAQ Electronic Bulletin Board or, if not reported
thereon, as reported in the "pink sheets" published by National Quotation
Bureau, Incorporated and, if such Common Stock is not so reported, shall be
the price of a share of common stock determined in good faith by HCMI's Board
of Directors.
Section 5. Representations and Warranties of HCMI. HCMI represents and
warrants to the Selling Agent that:
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(a) The Registration Statement must be approved and the related
Prospectus must be authorized for use and declared effective by the SEC
before the Offering may commence. On such date and at all times subsequent
thereto, no order has been issued by the SEC or any other state or federal
regulatory authority preventing or suspending the use of the Prospectus, and
HCMI does not have any knowledge that any action by or before any such
government entity revoking such approval or authorization is pending or
threatened.
(b) The Prospectus and any marketing materials to be used in
connection with the Offering authorized by HCMI for use in the Offering do
not and will not, at any relevant time hereto, contain any misstatements or
untrue statement of a material factor or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that representations or warranties in this Section 4(b)
shall not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to HCMI by the Selling Agent
expressly regarding the Selling Agent for use in the Prospectus.
(c) The offer and sale of the Shares will be conducted in
accordance with all applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent to the
Offering imposed upon HCMI by the SEC or any other regulatory authority. To
the best of HCMI's knowledge, no person has sought to obtain review of the
final action of the SEC in approving the Registration Statement or the
Prospectus and all prior sales of Shares were properly exempt from
registration pursuant to Regulation D under the Securities Act of 1933.
(d) The Registration Statement, including the Prospectus contained
in the Registration Statement (including any amendments or supplements
thereto), comply in all material respects with the applicable regulations.
(e) HCMI is organized and validly exists as a Delaware corporation
with full power and authority to conduct its business as described in the
Prospectus.
(f) HCMI has all such power, authority, authorizations, approvals
and orders necessary to enter into this Agreement, to carry out the
provisions and conditions hereof and to issue and sell the Shares to be sold
as provided herein. The execution, delivery and performance of this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of HCMI. This Agreement is the valid, legal and binding
agreement of HCMI enforceable in accordance with its terms subject to
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and the exercise of judicial discretion in
accordance with general principles applicable to equitable and similar
remedies (regardless of whether such enforceability is considered in a
proceeding at law or equity, and except as to those provisions which may be
limited by public policy).
(g) There is no litigation or pending governmental proceeding or,
to the knowledge of HCMI, threatened against, or involving the properties of
HCMI which individually or in the aggregate might materially and adversely
affect the Offering, the performance of this
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Agreement or the condition (financial or otherwise), operations, business,
assets or properties of HCMI.
(h) The financial statements which will constitute part of the
Prospectus will fairly present the financial condition, results of
operations, changes in stockholders' equity and cash flows of HCMI at the
dates thereof and for the respective periods covered thereby and comply as to
form in all material respects with generally accepted accounting principles.
Such financial statements will be prepared in accordance with generally
accepted accounting principles consistently applied through the periods
involved, presenting fairly in all material respects the information required
to be stated therein.
(i) Except as may otherwise be stated in the Prospectus as declared
effective: (i) there has been no material adverse change, financial or
otherwise, in the condition of HCMI or in the earnings, capital or properties
of such company whether or not arising in the ordinary course of business;
(ii) there has been no material increase in any long-term debt of HCMI, nor
has HCMI issued any securities or incurred any liability or obligation for
borrowing other than in the ordinary course of business; and (iii) there have
been no material transactions entered into by HCMI except with respect to
those transactions entered into in the ordinary course of business. The
capitalization, liabilities, assets, properties and business of HCMI will
conform in all material respects to the descriptions thereof contained in the
Prospectus.
(j) HCMI is not presently in breach of, or in default (nor has an
event occurred which with notice or lapse of time or both would constitute a
default) under any indenture, mortgage, deed of trust, note, bank loan or
credit agreement or any other instrument or agreement to which HCMI is a
party or by which any of its properties may be bound or affected, except for
such breaches or defaults as will not have a material adverse effect on the
business, operations or financial condition of HCMI.
(k) Neither the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth, nor the consummation of the
transactions herein contemplated will conflict with or constitute a breach of
or default under, or result in the creation or imposition of any lien, charge
or other encumbrance upon any of the properties or assets of HCMI pursuant
to: (i) HCMI's articles of incorporation; (ii) any contract, lease, loan
agreement, mortgage, note, indenture or other instrument to which HCMI is a
party or by which it may be bound, or to which any of the properties or
assets of HCMI are subject; or (iii) any applicable law, administrative
regulation or administrative or court decree, except for such conflicts,
breaches, defaults, liens, charges or other encumbrances which, with respect
to (ii) and (iii) above, will not have a material adverse effect on the
business, operations or financial condition of HCMI.
(l) Upon consummation of the Offering, the authorized, issued and
outstanding equity capital of HCMI will be, in all material respects, as set
forth in the Prospectus under the caption "Capitalization"; the Shares of
HCMI have been duly authorized by all necessary action of HCMI, and shall,
upon issuance thereof and payment therefor, be validly issued, fully paid and
nonassessable and shall conform to the description thereof contained in the
Prospectus and good title thereto shall be transferred by HCMI, free and
clear of all claims, encumbrances, security interests and liens whatsoever;
and the issuance of the Shares is not subject to preemptive rights.
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(m) No approval or consent of any regulatory or supervisory or
other public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares by HCMI, except for
the approval of the SEC, issuance of the "fairness letter" from the NASD and
any necessary qualification or registration under the securities laws of the
various states in which the Shares are offered and the expiration of any
statutory waiting periods.
(n) Appropriate arrangements have been made for placing the funds
received from subscriptions for Shares in the Escrow Account at George Mason
Bank until the Initial and any Subsequent Closing Dates, with provision for
refund to the purchasers in the event that the Offering is not completed for
whatever reason or for delivery to HCMI at the Initial Closing Date.
(o) Prior to the Offering, HCMI has not: (i) except as to the
preferred stock by HCC, had any material dealings within the 12 months prior
to the date hereof with any member of the NASD, or any person related to or
associated with such member, other than discussions and meetings related to
the proposed Offering and routine business activities; and (ii) engaged any
intermediary between the Selling Agent and HCMI in connection with the
Offering of the Shares and no person is being compensated in any manner for
such service.
Section 6. Covenants of HCMI. HCMI covenants and agrees that:
(a) HCMI shall deliver to the Selling Agent, from time to time,
such number of copies of the Prospectus as the Selling Agent may reasonably
request. HCMI authorizes the Selling Agent to use the Prospectus in
connection with the sale of the Shares.
(b) HCMI will not at any time file any amendment or supplement to
the Registration Statement or the Prospectus without so notifying the Selling
Agent before any such filing and without first providing the Selling Agent
and its counsel adequate time to review and comment on such amendment or
supplement prior to filing.
(c) HCMI will use its best efforts to cause any amendment or
supplement to the Registration Statement to be approved by the SEC and will
promptly upon receipt of any information concerning the events listed below
notify the Selling Agent and confirm the notice in writing: (i) when such
amendment or supplement has been approved; (ii) of the receipt of any
comments from the SEC or any other governmental entity for any amendment or
supplement to the Registration Statement or for additional information; (iii)
of the issuance by the SEC any other governmental entity of any order or
other action suspending the Offering or the use of the Prospectus; or (iv) of
the occurrence of any event mentioned in paragraph (d) below.
(d) If, during the period when the Prospectus is used in connection
with the offer and sale of the Shares, any event relating to or affecting
HCMI shall occur as a result of which it is necessary, in the reasonable
opinion of counsel for the Selling Agent and in the reasonable opinion of
counsel for HCMI, to amend or supplement the Prospectus in order to make the
Prospectus not false or misleading in light of the circumstances existing at
the time it is delivered to an offeree or a purchaser of the Shares, HCMI
shall, at its expense, forthwith prepare and furnish to the Selling Agent a
reasonable number of copies of amendment(s) or supplement(s) to the
Prospectus which shall amend or supplement the Prospectus so that, as amended
or supplemented, the Prospectus shall
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not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of
the circumstances existing at the time the Prospectus is delivered to an
offeree or a purchaser of the Shares, not misleading. For the purposes of
this subsection, HCMI shall furnish such information with respect to itself
as the Selling Agent from time to time reasonably may request.
(e) HCMI will comply in all material respects with any and all
terms, conditions, requirements and provisions with respect to the Offering
and the transactions contemplated thereby imposed by the SEC. During the
periods when the Prospectus is required to be delivered, HCMI will comply, at
its own expense, with all requirements imposed by the SEC, in each case as
from time to time in force, in accordance with the provisions hereof and the
Prospectus.
