<PAGE>
As filed with the Securities and Exchange Commission on July 25, 1997
Registration No. 333-8935
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE FORM S-1 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(EXACT NAME OR 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.
The Heideman Law Group, P.C.
1714 N Street, N.W.
Washington, D.C. 20036-2907
(202) 462-8990
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/
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<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
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<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 $20,000,000 AUGUST , 1997
4,000,000 Shares of Common Stock
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
4,000,000 shares of common stock (the "Shares") are being offered hereby by
Heartland Communications & Management, Inc., a Delaware corporation (the
"Company), on a best-efforts basis. 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. More
specifically, the Company's Heartland Radio Network, directly 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, one of which is on
more than 80 radio stations across the U.S. 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 program 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 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.
At the present time, all such investment opportunities are contingent on the
successful completion of this offering and due diligence supporting the
viability of the investment. Each of the currently contemplated joint ventures
relating to supplements to newspapers as well as the passive investment position
in the first management company require the Company's investment to be 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
<PAGE>
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 Managing Placement 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 $20,000,000 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 its current
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 10% 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.
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 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.")
<TABLE>
<CAPTION>
PRICE TO PUBLIC DURING
INITIAL OFFERING PERIOD SELLING
(1) COMMISSION (2) PROCEEDS TO COMPANY (3)
----------------------- -------------- -----------------------
<S> <C> <C> <C>
Per Share..................................... $ 5.00 $ 0.50 $ 4.50
------------ -------------- ------------
Total Minimum................................. $ 2,000,000 $ 200,000 $ 1,800,000
------------ -------------- ------------
Total Maximum................................. $ 20,000,000 $ 2,000,000 $ 18,000,000
------------ -------------- ------------
</TABLE>
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(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 10% will be paid on all Shares sold. The Company has
agreed to indemnify the Managing Placement Agent (and any Additional
Managing 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 $100,000
in the case of the minimum offering and $1,000,000 in the case of the
maximum offering) payable by the Company.
Until November , 1997 (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.
2
<PAGE>
Neither the delivery of this Prospectus nor any sale made hereunder or
thereunder shall, under any circumstances, creates any implication that the
information herein or therein is correct as of any time subsequent to the date
hereof or thereof 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
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 of 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.
(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 Managing 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 Managing 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 will also be distributed to Shareholders or made
available through E-mail and/or the Internet.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTIVE TITLE PAGE
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<S> <C>
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..................................................................
General.................................................................
Introduction............................................................
Specific Opportunities Under Consideration..............................
Fairness of Consideration...............................................
Management..............................................................
Professional Advisors...................................................
Remuneration............................................................
Employee Benefits.......................................................
Employment Agreements...................................................
Employees...............................................................
Property................................................................
Litigation..............................................................
Securities Ownership Of Certain Beneficial Owners And Management........
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)............................................. 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
</TABLE>
4
<PAGE>
(Heartland Logo & Photos appear on page)
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 December 31, 1996, 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), the "Doug Casey Show" 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 currently implementing the acquisition of four AM radio stations in
California, Washington and other states. 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 $.001
par value 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;
Non-Transferability Of Shares Until This Offering Period Ends.")
THE OFFERING
<TABLE>
<S> <C>
Securities 4,000,000 Shares having an aggregate offering price of $20,000,000 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 the Cover Page, the Initial Offering
Period begins on 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 $20,000,000 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 any interest earned thereon will be returned to the
investors.
6
<PAGE>
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 Subscription The minimum purchase (except as to IRA accounts) is $5,000 and 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 part to the costs which the Company will
Conflicts of incur, given the highly speculative nature of the communications and management business. (See
Interest "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 registered broker-dealers. (See "Plan
Distribution of Distribution.")
Application of Proceeds of this offering will be applied to certain contemplated acquisitions and/or start-ups outlined
Proceeds herein and for working capital purposes. (See "Application of Proceeds Proceeds." and "The Company.")
</TABLE>
SUMMARY FINANCIAL DATA
The Summary Financial Information, all of which (except the information for
the three months ended March 31, 1996 and 1997) has been derived from audited
financial statements included elsewhere in this Prospectus, reflects the
operations of the Company and 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
Operations."