(f) HCMI shall take all reasonably necessary action to qualify or
register the Shares for offer and sale under the securities laws of such
jurisdictions as the Selling Agent and HCMI may mutually agree upon;
provided, however, that HCMI shall not be obligated to qualify as a foreign
corporation to do business under the laws of any such jurisdiction. In each
jurisdiction where such qualification or registration shall be affected,
HCMI, unless the Selling Agent agrees that such action is not necessary or
advisable in connection with the distribution of the Shares, shall file and
make such statements or reports as are, or reasonably may be, required by the
laws of each such jurisdiction.
(g) For a period of three (3) years from the date of this
Agreement, HCMI shall furnish to the Selling Agent, as soon as available, a
copy of its annual report to shareholders and, if HCMI is registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports
prepared pursuant to the Exchange Act (including, but not limited to, reports
on Forms 10-K, 10-Q, 8-K and/or 8); and HCMI will furnish to the Selling
Agent: (i) as soon as available, a copy of each report or definitive proxy
statement of HCMI filed pursuant to the Exchange Act or mailed to
shareholders; (ii) concurrently, a copy of any Schedule 13D filing made with
the SEC with regard to HCMI's stock; and (iii) from time to time, such other
public information concerning HCMI as the Selling Agent may reasonably
request.
(h) HCMI intends to use the net proceeds from the sale of the
Shares in the manner set forth in the Prospectus under the caption
"Application of Proceeds."
(i) HCMI will conduct its business in compliance in all material
respects with all material applicable federal and state laws, rules,
regulations, decisions, directives and orders including all decisions,
directives and orders of the SEC.
(j) HCMI shall not deliver the Shares until it has satisfied or
caused to be satisfied in all material respects each and every condition set
forth in Section 9 hereof, unless such condition is waived in writing by the
Selling Agent.
(k) No person has acted as a finder or investment advisor in
connection with the transactions contemplated herein and will indemnify the
Selling Agent with respect to any claim for any finder's fee in connection
with the Offering.
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(l) No officer or director of HCMI is a member of the NASD or an
employee or associated member of the NASD.
(m) HCMI covenants that it has not promised or represented to any
person that any part of the Shares will be directed or otherwise made
available to them in connection with the proposed public offering.
(n) HCMI covenants that it has disclosed to the Selling Agent all
potential conflicts of interest involving HCMI officers, directors, principal
shareholders and/or employees and has disclosed all material conflicts of
interest in the Prospectus.
(o) All documents and other information relating to HCMI's affairs
will be made available upon request to the Selling Agent and its attorneys at
the Selling Agent's office or at the office of the Selling Agent's attorney
and copies of any such documents will be furnished upon request to the
Selling Agent or its attorneys.
(p) HCMI will provide the Selling Agent with unaudited monthly
financial data concerning HCMI from now until termination of the Offering.
(q) If required under applicable securities laws, HCMI will prepare
and file a Registration Statement with the SEC under the Securities and
Exchange Act of 1934, as amended, as soon as required. HCMI agrees that for
at least five (5) years after its common stock is registered under the
Securities and Exchange Act of 1934, HCMI will issue to its shareholders,
within forty-five (45) days after the end of HCMI's first three fiscal
quarters, quarterly reports containing unaudited financial information. HCMI
and the Selling Agent shall, upon HCMI becoming eligible and provided that at
least $12,000,000 has been achieved in the Offering, mutually agree upon on
an exchange or NASDAQ listing. HCMI will within one hundred twenty (120) days
from completion of the Offering apply for "listing" in Moody's
Over-the-Counter manual and maintain such "listing" on a current basis. HCMI
shall obtain a CUSIP number for its certificate and shall engage a transfer
agent acceptable to the Selling Agent.
(r) The properties owned or held under option by HCMI, the capital
structure of HCMI immediately preceding the Offering, the contemplated
dilution to the public investor , executive compensation and HCMI's business
plan shall be acceptable to the Selling Agent (whose concurrence shall not be
unreasonably withheld).
(s) Any employee (including officers' and/or directors') incentive
plan of whatever nature, presently contemplated, shall be fully disclosed in
the Registration Statement and subject to the approval of the Selling Agent.
(t) Upon the initial closing of the Offering, HCMI shall proceed to
expeditiously nominate to its Board of Directors two (2) nominees of the
Selling Agent, whose backgrounds and experience shall be reasonably
satisfactory to HCMI, to be placed upon HCMI's Board of Directors, not to
exceed nine (9) persons. HCMI shall exercise all available rights to
facilitate the election of the Selling Agent nominees. HCMI shall continue
to nominate such Selling Agent nominees until HCMI has shown operating
profits on an audited basis for two (2) consecutive years.
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(u) The statements contained in the Registration Statement, as
amended from time to time, will be in form and content satisfactory to the
Selling Agent and to the Selling Agent's counsel, and will have been prepared
and reported on by independent certified public accountants satisfactory to
the Selling Agent.
(v) The Registration Statement and any amendments thereto will be
submitted to the Selling Agent and to the Selling Agent's counsel as soon as
possible.
(w) HCMI covenants that the content of any oral comments and copies
of all comment letters from regulatory bodies shall immediately be supplied
to the Selling Agent and its counsel.
(x) HCMI shall not obtain an effective date from the SEC or allow
the Registration Statement (or any amendment) to become effective without
prior approval of the Selling Agent.
(y) During the period of the proposed Offering and for one (1)
year from the date of the definitive Prospectus, HCMI will not sell, directly
or indirectly (such as through options), any equity or long-term debt
securities without the Selling Agent's prior written consent (which may not
be unreasonably withheld). The foregoing limitation shall not, however,
preclude HCMI from obtaining bridge financing to fund specific activities
discussed in the draft Prospectus occasioned by any delays in the SEC filing
and the opportunity costs of not proceeding in a timely enough fashion, so
long as mutually agreeable to the parties, and subject to any applicable
regulatory approval.
(z) Prior to the effective date of the Registration Statement, HCMI
will cause each of its officers and directors and shareholders who own over
five percent (5%) of HCMI's Shares outstanding prior to the effective date of
the Registration Statement to enter into an undertaking to the Selling Agent
pursuant to the terms of which each such person will agree not to sell any
Shares owned directly or indirectly by him for twelve (12) months from the
date of the definitive Prospectus without the Selling Agent's prior written
consent.
(aa) All investor leads resulting from the Offering shall be
referred to the Selling Agent.
(bb) HCMI's officers, directors and promoters will comply with the
applicable blue sky requirements, including those pertaining to the escrow of
Shares, provided such escrow shall in no event extend beyond a period of
eighteen (18) months from the Effective Date of the Registration Statement.
(cc) Subscriptions in escrow will be accepted or rejected by HCMI
within 48 hours of deposit into escrow.
(dd) As soon as practicable, HCMI shall make generally available to
its security holders and to the Selling Agent an earnings statement which
will comply with the provisions of Section 11(a) of the 1933 Act and Rule
158(a) under the Act.
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(ee) HCMI will furnish to the Selling Agent copies of all reports to
shareholders or filing with the SEC and NASD or stock exchanges or material
press releases.
(ff) HCMI will maintain, as necessary, a transfer agent and a
registrar function (or engage a transfer agent and registrar) for the Shares.
(gg) HCMI will not make any material amendments to any employment
agreements with its executives for a period of two years after the effective
date of the Registration Statement without the concurrence of the Selling
Agent (which shall not be unreasonably withheld).
(hh) HCMI shall, as soon as practicable, take all necessary and
appropriate actions to be included in Standard & Poor's and Moody's Investor
Services, Inc. manuals.
(ii) Until termination of the offering, HCMI shall not, without the
prior written consent of the Selling Agent, issue any press release, other
than trade releases issued in the ordinary course of HCMI's operations.
Section 7. Selling Agent Representations and Warranties. The Selling
Agent represents and warrants to HCMI that:
(a) All references and information concerning the Selling Agent to
be included in the Prospectus and supplied by the Selling Agent will be
accurate in all material respects and, as to the Selling Agent, will not
contain any misleading or untrue statement of a material fact or omit to
state a material fact which is required to be made or is necessary to prevent
the statements therein from being misleading.
(b) The Selling Agent is a corporation duly organized and validly
existing under the laws of the state of its incorporation, is a member in
good standing of the NASD and has full power and authority to act as
marketing agent in the manner contemplated by this Agreement and as described
in the Prospectus.
(c) The Selling Agent is in good standing and in compliance with
all applicable broker-dealer registration requirements in any jurisdiction
where the parties agree the Shares will be sold by it; and any use or
distribution of the Prospectus or any other written communications prepared
to accompany the Prospectus by the Selling Agent will comply with the terms
and conditions set forth in the Prospectus, with the procedures set forth in
this Agreement and with the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act, all applicable state securities laws and
the rules and regulations promulgated under all such acts and laws and all
applicable rules and regulations of the NASD.