7
<PAGE>
<TABLE>
<CAPTION>
HCC (PREDECESSOR COMPANY)(1)(6) HCMI(SUCCESSOR CO.)(1)(6)
------------------------------------------------------------------ ---------------------------------
DATE OF DATE OF DATE OF DATE OF
FORMATION FORMATION FORMATION FORMATION
(6/23/94) YEAR YEAR 3 MONTHS 3 MONTHS (6/23/94) (3/27/96) 3 MONTHS (3/27/96)
THROUGH ENDED ENDED ENDED ENDED THROUGH THROUGH ENDED THROUGH
12/31/94 12/31/95 12/31/96 3/31/96 3/31/97 3/31/97 12/31/96 3/31/97 3/31/97
--------- --------- ---------- ---------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue.................. $-- $647 $2,847 $2,106 $104 $3,598 $3,507 $926 $4,433
Costs and expenses....... $211,372 $568,467 $361,354 $160,318 $78,288 $1,219,481 $291,421 $66,619 $358,040
Loss from operations..... ($211,372) ($567,820) ($358,507) $(158,212) ($78,184) ($1,215,883) ($287,914) ($65,693) ($353,607)
Interest expense
(income), net.......... $ 8,342 $25,690 $69,880 $1,514 ($993) $102,919 ($2,899) ($3,388) ($6,287)
Net loss (4)............. ($219,714) ($593,510) ($428,387) ($159,726) ($77,191) ($1,318,802) ($285,015) ($62,305) ($347,320)
Net loss per share....... ($0.03) ($0.07) ($0.05) ($0.02) ($0.01) ($0.16) ($0.23) ($0.05) ($0.28)
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 1,242,310 1,326,811 1,326,810
</TABLE>
<TABLE>
<CAPTION>
HCC (PREDECESSOR COMPANY)(1)(6) HCMI(SUCCESSOR CO.)(1)(6)
------------------------------------------------------------------ ---------------------------------
AS OF AS OF AS OF AS OF AS OF AS OF MINIMUM
12/31/94 12/31/95 12/31/96 3/31/97 12/31/96 3/31/97 ADJUSTED(3)
--------- --------- ---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficiency)........... $(245,214) $(333,529) ($32,014) ($195,894) ($516,327) ($727,288) ($972,712)
Total assets............. $36,274 $184,800 $605,375 $834,098 $827,964 $983,346 $2,668,346
Stockholders' equity
(deficit).............. $(217,714) $(171,379) $340,592 $263,401 $305,143 $242,838 $1,927,838
Accumulated deficit...... $(219,714) $(813,224) $(1,246,369) ($1,323,560) ($285,015) ($347,320) ($347,320)
</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
$1,700,000 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 wil 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 "Risk Factors--Going Concern Report of
Independent Certified Public Accountants.")
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, 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 until
the end of the initial Continuous Offering Period, 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 Period 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 Operations; Activities' Historical Net Losses. While
certain activities have been 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
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 $20,000,000 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
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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 $20,000,000 is the maximum offering,
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 management of the Company, including the selection of businesses
and/or companies to acquire, to the Company's management. This potential risk
is even more important in this offering since 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 none of whom is required to
devote their services exclusively to the Company. The Company has entered into
an employment agreement (which contains non-compete provisions) with each of
Michael L. Foudy, 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.
(7) Broad Discretion Of Management With Regard To Use 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 relatively broad discretion as
to the specific use of such funds. For example, as described in "Application of
Proceeds," $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 $1,625,000 (32.5%) at $5,000,000 and $2,180,000 (10.9%) at the
$20,000,000 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. 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. There can be no assurance that
future acquisitions will be available and, if they are, will be
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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 (17.5%) of the funds raised at the $2,000,000 minimum.
(10) Due Diligence Reviews. Directly or indirectly, the Company will use a
significant portion of the proceeds of this offering to perform necessary due
diligence, with regard to its proposed activities and/or contemplated future
acquisitions. To the extent that the Company determines any or a part of its
business plan is not feasible, or to the extent the Company is unable to make a
determination of feasibility and/or to modify the plan, the Company will be
unable to proceed to develop in accordance with its business plan and investors
may lose their entire investment in the Company.
(11) 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 industries 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.
(12) No Market Studies. 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.
(13) Dividends At Discretion Of Management; No Current Plans To Pay
Dividends. Dividends, if any, to shareholders are at the discretion of
management which it does not presently intend to do. (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
This 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 initial Continuous Offering Period,
approximately 6 to 18 months after the date of this Prospectus. In fact,
Shareholders will have their certificates legended to preclude the transfer of
their Shares until the Offering Period ends -- either because the $20,000,000
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, any
marketmaker 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"
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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. Decreases in
advertising revenues have historically corresponded with general economic
downturns and regional recessions and local conditions. 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
March 31, 1997, after giving effect to this offering) of approximately $1.50
if the $2,000,000 offering is achieved and $3.87 if the $20,000,000 maximum
offering is achieved. That represents dilution of $3.50 per share (or
approximately 70%) at the $2,000,000 level and $1.13 per share (or
approximately 23%) at the $20,000,000 level. (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"). 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,
conversion and redemption rights and sinking 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. The Board of Directors may issue
any such Preferred Stock without approval or other action by Shareholders;
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.
(20) Control By The Principal Stockholders. Prior to the Offering,
individual officers, directors, advisors and more than 10% shareholders (the
"Principal Stockholders") owned in the aggregate, excluding escrowed shares,
approximately 37% of the Shares. (See "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 26% of the Shares,
assuming the $20,000,000 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 $20,000,000 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 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, 3,433,500 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 less 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 has passed from the date of their
purchase. 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
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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. It should be noted that the 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 recently
enacted Telecommunications Act of 1996 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 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 related entities
such as Shareholders of the Company 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 from being an officer of the Company or
having a pecuniary interest in its activities beyond those of being a
Shareholder and/or director.
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(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. Messrs. Sivertsen and Foudy, each of whom is a
director of the Company, are directors and officers of HCC, an affiliate of the
Company. Mr. Foudy is an officer and director of the Company as well as the
managing member of ATB Productions, L.L.C. ("ATB"). Mr. Sivertsen is an
employee of DeRand Corporation of America, the financial advisor of HCC and an
investor in the Company and HCC, and serves as an officer or director of various
DeRand subsidiaries. Ms. Moore, Ms. Denora and Mr. Ryan Smith are officers of
the Company and investors in ATB. Messrs. Niemcek and Baker are officers of the
Company, and both have either interests in affiliated entities (Mr. Niemcek in
ATB) and/or possible activities to be pursued by the Company (Mr. Baker in the
proposed supplement for teens and in the proposed national sports weekly). Mr.
Foudy, who is an officer and director of the Company, is an investor in ATB.
Edward S. DeBolt is an investor in the Company and ATB; Chairman of and investor
in HCC, an affiliate of the Company; provides consulting services to the
Company; and is the sole principal of The DCM Group which is the landlord, and a
major vendor of products and services, to the Company. (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. To the extent that the relationships overlapped, there may have existed 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 arm's-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 factual circumstances.)
(7) Michael L. Foudy Relationships. Mr. Foudy is an investor, director and
officer in the Company, HCC and ATB. Mr. Foudy is managing director of ATB
Productions, L.L.C. and the majority owner of that entity through a family-owned
trust. In addition, Mr. Foudy has extended loans to HCC and, as of June 30,
1997, has a $339,794 note receivable from HCC, an affiliate of the Company.
Finally, certain compensation due Mr. Foudy has not been paid in full and
$90,000 has been deferred by the Company. 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
described below.)