(d) The Selling Agent has and will maintain all required
governmental and regulatory approvals and licenses to perform its obligations
under this Agreement and to act as described in the Prospectus, and the
performance of its obligations under this Agreement and its acting as
described in the Prospectus will not violate or result in a material breach
of any provisions of either of its Articles of Incorporation or By-laws, or
any agreement, order, law or regulation binding upon it.
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(e) This Agreement has been duly and validly authorized, executed
and delivered on behalf of the Selling Agent, and is a valid and binding
agreement of the Selling Agent enforceable in accordance with its terms.
Section 8. Payment of Expenses. HCMI shall bear all costs and expenses
incident to the issuance, offer, sale and delivery of the Shares, including
all expenses and fees incident to the filing of the Registration Statement
with the SEC and the NASD, the costs and counsel fees of qualification under
state securities laws, fees and disbursements of HCMI counsel and
accountants, fees and expenses of the valuation firm for the fairness
opinion, costs for preparing and printing the Registration Statement and cost
of printing as many copies of the underwriting documents and Prospectuses and
related exhibits as the Selling Agent may deem necessary, including all
amendments and supplements to the Registration Statement. In the unlikely
event that blue sky work is undertaken by counsel to the Selling Agent, it
shall be separately billed to HCMI and shall be the financial obligation of
HCMI. All other fees of Selling Agent's counsel shall be paid directly by
the Selling Agent. Other than those specifically provided in Section 3, the
Selling Agent will absorb all actual accountable out-of-pocket expenses
arising out of, in connection with, and otherwise incident to, the Offering,
including those related to any and all travel, communications, postage and
legal fees and expenses.
Section 9. Conditions of the Selling Agent's Obligations. The
obligations of the Selling Agent as provided herein shall be subject to the
accuracy of the representations and warranties contained herein as of the
date hereof and as of the Initial and any Subsequent Closing Date, to the
accuracy of the statements of officers and directors of HCMI made pursuant to
the provisions hereof, to the performance by HCMI of its obligations
hereunder and to the following conditions:
(a) At the Initial and any subsequent Closing Date, HCMI will have
completed the conditions precedent to, and shall have conducted the Offering
in all material respects in accordance with the Registration Statement and
all applicable laws, regulations, decisions and orders, including any and all
terms, conditions, requirements and provisions precedent to the Offering
imposed upon it by the SEC.
(b) At the Initial and any subsequent Closing Date, no order or
other action suspending the approval of the Registration Statement or the
consummation of the Offering shall have been issued or proceedings therefore
initiated or, to the knowledge of any of the parties, threatened by the SEC
or any state authority.
(c) At the Initial and any subsequent Closing Date, the Selling
Agent shall receive a favorable opinion of Duncan, Blum & Associates,
securities counsel for HCMI, dated the Initial Closing Date, addressed to the
Selling Agent to the effect that:
(i) HCMI is organized and validly existing as a Delaware
corporation with full power and authority to own its properties and conduct
its business as described in the Prospectus. HCMI's articles of
incorporation comply in all material respects with Delaware law.
(ii) HCMI has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its
business, except for those licenses, permits
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and authorizations which the failure to obtain would not have a material
adverse effect on the business, operations or financial condition of HCMI.
(iii) The issuance and sale of the Shares have been duly
and validly authorized by all necessary corporate action on the part of HCMI;
and the Shares, when issued in accordance with the terms of the Prospectus
and this Agreement, will be validly issued, fully paid, nonassessable and
free of preemptive rights.
(iv) The Shares conform to the description thereof contained in
the Prospectus, and the Shares comply as to form in all material respects
with applicable legal requirements.
(v) No further approval, authorization, consent or other order
of any federal board or body besides the SEC is required in connection with
the execution and delivery of this Agreement, the issuance and sale of the
Shares and consummation of the Offering except for any necessary
qualification or registration under the securities laws of the various states
in which the Shares are to be offered.
(vi) The execution and delivery of this Agreement have been
duly and validly authorized by all necessary action on the part of HCMI; and
this Agreement is a valid and binding obligation of HCMI, enforceable in
accordance with its terms except that the enforceability of the obligations
of HCMI may be subject to bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally or the rights of
creditors of a saving bank, the accounts of which are insured by the FDIC
(including laws concerning fraudulent conveyance or fraudulent obligations)
and the exercise of judicial discretion in accordance with general principles
applicable to equitable and similar remedies (regardless of whether such
enforceability is considered in a proceeding at law or equity) and except as
to those provisions which may be limited by public policy, including
provisions relating to the right of a party to obtain reimbursement of its
attorneys' fees and litigation costs from another party, as to which such
counsel need express no opinion, and except as to those provisions relating
to indemnity or contribution for liabilities arising under the Securities
Act, as to which such counsel need express no opinion.
(vii) There are no material, legal or governmental
proceedings pending or threatened against HCMI; such counsel does not know of
any statutes or regulations required to be described or disclosed in the
Prospectus which are not so described or disclosed; and the description in
the Prospectus of such statutes and regulations are accurate summaries
thereof and fairly present the information required to be shown.
(viii) The statements in the Prospectus, insofar as they
constitute statements of law or legal conclusions, have been prepared or
reviewed by them and are materially correct.
(ix) Based on certificates of officers and such investigation
and verification as deemed appropriate, HCMI is presently not in breach of,
or in default (nor has an event occurred which with notice or lapse of time
or both would constitute a default) under any indenture, mortgage, deed of
trust, note, bank loan or credit agreement or any other instrument or
agreement to which HCMI is a party or by which any of its properties may be
bound or affected, except for such breaches
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or defaults as will not have a material adverse effect on the business,
operations or financial condition of HCMI; and HCMI is not in violation of
any term or provision of its articles of incorporation or any judgment,
government authorization, injunction, license, permit, decree, order,
statute, rule, writ or regulation, except for such violations as will not
have a material adverse effect on the business, operations or financial
condition of HCMI.
(x) Neither the execution and delivery of this Agreement nor
the incurrence of the obligations herein set forth will conflict with HCMI's
articles of incorporation; (ii) constitute a breach of or default under, or
result in the creation or imposition of any lien, charge or other encumbrance
upon any of the properties or assets of HCMI pursuant to any contract, lease,
loan agreement, mortgage, note, indenture or other instrument known to such
counsel to which HCMI is a party or by which it may be bound, or to which any
of the properties or assets of HCMI are subject; or (iii) conflict with any
applicable law, administrative regulation or administrative or court decree,
except for such conflicts, breaches, defaults, liens, charges or other
encumbrances which, with respect to (ii) and (iii) above, will not have a
material adverse effect on the business, operations or financial condition of
HCMI.
(xi) At the time that the Registration Statement became
effective, the Registration Statement (as amended or supplemented) -- other
than the financial statements, notes to financial statements, financial
tables or other financial and statistical data as to which counsel need
express no opinion -- complied as to form in all material respects with
pertinent regulations. Based on conferences with and certificates of officers
of HCMI, discussions with customers and vendors and other appropriate due
diligence measures, all material documents and exhibits relating to HCMI
required to be filed with the Registration Statement (as amended or
supplemented) have been so filed. The description in the Registration
Statement and the Prospectus of such documents and exhibits is accurate in
all material respects and fairly presents the information required to be
shown. Nothing has come to such counsel's attention that caused counsel to
believe that, at the date hereof, the Registration Statement or the
Prospectus contained an untrue statement of a material fact relating to HCMI
or omitted to state a material fact relating to HCMI required to be stated
therein or necessary to make the statements therein not misleading, in light
of the circumstances under which they were made.
(d) Counsel for the Selling Agent shall have been furnished such
documents and opinions as they reasonably may require for the purpose of
enabling them to review or pass upon the matters required by the Selling
Agent, and for the purpose of evidencing the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained, including, but not limited to, resolutions of the Board of
Directors of HCMI regarding the authorization of this Agreement and the
transactions contemplated hereby.
(e) At the Initial and any subsequent Closing Date, the Selling
Agent shall receive a certificate of the President and of the chief financial
or accounting officer of HCMI, dated the Initial Closing Date, to the effect
that: (i) they have carefully examined the Prospectus and, in their opinion,
at the time the Prospectus became authorized for final use, it did not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; (ii) since the date
the Prospectus became authorized for final use, no event has occurred which,
in their opinion, should
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have been set forth in an amendment or supplement to the Prospectus which has
not been so set forth, including specifically, but without limitation, any
material adverse change in the condition, financial or otherwise, or in the
earnings, capital or properties of HCMI and, the conditions set forth in this
Section 8 have been satisfied; (iii) no order has been issued by the SEC to
suspend the Offering or the authorization for final use of the Prospectus and
no action for such purposes has been instituted or, to the best of their
knowledge, threatened by such regulatory agencies; (iv) to the best of their
knowledge, no person has sought to obtain review of the final action of the
SEC approving the Registration Statement; and (v) all of the representations
and warranties contained in Section 4 of this Agreement are true and correct,
with the same force and effect as though expressly made on the Initial
Closing Date.