(8) Overlapping Relationships Among Denison, Ryan And Angela Smith. Denison
Smith is a principal of the Managing Placement Agent selected. 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 $20,000,000 offering. This is because Mr. Smith is expected to be a major
seller of Shares, thereby participating in a negotiated portion of the 10%
selling commission on Shares offered and sold. In addition, since Denison Smith
(or his wife, Angela) owns 88,548 Shares acquired for services rendered and/or
at a maximum exercise price of $.50 per share as well as 320,452 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, is a production associate of
(and an investor in) ATB. Finally, Angela Smith, the wife of Denison Smith, is
a registered representative of Northridge Capital Corporation, the Managing
Placement Agent, and 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 and HCC and
their management are represented by the same counsel. Therefore, to the extent
the Company and this offering would benefit by
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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, 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 which
relationship may have been (and continues to be) material to the Company.
The other ventures identified are only development 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 the
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 would 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 the date of
its termination for other reasons. Revenues recognized by HCC under the HCC
Agreement aggregated $647 and $2,847 during 1995 and 1996, and $104 in the three
months ended March 31, 1997, respectively. After the transfer, HCMI recognized
$3,507 in revenue from the HCC Agreement through December 31, 1996, and $926
in the three months ended March 31, 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 $.001 per share.)
The Board of Directors of the Company is empowered to provide for the issuance
of shares of preferred stock in series, to establish the number of shares to be
included in each series and fix the designations, powers, preferences and rights
of the shares of each such series. To date, no series has been issued.
In conjunction with the Company's formation as an HCC subsidiary, HCC
subscribed to 1,030,086 shares of the Company's common stock on March 27, 1996.
On May 17, 1996, HCC contributed the original par value ($.001) of those shares
to the Company in cash ($4,758) in full payment of its subscription receivable
and the 1,030,086 shares were issued to HCC. In conjunction with the Company's
spinoff to the shareholders
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of HCC, on May 18, 1996, the Company 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, 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 its shareholders 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
$5 per share IPO price). 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.
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 three
officers and employees, Michael L. Foudy, 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 the 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, have a term 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 term of the Agreements.
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 a fixed rate of 8% per annum, with payment of monthly interest on
any borrowing commencing January 15, 1997. Through June 30, 1997, no interest
payments have been made. 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 March
31, 1997, the Company had advanced $172,780 and $170,535 respectively, while HCC
had advanced $338,695 and $417,845 as of December 31, 1996 and March 31, 1997,
respectively. Although the total advances ($511,475 and $590,680 as of December
31, 1996 and March 31, 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 line of credit amounted to $2,899 and $3,388 for the period
March 27, 1996 (date of formation) through December 31, 1996 and the three
months ended March 31, 1997, respectively. Interest income earned by HCC on its
share of the outstanding loans amounted to $3,364, $22,970 and $7,566 for the
years ended December 31, 1995 and 1996 and the three months ended March 31,
1997, respectively.
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 $600,000 if $20,000,000 is raised),
solely from the offering proceeds. As of December 31, 1996 and March 31, 1997,
the amount owed by the Company to HCC for these costs, net of repayments,
amounted to $220,616 and $289,772, respectively.
Xpress Ventures, Inc. is a Tennessee corporation whose principals are
Gerald Garcia (former 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, Inc.
delegating all rights each has in a proposed magazine for teens and a national
sports weekly. In turn, Xpress Ventures, Inc. has now assigned all 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 principals 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.
Edward S. DeBolt is the Chairman of the Board of HCC and an investor in
ATB. In addition, he is the sole principal of The DCM Group, which is an
investor in the Company and HCC and a major provider of products and services to
the Company. The Company, HCC and ATB lease office space, furniture, computers,
telephone, office equipment and are provided receptionist services from The DCM
Group under operating leases cancelable on thirty days notice. The three
companies' combined expense under those operating leases was $8,000, $17,500 and
$60,500 in 1994, 1995 and 1996, respectively, and $15,875 for the three months
ended March 31, 1997. Of the foregoing amounts, the rent only component was
$4,400 for 1994 (approximately 6 months), $10,200 in 1995, $31,450 in 1996 and
$7,735 for the three months ended March 31, 1997; during the period, the space
leased started at 200 square feet and increased in stages to 1,300 square feet.
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, 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 transactions 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) 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 any 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.
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 Rule 10b-5, 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.
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
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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 principal executive 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 programming, supplements to
newspapers and insert 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 management 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, one of
which is already carried by more than 80 stations across the country. 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 implementing
the acquisition of up to four AM radio stations in California, Washington and
other states. 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 is 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 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 the existing HCC shareholders receiving 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, as of 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. (See also the discussion below regarding how the fund
manager business was added to the Company's proposed activities.) 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. "
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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 and information
radio, a teen-oriented supplement to newspapers, a newspaper insert aimed at
sports enthusiasts and an investment fund management company. The radio
activities were 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 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, "The Doug Casey Show"and "The Travel Show" (with Larry Gelwix and Danny
Kramer). There are a number of other radio talk and information productions
under development which are expected to be added to the existing lineup, 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
show offerings. 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 the appropriate 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
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
investigate 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
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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
facilities and services to the $11.5 billion advertiser-supported commercial
radio broadcasting market. (Source: National Association of Broadcasters 1995
Annual Report.) For example, the Company's Heartland Radio Network ("HRN"),
through ATB, provides programming, marketing and administrative support for
"Newsmaker," "The Doug Casey Show," "The Travel Show" and "The Entrepreneurs
Show" (nine hours of programming weekly) in addition to other existing programs,
or those under development, thereby building a network one program at a time.
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 14-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 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") programs 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.
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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 been developed 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 preexisting 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 preexisting 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 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 opportunity inherent 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.
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
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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 stations rely on their 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 Productions affiliates enter this market.
Working with Texas businessman, Fred Lundgren, ATB Media, Inc. -- a new
subsidiary -- is attempting to acquire four distressed AM licenses in
California, Washington and other states and converting them to block-time sales
operations. Lundgren, a radio 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
acquisitions assisting in the management of them, and will receive a share of
station revenues through its contractual relationship with ATB Productions.
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 profitable 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 $5,000,000 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 include radio station
operators, 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.
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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 and
selling 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 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 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, a former officer of the Company, and
Bradford W. Baker, a current officer 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 their influence on household purchases. The
1994 Find/SVP 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, Messrs. 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 is believed to be 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 Company believes
it can attract advertisers who know teens spend (especially when it comes to
food, clothes and fun) and help such advertising entities 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 similar manner as 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
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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 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.)
(4) 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 above, the Company intends to bring the
proposed national sports weekly to market through a joint venture with the
creators of the concept, Gerald Garcia, a former officer of the Company, and
Bradford W. Baker, a current officer, in return for the Company providing needed
funding (approximately $4,925,000 if $12,500,000 is raised in this offering and
approximately $11,265,000 if $20,000,000 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, 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, the 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 is not expected to 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
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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.
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 $11,265,000 of this offering's net
proceeds (or, if only about $12,500,000 of the aggregate offering is achieved,
about $4,737,500) to create NSW. Such funds will be used for purposes relating
to bringing NSW to fruition, including research and development to further
fine-tune our competitive advantages as well as exposing any potential obstacles
among our three target audiences (newspaper publishers, advertisers & 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 our
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. However, the Company is currently exploring potential strategic
partners for its National Sports Weekly. Should these relationships develop, it
is expected the Company's investment in this venture would be reduced. (See
"Application of Proceeds.")
(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 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 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.
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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 dated July __, 1997
attached to this Prospectus as Appendix IV (the "Fairness Opinion"), to the
effect that the offer 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 dated 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 has agreed to pay Houlihan a fee in the amount of $30,000 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
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, 1997 and now co-hosts "Newsmaker" 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, Mr. 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 most successful
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. Michael Foudy 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. Michael Foudy has been active in a variety of charitable and
community organizations including the
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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
as Editor of the American Initiative Newsletter.
Bradley B. Niemcek, born 1940, Vice President-Operations and a director 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 an 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 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 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: 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 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 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 when she began working with
Edward S. DeBolt, Chairman of the Board of HCC and, in 1971 and 1972, was
Assistant to Mr. DeBolt who served as 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 the
Board of Directors since 1974.
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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.
Ryan T. Smith, born 1973, Assistant Secretary of the Company, is a 1995
B.A. in communications graduate of Purdue University. While in college, Mr.