(f) At or prior to the Initial Closing Date, the Selling Agent
shall receive: (i) a copy of the letter from the SEC declaring the
Registration Statement effective; and (ii) a certified copy of HCMI's
articles of incorporation.
(g) Concurrent with SEC effectiveness, the Selling Agent shall
receive a letter from BDO Seidman,, LLP, certified public accountants, dated
the date hereof and addressed to the Selling Agent: (i) confirming that BDO
Seidman is a firm of independent public accountants within the meaning of 12
C.F.R. Section 571.2(c)(3) under the Securities Act and no information
concerning its relationship with or interests in HCMI is required to be
disclosed in the Registration Statement, and stating in effect that in its
opinion on the consolidated financial statements of HCMI for the years ended
December 31, 1995, as included in the Prospectus and covered by their
respective opinions included therein, comply as to form in all material
respects with generally accepted accounting principles; (ii) stating in
effect that, consistent with SAS 72 and after reading the latest available
unaudited interim financial statements of HCMI, a reading of the minutes of
the meetings of the Board of Directors and consultations with officers of
HCMI responsible for financial and accounting matters, nothing came to its
attention which caused it to believe that: (a) the unaudited financial
statements included in the Prospectus, fail to comply as to form in any
material respect with generally accepted accounting principles; (b) such
unaudited financial statements are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Prospectus; or (c) during
the period from the date of the latest unaudited consolidated financial
statements included in the Prospectus to a specified date not more than five
business days prior to the date hereof, there was any material increase in
borrowing by HCMI.
(h) At the Initial Closing Date, BDO Seidman, LLP will deliver to
the Selling Agent a letter in form and substance satisfactory to counsel for
the Selling Agent dated the Initial Closing Date, confirming the statements
made by them in the letter delivered by them pursuant to the preceding
subsection as of a specified date not more than three (3) business days prior
to the Initial Closing Date.
(i) At or prior to the Initial Closing Date, counsel to the Selling
Agent shall have been furnished with such documents and opinions as they may
reasonably require for the purpose of enabling them to evidence the accuracy
or completeness of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken
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by HCMI in connection with the Offering and the sale of the Shares as herein
contemplated shall be reasonably satisfactory in form and substance to the
Selling Agent and its counsel.
(j) HCMI shall not have sustained, since the date of the latest
audited financial statements, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in such
statements, there shall not have been any material change in the consolidated
long-term debt of HCMI or any change or any development involving a
prospective material change in or affecting the general business affairs,
management, financial position, stockholders' equity, cash flow or results of
operations of HCMI, otherwise than as set forth or contemplated in such
statements, the effect of which, in any such case described above, is in the
reasonable judgment of the Selling Agent sufficiently material and adverse as
to make it impracticable or inadvisable to proceed with the Offering or the
delivery of the Shares on the terms and in the manner contemplated in the
Prospectus.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory, in their
reasonable opinion, to the Selling Agent and its counsel. Any certificates
signed by an officer or director of HCMI and delivered to the Selling Agent
or to counsel for the Selling Agent shall be deemed a representation and
warranty by HCMI to the Selling Agent as to the statements made therein. If
any condition to the Selling Agent's obligations hereunder to be fulfilled
prior to or at the Initial Closing Date is not so fulfilled, the Selling
Agent may terminate this Agreement or, if the Selling Agent so elects, may
waive any such conditions which have not been fulfilled or may extend the
time of their fulfillment.
Section 10. No Right of First Refusal. No right of first refusal
attaches to this offering.
Section 11. Registration Rights. HCMI agrees that if, at any time it
should file a Registration Statement with the SEC pursuant to the Securities
Act, HCMI, will offer, at its own expense, to the Selling Agent and its
warrantholders the opportunity to register or qualify the warrants or shares
of common stock issued upon exercise of the warrants as described in Section
4 hereof. This registration right is not applicable to a Registration
Statement filed by HCMI on Form S-8 or Form S-4.
Within the period commencing twelve (12) months and ending five (5) years
after the date of the definitive Prospectus, HCMI agrees that (upon written
request of the then holder(s) of at least 80% of the total warrants and/or
common stock issued upon the exercise of the Warrants which were originally
issued to the Selling Agent), it will file, no more than once, a Registration
Statement and all necessary amendments thereto, under the Securities Act,
registering the Shares of common stock underlying the Warrants. HCMI agrees
to use its best efforts to cause the above filing to become effective. All
expenses of such registration or qualification, including, but not limited
to, legal, accounting and printing fees, will be borne by HCMI (up to
$25,000). HCMI shall not be responsible for the cost of any separate counsel
to review the Registration Statement on behalf of or to advise the selling
shareholders.
In addition to the rights above provided, HCMI will cooperate with the
then holder(s) of the Warrants and common stock issued upon the exercise of
the Warrants in preparing and signing any
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Registration Statement, in addition to the Registration Statement discussed
above, required in order to sell or transfer the Shares of common stock
issued upon the exercise of the Warrants and will supply all information
required therefor, but such additional Registration Statement shall be at the
then holder(s) cost and expense.
Section 12. Indemnification.
(a) HCMI agrees to indemnify and hold harmless the Selling Agent
and any of its directors, officers, employees, agents (including counsel) and
affiliates who act on behalf of HCMI and in connection with the services
called for under this Agreement, from and against any and all loss, cost,
damage, claim liability or expense of any kind, including reasonable
attorneys' fees and other expenses incurred in investigating, preparing to
defend and defending any claim or claims; provided however, that any payments
provided for in this Section 12 shall not be paid or payable by HCMI if the
Selling Agent or any of its directors, officers, employees, agents or
affiliates are found by a court to have been grossly negligent or to have
acted in bad faith in performing the services which are the subject of this
letter agreement. This indemnity shall be in addition to any liability HCMI
may have to the Selling Agent otherwise. If any action is brought against the
Selling Agent which HCMI is obligated hereby to indemnify, then the Selling
Agent promptly shall notify HCMI in writing of such action. HCMI agrees
promptly to notify the Selling Agent of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the sale of the Shares or in connection with the Prospectus.
(b) The Selling Agent agrees to indemnify and hold harmless HCMI,
its directors and executive officers and each person, if any, who has control
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from HCMI to the Selling
Agent, but only with respect to any untrue or alleged untrue statement of a
material fact or the omission or alleged omission of a material fact required
to be stated or necessary to make not misleading any statements contained in
the Prospectus in reliance upon, and in conformity with, written information
furnished to HCMI with respect to the Selling Agent by or on the behalf of
the Selling Agent expressly for use in the Prospectus or any materially
misleading unwritten statement made to a purchaser of the Shares by any
director or officer or any person employed by the Selling Agent. If any
action is brought against HCMI or any other person the Selling Agent is
obligated hereby to indemnify, then such person promptly shall notify the
Selling Agent in writing of such action. The Selling Agent agrees promptly
to notify HCMI of the commencement of any litigation or proceedings against
the Selling Agent or any of its directors, officers or employees in
connection with the sale of the Shares or in connection with the Prospectus.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may
be sought hereunder, but failure to notify an indemnifying party promptly
shall not relieve it from any liability which it may have on account of this
Section 12 or otherwise. An indemnifying party may participate at its own
expense in the defense of such action. In addition, if it so elects within a
reasonable time after receipt of such notice, an indemnifying party, jointly
with any other indemnifying parties receiving such notice, may assume the
defense of such action with counsel chosen by it and approved by the
indemnified parties that are defendants in such action, unless such
indemnified parties reasonably object to such assumption on the ground that
there
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<PAGE>
may be legal defenses available to them that are different from or in
addition to those available to such indemnifying party. If an indemnifying
party assumes the defense of such action, the indemnifying party shall not be
liable for any fees and expenses of counsel for the indemnified parties
incurred thereafter in connection with such action, proceeding or claim,
other than reasonable costs of investigation. In no event shall the
indemnifying parties be liable for the fees and expenses of more than one
separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings
or claims in the same jurisdiction arising out of the same general
allegations or circumstances.
Section 13. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for
in Section 12 above is for any reason held to be unavailable to the Selling
Agent, HCMI shall agree to contribute to the aggregate losses, liabilities,
claims, damages, and expenses of the nature contemplated by Section 12 of
this Agreement incurred by HCMI or the Selling Agent (i) in such proportion
as is appropriate to reflect the relative benefits received by HCMI and the
Selling Agent from the Offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of HCMI in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by HCMI and the
Selling Agent shall be deemed to be in the same proportions as the total
proceeds from the Offering (before deducting expenses) received by HCMI to
the total marketing and commission fees received by the Selling Agent under
this Agreement. The relative fault of HCMI and the Selling Agent shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by HCMI or by the Selling Agent and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
HCMI and the Selling Agent agree that it would not be just and equitable
if contribution pursuant to this Section 13 were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 13, the
Selling Agent shall not be required to contribute any amount in excess of the
amount by which fees owed the Selling Agent pursuant to this Agreement
exceeds the amount of any damages which the Selling Agent has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation shall be entitled to contribution from any person who is
not guilty of such fraudulent misrepresentation.
Section 14. Survival of Agreements, Representations and Indemnities.
The respective indemnities of HCMI and the Selling Agent set forth in or made
pursuant to this Agreement shall remain in full force and effect, regardless
of any termination or cancellation of this Agreement or any
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<PAGE>
investigation made by or on behalf of any of the parties hereto and the
warranties of HCMI set forth in or made pursuant to this Agreement shall
remain in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of
any of the parties hereto or any controlling person, and shall survive the
termination date of this Agreement. Any legal representative, successor or
assign of the Selling Agent or HCMI, and any such controlling person shall be
entitled to the benefit of the respective agreements, indemnities, warranties
and representations.
Section 15. Termination.
(a) The Selling Agent and HCMI shall each have the right to
terminate this Agreement at any time prior to the Initial Closing Date if any
domestic or international event or act or occurrence has materially
disrupted, or in such party's good faith opinion will in the immediate future
materially disrupt, the securities markets; or if trading on the New York
Stock Exchange shall have been suspended for more than 24 hours, or minimum
or maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been required, on the New York Stock
Exchange, by the New York Stock Exchange or by the order of the Securities
and Exchange Commission or any other governmental authority having
jurisdiction; or if the United States shall have become engaged or continues
to be engaged in a war or major hostilities if the effect of such war or
hostilities, in such party's reasonable judgment, makes it impracticable or
inadvisable to proceed with the offering; of the Shares on the terms and in
the manner contemplated by the Prospectus; or if a banking moratorium has
been declared by a state or federal authority; or if a moratorium in foreign
exchange trading by major international banks or persons has been declared;
or if HCMI shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, threat, sabotage or other calamity or malicious act,
whether or not covered by insurance, which in such party's good faith
opinion, will make it inadvisable to proceed with the Offering, or if there
shall have been such material adverse change in the condition or prospects of
HCMI or the prospective market for the HCMI's securities as in such party's
good faith opinion would make it inadvisable to proceed with the offering,
sale or delivery of the Shares; or if in such party's good faith opinion the
price for the Shares is not reasonable or equitable under then prevailing
market conditions; or if any other party has breached in any material respect
the representations, warranties or covenants contained in the Agreement.
(b) Selling Agent reserves the right in its uncontrolled discretion
to determine whether the Offering can be successfully marketed through a
placement agent group and may, without any obligation to HCMI, for any
reason, including, without limiting the generality of the foregoing, market
conditions (both those relating to securities and commodities generally and
those relating to HCMI's stock) and the reaction of prospective members of
the selling group to the proposed offering, decline to proceed further with
the Offering. If Selling Agent has terminated its services, any commitment
relating to compensation (other than legal fees), advisor agreements,
warrants and other executory rights shall become null and void.
(c) Should HCMI be unable to obtain blue sky clearance without
significant suitability restrictions in the major proposed marketing
jurisdictions, or NASD clearance or SEC effectiveness is not obtained on or
before, March 31, 1998, the Selling Agent may elect to terminate the Offering.
20
<PAGE>
(d) Should a mutually agreeable valuation firm independent of HCMI
be unable to issue a fairness opinion confirming that the five dollar ($5)
per share price to the public shareholders is fair, the Selling Agent may
elect to terminate the Offering.
(e) If any party elects to terminate this Agreement as provided in
this Section 15, the other parties shall be notified promptly by the party
terminating this Agreement by telephone or telegram, confirmed by letter.
Section 16. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to the
Selling Agent shall be mailed, delivered or telegraphed and confirmed to
Northridge Capital Corporation (with a copy to its counsel, Attn: John Ringo,
Esq., 625 Colonial Park Drive -- Suite 201, Roswell, Georgia 30075).
Section 17. Parties. HCMI shall be entitled to act and rely on any
request, notice, consent, waiver or agreement purportedly given on behalf of
the Selling Agent when the same shall have been given by the undersigned.
The Selling Agent shall be entitled to act and rely on any request, notice,
consent, waiver or agreement purportedly given on behalf of HCMI, when the
same shall have been given by any officer. This Agreement shall inure solely
to the benefit of, and shall be binding upon, the Selling Agent and HCMI.
Section 18. Closings. The initial closing for the sale of the Shares
shall take place on a business day to be agreed upon by the parties hereto at
the offices of Duncan, Blum & Associates or such other location as mutually
agreed upon by the Selling Agent and HCMI (the "Initial Closing Date").
Subsequent closings will occur during the Continuous Offering Period on the
date that $250,000 in subscriptions are accepted or at each month-end,
whichever first occurs (each constituting a "Subsequent Closing Date"). At
each closing, HCMI shall deliver to the Selling Agent in next day funds the
commissions due and owing to the Selling Agent as set forth herein and the
opinions and certificates required hereby and other documents deemed
reasonably necessary by the Selling Agent shall be executed and delivered to
effect the sale of the Shares as contemplated hereby and pursuant to the
terms of the Prospectus.
Section 19. Partial Invalidity. In the event that any term, provision
or covenant herein or the Registration Statement thereof to any circumstance
or situation shall be invalid or unenforceable, in whole or in part, the
remainder hereof and the Registration Statement of said term, provision or
covenant to any other circumstance or situation shall not be affected
thereby, and each term, provision or covenant herein shall be valid and
enforceable to the full extent permitted by law.
Section 20. Construction. This Agreement shall be construed in
accordance with the laws of the State of Georgia.
Section 21. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute but one and the same
instrument.
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<PAGE>
Section 22. Entire Agreement. This Agreement shall constitute the
entire agreement of the parties and shall supersede any and all prior or
contemporaneous understandings or arrangements with regard to the subject
matter hereof.
If the foregoing correctly sets forth the understanding between the
Selling Agent and HCMI, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
______________________________
Michael L. Foudy
President and Chief Executive Officer
Heartland Communications & Management, Inc.
Accepted as of the date first written above
NORTHRIDGE CAPITAL CORPORATION
By:
Anthony John Negus, President
22
<PAGE>
EXHIBIT 1.2
NORTHRIDGE CAPITAL CORPORATION
SELECTED DEALER AGREEMENT
December___, 1997
[Insert Name
and Address of
Additional Selling Agent(s)]
Re: Heartland Communications & Management, Inc.
Ladies and Gentlemen:
Northridge Capital Corporation (the "Selling Agent") has agreed to serve as
exclusive lead placement agent, on a best efforts basis, in connection with the
offer and sale of the common stock (the "Shares") of Heartland Communications &
Management, Inc., a Delaware corporation ("HCMI"). Up to $12,500,000 Shares
shall be offered by the Selling Agent and a selected dealer group in this
offering (the "Offering").
The Selling Agent has entered into a Managing Placement Agent Agreement
(the "Agency Agreement") dated November ___, 1997 with HCMI pursuant to which
the Selling Agent has agreed to use its best efforts to obtain subscribers for
the Shares. A copy of such Agency Agreement has been furnished to you and is
hereby incorporated by reference; you understand the terms used in this
Agreement shall have the meanings ascribed to them in the Agency Agreement
and/or the Prospectus unless the context indicates otherwise. As provided in
such Agency Agreement, HCMI has agreed that the Selling Agent may, in its
discretion, use the services of other members of the National Association of
Securities Dealers, Inc. (the "NASD") or of any foreign securities firm which is
eligible for membership in the NASD and which agrees to abide by the NASD Rules
of Fair Practice (collectively, "Additional Selling Agents"), in connection with
the offer and sale of the Shares. You are invited to become one of the
Additional Selling Agents and, by your best efforts, to obtain subscribers for
the Shares in accordance with the Agency Agreement and the following terms and
conditions.
All Shares, if any, will be offered to members of the general public,
subject to HCMI's right to reject such orders in whole or in part. The offering
to the general public may include the sale by other members of the National
Association of Securities Dealers, Inc. (the "NASD"). Such members shall be part
of a selling group managed by the Selling Agent. All purchases will be subject
to the maximum and minimum purchase limitations and other terms and conditions
described in the Prospectus.
All orders must include acceptable payment (or appropriate instructions
authorizing withdrawal of payment from one or more escrow accounts at the escrow
agent bank described in the Prospectus) and appropriate documentation including
a completed Subscription Agreement and Power of Attorney. Deposits for the
purchase of Shares will earn interest (based upon the interest
<PAGE>
rate received on the escrow account) from receipt of the payment by the Escrow
Agent (described in the Prospectus) to the date on which such sales of the
Shares are actually consummated.
The Selling Agent has been advised by HCMI that the Prospectus was declared
effective by the Securities and Exchange Commission on November ___, 1997 (the
"Effective Date"). The Shares will be offered and sold on the terms and subject
to the conditions set forth herein and in the Prospectus.