Smith served as director, producer and editor of the first-ever Purdue all
student-run newscasts, was considered by its communications faculty as one of
the top three television directors in his senior class and, as an active
volunteer at the West Lafayette, Indiana cable station, performed a variety of
tasks (including directing a live two camera town hall meeting broadcast).
Between semesters at Purdue, among other activities, Mr. Smith worked at
National Empowerment Television in Washington, D.C. as a studio technician
intern where he learned technical facets of production. Currently, he is a
production assistant for "Newsmaker," a nationally syndicated talk radio show,
and various other Company-related radio projects. His duties entail
correspondence, station relations, marketing, booking guests and technical
assistance in the studio.
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
(a) Current
Michael L. Foudy. (See "Officers" above.)
Ron Alexenburg, born 1942, has been President of National Video Center, a
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 Gyro 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.
Thomas Burgum, born 1935, is a principal of Thicksten Grimm Burgum, Inc., 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, Inc., 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 for
Agriculture and Transportation; selected to represent the Department in issue
negotiations with the Office of Management and Budget as well
28
<PAGE>
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, serves as an
officer and director of various subsidiaries of DeRand Corporation of America.
Mr. Sivertsen is a member of the Virginia state bar, 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, 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.)
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 1994-95 prime-time series; producer and host of "Up
Front With . . .," a syndicated half-hour celebrity series; producer and host of
"Heart of the Matter," 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.
29
<PAGE>
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)
To better 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 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 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 partner in the Washington, D.C.
office of the law firm Reed Smith Shaw & McClay and, from June, 1987 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 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.
30
<PAGE>
Remuneration
The Company was formed on March 27, 1996 and therefore paid no compensation
prior to that time. Under their respective current compensation agreements,
each 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.
Bradford W. Baker has an employment agreement with the Company which does not
provide for direct compensation but does make him 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 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, and any associated salary adjustments, will be at the discretion of
the independent members 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 rates that may be below market price at 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.
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
As of May 1, 1996, Messrs. Foudy, Baker and Niemcek each entered into a
three-year employment agreement with the Company (collectively, the "Employment
Agreements"). Each provides for bonuses and such other benefits (including base
annual salaries as to Messrs. Foudy and Niemcek) as set forth in their
agreements. As described in"Remuneration", it is anticipated that Messrs.
Foudy and Niemcek will devote approximately 50% of their time to HCC or ATB and
the determination of time allocation, and any associated salary adjustments,
will be at the discretion of the independent members of the Board of Directors.
Messrs. Foudy, Baker and Niemcek and the Board 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, 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 June 30, 1997, the Company had one full-time and three part-time
employees, two of whom are located in its McLean, 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 office facilities at 1320 Old Chain Bridge Road, McLean,
Virginia, 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.
31
<PAGE>
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").
<TABLE>
<CAPTION>
After the Offering
--------------------
Prior to the Offering Minimum(2) Maximum(3)(4)
--------------------------- -------------------- --------------------
Name of Beneficial Owner: Number(1) % Number % Number %
- --------------------------------------- ----------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND OFFICERS
Michael L. Foudy..................... 2,078,500 22.5 2,078,500 21.57 2,078,500 18.35
Bradford W. Baker.................... -- -- -- -- -- --
Bradley B. Niemcek (5)............... 112,500 1.22 112,500 1.17 112,500 0.99
Linda G. Moore....................... -- -- -- -- -- --
Sherri Schwamb Denora................ -- -- -- -- -- --
Ryan T. Smith........................ -- -- -- -- -- --
Ron Alexenburg....................... 12,500 1.35 12,500 0.13 12,500 0.11
Thomas Burgum........................ 12,500 1.35 12,500 0.13 12,500 0.11
Kirby S. Ralston..................... 12,500 1.35 12,500 0.13 12,500 0.11
B. Eric Sivertsen.................... 37,500 0.41 37,500 0.39 37,500 0.33
Gregory Jackson (5).................. -- -- -- -- -- --
Sharon M. Murphy (5)................. -- -- -- -- -- --
----------- ----- --------- --------- --------- ---------
ALL DIRECTORS AND OFFICERS AS A
GROUP.................................. 2,228,500 24.12% 2,197,500 22.8% 2,197,500 16.6%
----------- ----- --------- --------- --------- ---------
----------- ----- --------- --------- --------- ---------
ALL 10% SHAREHOLDERS
Michael Foudy........................ 2,078,500 22.5 2,078,000 21.38 2,078,500 18.35
Heartland Capital Corporation
(warrants only).................... 1,236,000 13.38 1,236,000 12.83 1,236,000 9.33
----------- ----- --------- --------- --------- ---------
ALL 10% SHAREHOLDERS AS A GROUP........ 3,464,500 37.3 3,464,500 35.97 3,464,500 30.59
----------- ----- --------- --------- --------- ---------
----------- ----- --------- --------- --------- ---------
ALL BENEFICIAL OWNERS AS A GROUP....... 3,464,500 37.5% 3,464,500 35.97% 3,464,500 30.59
----------- ----- --------- --------- --------- ---------
----------- ----- --------- --------- --------- ---------
</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 March 31, 1997.
Detailed ownership information 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
Company 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 March 31, 1997.
(3) Assumes issuance and sale of 4,000,000 of the Company's shares during this
Offering Period (the "maximum offering"), in addition to the 1,326,811
Company Shares currently outstanding, the escrowed Shares of 4,801,589,
the issuance of
32
<PAGE>
75,000 contingent shares and the assumed exercise of warrants to
purchase 3,033,600 additional Shares, all as of March 31, 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, 1996 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. Foudy (934,329) and Bradley B. Niemcek (19,588).
(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
Director Non- Under
and/or Outstanding Escrowed Contingent Contingent
Officer Shares Shares Warrants Warrants Share Total
- ------------------------- --------------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Michael L. Foudy......... 270,671 934,329 867,500 -- 2,078,500
Bradley B. Niemcek....... 5,412 19,588 12,500 75,000 112,500
Eric B. Sivertsen........ 12,500 -- 25,000 -- 37,500
------- ----------- ------------- ------ -----------
TOTAL 280,583 953,917 905,000 75,000 2,228,500
------- ----------- ------------- ------ -----------
------- ----------- ------------- ------ -----------
</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 which are included elsewhere in this
Prospectus. The selected financial data for the three months ended March 31,
1996 and 1997 and the periods from date of formation through March 31, 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 three months ended March 31, 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.
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK.]
33
<PAGE>
HCC (Predecessor Company)(1)(6)
<TABLE>
<CAPTION>
DATE OF DATE OF
FORMATION FORMATION
(6/23/94) YEAR YEAR 3 MONTHS 3 MONTHS (6/23/94)
THROUGH ENDED ENDED ENDED ENDED THROUGH
12/31/94 12/31/95 12/31/96 3/31/96 3/31/97 3/31/97
------------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue.................. $-- $ 647 $ 2,847 $ 2,106 $ 104 $ 3,598
Costs and expenses....... $ 211,372 $ 568,467 $ 361,354 $ 160,318 $ 78,288 $ 1,219,481
Loss from operations..... $(211,372) $(567,820) $ (358,507) $ (158,212) $ (78,184) $(1,215,883)
Interest expense
(income), net.......... $ 8,342 $ 25,690 $ 69,880 $ 1,514 $ (993) $ 102,919
Net loss (4)............. $(219,714) $(593,510) $ (428,387) $ (159,726) $ (77,191) $(1,318,802)
Net loss per share....... $ (0.03) $ (0.07) $ (0.05) $ (0.02) $ (0.01) $ (0.16)
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>
HCC (Predecessor Company)(1)(6)
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
12/31/94 12/31/95 12/31/96 3/31/97
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (Deficiency)............... $ (245,214) $ (333,529) $ (32,014) $ (195,894)
Total assets............................... $ 36,274 $ 184,800 $ 605,375 $ 834,098
Stockholders' equity (deficit)............. $ (217,714) $ (171,379) $ 340,592 $ 263,401
Accumulated deficit........................ $ (219,714) $ (813,224) $(1,246,369) $(1,323,560)
</TABLE>
HCMI (Successor Co.)(1)(6)
<TABLE>
<CAPTION>
DATE OF DATE OF
FORMATION) FORMATION)
(3/27/96) 3 MONTHS (3/27/96)
THOUGH ENDED THOUGH
12/31/96 3/31/97 3/31/97
------------ ------------ ------------
<C> <C> <C>
$ 3,507 $ 926 $ 4,433
$ 291,421 $ 66,619 $ 358,040
$ (287,914) $ (65,693) $ (353,607)
$ (2,899) $ (3,388) $ (6,287)
$ (285,015) $ (62,305) $ (347,320)
$ (0.23) $ (0.05) $ (0.28)
1,242,310 1,326,811 1,326,810
</TABLE>
HCMI (Successor Company)(1)(6)
<TABLE>
<CAPTION>
AS OF AS OF MINIMUM
12/31/96 3/31/97 ADJUSTED(3)
----------- ------------- ------------
<C> <C> <C>
$ 516,327 $ (727,288) $ (972,712)
$ 827,964 $ 983,346 $ 2,668,346
$ 305,143 $ 242,838 $ 1,927,838
$ (285,015) $ (347,320) $ (347,320)