All Shares will be offered and sold at the same $5.00 price per share
Selling Price (as defined). Following completion of the Initial Offering Period
(as defined) and until the end of this up to eighteen (18) month Offering
Period, subscribers must subscribe for and submit payments for a specific number
of shares at the Selling Price.
You are invited to become one of the selected dealers (a "Dealer") with
respect to the sale of the Shares, and by your confirmation hereof, you agree to
act in the capacity of a selected dealer and to use your best efforts to find
purchasers for the Shares in accordance with the following terms and conditions:
1. Solicitation and Solicitation Material; Best Efforts.
a. Solicitation and other activities by Dealer hereunder shall be
undertaken only in accordance with applicable laws and regulations and the terms
hereof. Accompanying this letter is a copy of the Prospectus prepared by HCMI
for use in conjunction with the Offering and sale of the Shares. Additional
copies of the Prospectus and of all amendments and supplements thereto will be
furnished to you by the Selling Agent in reasonable quantities upon your
request. Dealer is not authorized to use any solicitation material other than
such Prospectus or such other material as may be provided by HCMI. Any such
other material that is provided by HCMI is hereinafter referred to as
"Supplemental Literature."
b. Dealer agrees to use its best efforts to procure subscribers for
Shares during a period commencing current with the Effective Date and ending at
5:00 P.M., Eastern Time, on _____________, 1998, subject to an extension up to
_________, 1998, unless earlier terminated or extended at the option of HCMI.
2. Compensation.
a. As compensation for the services of Dealer in soliciting and
obtaining purchasers of the Shares, unless otherwise agreed in writing by the
Selling Agent, Dealer will receive a selling concession equal to __% of the
aggregate subscription on Shares sold by Dealer. Neither the Selling Agent nor
HCMI shall be responsible for any costs or expenses incurred by Dealer in
connection with the performance of Dealer's obligations under this Agreement.
All such costs and expenses shall be borne by Dealer.
b. Dealer will not be entitled to receive compensation pursuant to
this Section 2 in any case in which it is determined by the Selling Agent that
(i) the solicitation by Dealer was made in violation of applicable law or the
terms of this Agreement; (ii) Dealer is not a member in good
2
<PAGE>
standing of (or an entity not properly exempt from membership in) the National
Association of Securities Dealers, Inc. (the "NASD") or a licensed broker-dealer
in good standing under applicable laws at the time compensation would otherwise
be payable to Dealer hereunder; or (iii) Dealer has not delivered to the Selling
Agent an executed original of this Agreement signed by an authorized officer of
Dealer.
c. Dealer will not be entitled to receive compensation pursuant to
this Section 2 with respect to subscriptions obtained by Dealer if such
subscriptions are not accepted by HCMI for any reason, including termination of
the Offering by HCMI prior to subscription of the maximum amount of Shares being
offered. HCMI has the right, to be exercised in its sole discretion, to reject
any subscription for any reason whatsoever.
d. In the event that the Selling Agent delivers compensation to
Dealer and it is subsequently determined by the Selling Agent that all or part
of such compensation violates Subsection (b) or (c) of this Section 2, the
Selling Agent shall notify Dealer of the amount of compensation wrongfully paid.
Dealer shall refund the amount of compensation specified in the notice within
five (5) business days of the day on which Dealer receives such notice.
3. Unauthorized Information and Representations. Neither Dealer nor any
other person is authorized by the Selling Agent or HCMI to give any information
or make any representations in connection with this Agreement or the Offering or
sale of the Shares other than the information or representations contained in
the Prospectus, as supplemented or amended, or any Supplemental Literature.
Dealer agrees not to publish, circulate or otherwise use any advertising or
solicitation material other than the Prospectus, as supplemented or amended, or
any Supplemental Literature.
4. Compliance with Securities Act of 1933 and the Securities Exchange Act
of 1934. In making offers and sales of the Shares, Dealer agrees to comply with
any applicable requirements of the Securities Act of 1993, as amended (the "1933
Act"), and the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the rules and regulations thereunder.
5. Representations and Warranties of Dealer. Dealer represents and
warrants to, and agrees with, the Selling Agent as follows:
a. Authority and Non-Contravention. Dealer has all requisite
corporate power and authority to enter into this Agreement. The execution,
delivery and performance of this Agreement will not conflict with or result in a
breach of any of the provisions of, or constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of Dealer pursuant to the terms of any agreement or
instrument to which Dealer is now a party, or by which Dealer will be bound, and
will not conflict with or result in a violation of any law, governmental or
administrative regulation or court decree applicable to Dealer or of the
provisions of Dealer's Articles of Incorporation, if any.
b. NASD Membership. Except as to foreign brokers properly exempt
from such requirements, Dealer is a member in good standing of the NASD, and in
making the offers and sales of the Shares, Dealer will comply with the NASD's
Interpretation with respect to Free-Riding and Withholding and with the
provisions of Sections 8, 24, 25 and 36 of Article III of the NASD Rules
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<PAGE>
of Fair Practice. Neither Dealer nor any of its directors, officers, partners,
affiliates, associates or any person who constitutes a "related person" of
Dealer (as the term "related person" is defined in the NASD Rules of Fair
Practice) (i) has participated in any private placement involving the securities
of HCMI, and/or any affiliate thereof or purchased any such securities in a
private transaction within the 18 months preceding the date hereof; (ii) has
purchased any warrants, options or other securities of HCMI and/or any affiliate
thereof within the 12 months preceding the date hereof or (iii) has had any
other dealings with HCMI or any subsidiary or controlling shareholder thereof,
other than relating to this Agreement, as to which documents or information are
required to be filed with the NASD pursuant to its Interpretation with respect
to Review of Corporate Financing.
c. Licensed Broker-Dealer. Dealer is registered as a broker-dealer
(or any similar term) under the 1934 Act and the securities laws of each state
in which Dealer conducts its solicitation activities (or, if a foreign broker is
properly exempt from such requirements).
d. Employees of Dealer. All employees of Dealer are duly licensed
under applicable law to carry out the transactions contemplated by this
Agreement.
e. Additional Investment Qualifications. Dealer will not offer or
sell the Shares to any pension and profit sharing plans, any individual
retirement account arrangements or any other qualified retirement plans
sponsored by HCMI and/or any other affiliate of such entities that are
ineligible to invest in the Shares because of potential prohibited transaction
issues which may arise in connection with such investment pursuant to Section
4975 of the Internal Revenue Code of 1986, as amended, and Section 406 of the
Employee Retirement Security Act of 1974, as amended.
f. Offers. Dealer will effect offers in compliance with applicable
law and will not make an offer without delivering a copy of the Prospectus, as
supplemented or amended, to the offeree.
g. Delivery of Subscription Agreement. Dealer will cause each
subscriber solicited by Dealer to complete, execute and deliver to the
Subscription Agreement authorized for use by HCMI, together with a check, bank
draft or money order payable, to the order of Heartland Communications &
Management, Inc. -- Escrow Account during both the Initial Offering Period (as
defined) and the balance of this up to nine (9) month Offering Period (as
defined). Such payment shall be in an amount equal to $5.00 per share during
the Initial Offering Period and the Selling Price per share of the Shares
purchased during the balance of the up to nine (9) month Offering Period.
Checks shall be delivered to the Escrow Agent by 12:00 p.m. of the next business
day after receipt by Dealer.
h. Reports. Dealer will advise the Selling Agent on a daily basis of
the amount of Shares sold by Dealer.
6. Blue Sky Matters. Dealer will be informed as to the states in which
HCMI's counsel has advised the Selling Agent that the Shares have been
registered or otherwise qualified for sale or exempt under the respective
states' securities laws. The Selling Agent has not assumed and will not assume
any obligation or responsibility as to whether the Shares is so registered or
otherwise qualified or exempt or whether the Shares can be offered and sold in
any such state.
4
<PAGE>
7. Liability. As manager of the Offering, the Selling Agent shall have
full authority to take such action as it may deem advisable in respect to all
matters pertaining to the Offering or arising thereunder. The Selling Agent
shall be under no liability to Dealer, except such as may be incurred under the
1933 Act and except for lack of good faith and for obligations expressly assumed
by Selling Agent in this Agreement. No obligation on the part of the Selling
Agent shall be implied or inferred herefrom. Nothing will constitute the
Dealers as an association or separate entity or partners with the Selling Agent,
or with each other, but Dealer will be responsible for its share of any
liability or expense based on any claim to the contrary.
8. Effective Date of This Agreement and Termination. Provided that
Dealer has executed and delivered one copy of this Agreement to the Selling
Agent, this Agreement shall become effective at McLean, Virginia, concurrent
with the Offering's Effective Date. This Agreement will terminate at the
earlier of (i) the expiration of the Offering Period, (ii) the day and time
HCMI, in its sole discretion, terminates the Offering or (iii) the day and time
the Selling Agent, in its sole discretion, terminates this Agreement; provided,
however, any termination under clause (ii) or (iii) of this Section 8 must be
preceded by a written notice to Dealer that specifies the time and date of
termination and is received by Dealer at least three (3) business days before
the date of termination; provided, further, that any such termination pursuant
to this Section 8 shall not affect any previously incurred obligation hereunder
to pay compensation pursuant to this Agreement.
9. Survival of Representations and Warranties. The representations and
warranties set forth in Section 5 hereof shall remain in full force and effect
and survive the termination of this Agreement.
10. Parties. This Agreement shall be binding upon, and inure solely to
the benefit of HCMI, the Selling Agent and Dealer and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares shall
be deemed a successor or assign solely by reason of such purchase.
11. Partial Invalidity. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
12. Entire Agreement. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
13. Notices. Any notice from the Selling Agent to Dealer shall be deemed
to have been duly given if mailed or faxed (with original to follow) to Dealer
at the address set forth herein. Any notice from Dealer to the Selling Agent
shall be deemed to have been duly given if mailed or telegraphed to the Selling
Agent at 625 Colonial Park Drive -- Suite 102, Roswell, Georgia 30075
(Attn: Anthony Negus, President).
5
<PAGE>
14. Attorney's Fees. In the event that any party hereto must resort to
legal action in order to enforce the provisions of this Agreement or to defend
any such suit, the prevailing party shall be entitled to reimbursement from the
other party for all reasonable attorney's fees and other costs incurred in
commencing or defending such suit.
15. Headings. The headings herein are for convenience of reference only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia.
17. Confirmation. Please confirm your agreement to become a soliciting
dealer under the terms and conditions set forth herein by executing and
returning the enclosed duplicate copy of this Agreement at once to the Selling
Agent at 625 Colonial Park Drive -- Suite 102, Roswell, Georgia 30075.
Very truly yours,
NORTHRIDGE CAPITAL CORPORATION
By:_____________________________
Anthony John Negus, President
This Selected Dealer Agreement is
accepted and confirmed this
______ day of ___________, 199 .
DEALER/NAME:___________________________
By:____________________________________
Name:__________________________________
Title:_________________________________
Address:_______________________________
_______________________________________
Telephone No. ( )____________________
6
<PAGE>
Duncan, Blum & Associates
5718 Tanglewood Drive 1863 Kalorama Road, N.W.
Bethesda, Maryland 20817 Washington, D.C. 20009
(301) 263-0200 (202) 232-6220
(301) 263-0300 (Fax) (202) 232-7891 (Fax)
November 28, 1997
EXHIBIT 5.1
Heartland Communications & Management, Inc.
1320 Old Chain Bridge Road -- Suite 220
McLean, Virginia 22101
Re: Registration Statement on Form S-1 Relating to the
Offer and Sale of $12,500,000 of Shares of Common Stock
Gentlemen:
Since September 29, 1997 (when the undersigned became managing partner of
Duncan, Blum & Associates), this firm has acted as securities counsel for
Heartland Communications & Management, Inc. (the "Company"), a Delaware
corporation organized under the Delaware General Corporate Law, in connection
with the registration under the Securities Act of 1933, as amended, of shares of
common stock (the "Shares") in the Company, having a maximum aggregate offering
price of $12,500,000, pursuant to the referenced Registration Statement.
You have requested our opinion regarding the legality of the Shares
registered pursuant to the Registration Statement on Form S-1 and Pre-Effective
Amendment No. thereto (hereinafter, collectively, the "Registration Statement").
We have examined originals or copies, certified to our satisfaction, of such
records, agreements and other instruments of the Company, certificates or public
officials, certificates of the officers or other representatives of the Company,
and other documents, as we have deemed necessary as a basis for the opinions
hereinafter set forth. As to various questions of fact material to such
opinions, we have, when relevant facts were not independently established,
relied upon written certifications of officers and references, including (but
not limited to) statements contained in the Registration Statement.
Our opinions, insofar as they address issues of Delaware law, are based
solely upon our review of (i) the records of the Company, (ii) the Delaware
General Corporate Law and (iii) a certified copy of the Company's March 27, 1996
Articles of Incorporation and April 4, 1996 amendment thereto. Subject to the
foregoing, we do not express our opinion herein concerning any law other than
the federal laws of the United States.
We have assumed the genuineness of all signatures on documents reviewed by
or presented to us, the legal capacity of natural persons, the authenticity of
all items submitted to us as originals and the conformity with originals of all
items submitted to us as copies.
<PAGE>
Heartland Communications & Management, Inc.
November 28, 1997
Page 2
Based upon the foregoing, we are of the opinion that:
1. The Company is a duly organized, validly existing corporation under
the laws of the State of Delaware.
2. The Shares of the Company to be offered pursuant to the Prospectus
forming a part of the Registration Statement are validly authorized and when (a)
the pertinent provisions of the Securities Act of 1933, as amended, and such
state securities laws and regulations as may be applicable have been complied
with and (b) such Shares have been duly delivered against payment therefor as
contemplated by the offer contained in the Prospectus, such Shares will be
validly issued, fully paid and nonassessable under the law of Delaware.
Our opinion is expressed as of the date hereof, and we do not assume any
obligations to update or supplement our opinion to reflect any fact or
circumstances which hereafter comes to our attention or any change in the law
that hereafter occurs.
We hereby consent to the reference to our firm in the "Legal Matters"
section of the Prospectus and to the inclusion of this opinion as an Exhibit to
Pre-Effective Amendment No. 2 to the Registration Statement.
DUNCAN, BLUM & ASSOCIATES
By: /s/ Carl N. Duncan
------------------------------------
Carl N. Duncan, Managing Partner
<PAGE>
EXHIBIT 10.68
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made effective as of
May 1, 1997, by and between Heartland Communications & Management, Inc., (the
"Employer"), and Gerald Garcia, (The "Employee").
A. Employer is engaged in the business of promoting talk radio
programming selling program time, providing consulting and financial
services to the communications industry, and providing information and
management services and investing in communications and management
based companies, including those engaged in producing print product
such as newspapers, magazines, etc. and those that distribute print
product via the Internet.
B. Employer desires to have the services of the Employee.
C. Employee is willing to be employed by Employer.
Therefore, the parties agree as follows:
1. EMPLOYMENT. Employer shall employ Employee as Vice President to
perform those duties prescribed by the Employer's Articles of
Incorporation and Bylaws and as otherwise directed by the Board of
Directors from time to time. Employee accepts and agrees to such
employment, subject to the general supervision, advice and direction
of Employer's Board of Directors. Employee shall also perform such
other duties as are customarily performed by an employee in a similar
position.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully,
industriously, and to the best of Employee's ability, experience, and
talents, all of the duties that may be required by the express and
implicit terms of this Agreement, to the reasonable satisfaction of
Employer. Such duties shall be provided at such place(s) as the
needs, business, or opportunities of the Employer may require form
time to time. It is understood that Employee will devote most of his
time to the business of Creative Network, Inc. and/or Xpress Ventures,
Inc.
3. COMPENSATION OF EMPLOYEE. As compensation for the services provided
by Employee under this Agreement, Employee will receive no base
salary, but will be eligible to participate in a bonus pool to be
established by the Employer and will be eligible for stock options as
follows:
<PAGE>
A. Base Salary - None.
B. Bonus Compensation - Employer shall establish an annual bonus pool.
The bonus pool shall be subject to the Board of Directors
determination, on an annual basis, of Company criteria (the "Company
Criteria") for establishment of such bonus pool, which shall be based
on profitability and other factors as determined by the Board. Those
persons eligible to participate in this bonus pool shall be
designated by the Employer's Board of Directors. Employee shall be
entitled to participate in this bonus pool. The portion of the bonus
pool to be allocated to each eligible participant shall be at the
sole discretion of the Board of Directors. The Board of Directors
shall establish at the beginning of each year, individual objective
goals required for each eligible participant to earn a minimum stated
percentage of the bonus pool if the Company Criteria are first met.
If an employee does not meet the goals established for him or her,
the Board, in its sole discretion may allocate none, all or a portion
of the minimum stated percentage to such Employee. If all of the
bonus pool is not allocated because certain Employees failed to meet
their goals and were not allocated all of their minimum stated
percentage, the Board in its sole discretion may allocate all, part
or none of the excess bonus pool funds to other eligible participants.
C. Stock Options - Employee shall be eligible to receive options to buy
up to 5,000 shares of Employers' common voting stock for $.10 per
share. The grant of such options and the terms and conditions, other
than price, thereof shall be at the sole discretion of the Employer's
Board of Directors.
Accrued vacation will be paid in accordance with state law and the Employer's
customary procedures.
4. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH EMPLOYER POLICY. The
Employer will reimburse Employee for "out-of-pocket" expenses in accordance
with Employer policies in effect from time to time.
5. CONFIDENTIALITY. Employee recognizes that Employer has and will
have information regarding products, prices, future plans, business affairs,
processes, trade secrets, technical matters, customer lists, product design,
copyrights and other vital and proprietary information (collectively,
"Information") which are valuable, special and unique assets of Employer.
Employee agrees that the Employee will not at any time or in any manner,
either directly or indirectly, divulge, disclose, or communicate in any
manner any Information to any third party, except in the ordinary performance
of his duties, without the prior written consent of the Employer. Employee
will protect the Information and treat it as strictly confidential. A
violation by Employee of this paragraph shall be a material violation of this
Agreement and will justify legal and/or equitable relief in addition to being
grounds for dismissal for cause.
<PAGE>
6. UNATHORIZED DISCLOSURE OF INFORMATION. If it appears that Employee
has disclosed (or has threatened to disclose) Information in violation of
this Agreement, Employer shall be entitled to an injunction to restrain
Employee from disclosing, in whole or in part, such Information, or form
providing any services to any party to whom such Information has been
disclosed or may be disclosed. Employer shall not be prohibited by this
provision from pursuing other remedies, including a claim for losses and
damages.
7. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The
confidentiality provisions of this Agreement shall remain in full force and
effect for one (1) year after the termination of Employee's employment.
8. NON-COMPETE AGREEMENT. Recognizing that the various items of
information are special and unique assets of the Company, Employee agrees and
covenants that for a period of one (1) year following the end of the Term of
this Agreement, whether such termination is voluntary or involuntary,
Employee will not directly or indirectly engage in any business competitive
with Employer. This covenant shall apply to all geographical areas in which
the Employer conducts business or from which the Employer otherwise derives
revenues and to Internet delivery of said products and services. Directly or
indirectly engaging in any competitive business includes, but is not limited
to, (i) engaging in a business as owner, partner, or agent, (ii) becoming an
employee of any third party that is engaged in such business, (iii) becoming
interested directly or indirectly in any such business, or (iv) soliciting
any customer of Employer for the benefit of a third party that is engaged in
such business. Employee agrees that this non-compete provision will not
adversely affect the Employee's livelihood. Notwithstanding any of the
foregoing provisions of this paragraph 8, this paragraph 8 shall apply only
to products, services, and business lines engaged in by the Employer on the
date of Employee's termination.
9. TERM/TERMINATION
9.1 Employee's employment under this Agreement shall be for three (3)
years, beginning on May 1, 1997.
9.1 If Employee is in violation of this Agreement, Employer may
terminate employment without notice and for cause and with compensation to
Employee only to the date of such termination as provided in paragraph 3
above. The compensation paid under this Agreement shall be the Employee's
exclusive remedy.
9.3 If this Agreement is terminated by Employer without cause
prior to the end of its Term, Employee shall be paid (i) at the rate of his
base salary as provided in paragraph 3 above at the date of termination for
the period after the termination date through the end of the Term of this
Agreement and (ii) any bonus payment that would have been due Employee for
the year in which Employee was terminated based on the objective criteria
established by the Board of Directors. Such payments shall be paid as and
when salary and bonus payments would have been paid to Employee had Employee
not been terminated.
<PAGE>
10. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
Employer:
Heartland Communications & Management, Inc.
1320 Old Chain Bridge Road, Suite 220
McLean, Virginia 22101
Employee:
Gerald Garcia, Vice President
The Creative Network
516 Union Avenue
Knoxville, Tennessee 37902
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
11. ENTIRE AGREEMENT. This Agreement contains the entire agreement of
the parties and there are no other promises or considerations in any other
agreement whether oral or written. This Agreement supersedes any prior
written or oral agreement between the parties.
12. AMENDMENT. This Agreement may be modified or amended, if the
amendment is made in writing and is signed by both parties.
13. SEVERABILITY. If any provisions of this Agreement shall be held to
be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Agreement is invalid or unenforceable, but that by limiting such
provision it would become valid or enforceable, then such provision shall be
deemed to be written, construed, and enforced as so limited.
14. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to
enforce any provision of this Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with every provision of this Agreement.
15. APPLICABLE LAW. This Agreement shall be governed by the laws of
the Commonwealth of Virginia.
<PAGE>
16. ARBITRATION. All disputes under this Agreement that cannot be
resolved by the parties shall be submitted to arbitration under the rules and
regulations of the American Arbitration Association with the arbitration to
be held in Washington, D.C. Either party may invoke this paragraph after
providing 30 days' written notice to the other party. All costs of
arbitration shall be divided equally between the parties. Any award may be
enforced by a court of law.
Employer:
Heartland Communications & Management, Inc.
1320 Old Chain Bridge Road, Suite 220
McLean, Virginia 22101
By: [sig illegible]
--------------------------
Title: President
-------------------------
AGREED TO AND ACCEPTED
Employee:
/s/ Gerald Garcia
- --------------------------------
Gerald Garcia
<PAGE>
EXHIBIT 10.69
ICON
INTERNATIONAL INC
Lance illegible October 21, 1997
President
Mr. Mike Foudy
Heartland Communication Management, Inc.
1320 Old Chain Bridge Road
Suite 220
McLean, Va 22101
Dear Mike,
This provides a letter of agreement to enter into a barter trade contract
with HCMI and its affiliate, Xpress Ventures and its publication, The
National Sports Weekly, which is to begin publication in September 1998. The
barter trade agreement between Icon International and HCMI would be
structured as follows.
Icon International agrees to purchase a minimum of 24 (P4C or BW) insertions
in the National Sports Weekly within the first year of publication, and 24
(P4C or BW) insertions in each of the following four years (120 insertions
over five years). Insertions may be used in the calendar year acquired, or
their media value held for use at a later date, with no expiration.
The National Sports Weekly agrees to charge Icon International 40% (net) of
the open gross rate card. The following provides an estimate of the open and
Icon rates based on estimated circulation rate bases. The payment made by
Icon is to be a mix of 75% trade credits and 25% cash.
Rate Open Icon Icon
Base* CPM CPM P4C Rate
----- ------ ---- --------
Year 1 10 mil $11.00 $3.85 $ 38,500
Years 2 20 mil $11.00 $3.85 $ 77,000
Years 3 30 mil $11.00 $3.85 $115,500
Years 4 30 mil $11.00 $3.85 $115,500
Years 5 30 mil $11.00 $3.85 $115,500
*Subject to ABC Audit verification.
<PAGE>
Based on the circulation estimates, Icon's minimum space commitments are
valued as follows:
<TABLE>
<CAPTION>
Yearly Total Trade Cash
Ins P4C Rate Amount Amount Amount
--------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year 1 24 $38,500 $924,000 $693,000 $231,000
Year 2 24 $77,000 $1,848,000 $1,386,000 $462,000
Year 3 24 $115,500 $2,772,000 $2,079,000 $693,000
Year 4 24 $115,500 $2,772,000 $2,079,000 $693,000
Year 5 24 $115,500 $2,772,000 $2,079,000 $693,000
---------- ------------ -----------
$11,088,000 $8,316,000 $2,772,000
</TABLE>
HCMI or Xpress Ventures or the National Sports Weekly will use the trade
credits to purchase media (at a mix of 75% cash, 25% trade credits) and/or
other goods and services at rates to be negotiated at the time of purchase.
The trade credits could be used up to three years following the calendar year
earned. (Example: credits earned September 98 must be used by September 01).
Trade due by Icon may be used upon receipt and is deemed to be earned on a
monthly basis. Cash due by Icon may be named off the cash due Icon for media
schedules placed, at Icon's sole option. If HCMI or its affiliates delay to
use their trade credits, the cash due by Icon shall not be payable until such
trade credits are used.
This agreement is subject to consummation of a more detailed legal agreement
between the parties.
/s/ Michael Foudy /s/ L. B. Lundberg
------------------------ ------------------------
Accepted Lance B. Lundberg
<PAGE>
EXHIBIT 24.1
CONSENT OF COUNSEL
We hereby consent to the reference to us in the prospectus constituting
part of Pre-Effective Amendment No. 2 to this Registration Statement for
Heartland Communications & Management, Inc. under the caption "Legal matters."
DUNCAN, BLUM & ASSOCIATES
Bethesda, Maryland
November 28, 1997
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Heartland Communications & Management, Inc.
Heartland Capital Corporation
ATB Productions, L.L.C.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our reports dated April 25, 1997 and
September 19, 1997, related to our audits of the financial statements of
Heartland Communications & Management, Inc, Heartland Capital Corporation and
ATB Productions, L.L.C., respectively. Each of our reports contains an
explanatory paragraph regarding the Companies' ability to continue as going
concerns.
We also consent to the reference to our firm under the caption "Experts" in
the Prospectus.
BDO Seidman, LLP
Washington, D.C.
December 3, 1997