</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 has 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 is 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
$1,700,000 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 "Risk Factors--Going Concern Report of
Independent Certified Public Accountants.")
34
<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 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 three months ended March 31, 1997:
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------
<S> <C> <C>
12/31/96 6/30/97
---------- ---------
Net cash used in operating activities ............................................. ($417,290) ($1,119)
Net cash used in investing activities, principally loans to ATB.............................. (172,780) 2,245
Net cash provided by financing activities, principally from exercise of warrants............. 590,158 --
---------- --------
Increase in cash............................................................................. $ 88 $ 1,126
---------- --------
---------- --------
</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 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 finance 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
35
<PAGE>
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 March 31, 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 account
for the majority of the $347,320 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. Such deferred costs amounted to $799,591 as
of March 31, 1997. Together such costs account for $1,146,911 of expenditures
and, when netted against the non-cash increases in liabilities of $740,000,
approximate the $418,409 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 three months ended March
31, 1997, ATB repaid $2,245 of this loan. The $170,535 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 plan to invest in an
investment fund management company. If a total of $12,500,000 is raised, the
Company also would expect to devote additional capital to investments in the
fund management venture 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. If the complete offering
amount of $20,000,000 is raised in the IPO, then the Company expects that, in
addition to the projects funded at lower levels, the sports-based newspaper
insert concept would be fully funded and that additional, as yet unidentified,
synergistic print, electronic media and Internet-based investments would be
made.
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
36
<PAGE>
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.
(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 $77,191 for the three months ended March
31, 1997, and has incurred losses since formation resulting in an accumulated
deficit of $1,323,560 as of March 31, 1997. At March 31, 1997, HCC had
negative working capital, as indicated by current liabilities exceeding
current assets by $195,894. 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 $749,986,
as of March 31, 1997, from the Company and ATB which, in turn, are both
development stage companies. 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 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.
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 (DATE 6/23/94
OF (DATE OF
FORMATION) FOR THE FOR THE YEAR FOR THE THREE MONTHS FORMATION)
THRU YEAR ENDED ENDED ENDED MARCH 31, THRU
12/31/94 12/31/95 12/31/96 1996 1997 3/31/97
-------------- -------------- ------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided
by (used in)
operating activities $ (101,928) $ (260,015) $ (471,823) $ (126,174) ($ 108,570) ($ 942,336)
Net cash used in
investing activities,
principally loans
to ATB -- (147,875) (194,255) (74,375) (149,951) (492,081)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD PERIOD
6/23/94 (DATE 6/23/94
OF (DATE OF
FORMATION) FOR THE FOR THE YEAR FOR THE THREE MONTHS FORMATION)
THRU YEAR ENDED ENDED ENDED MARCH 31, THRU
12/31/94 12/31/95 12/31/96 1996 1997 3/31/97
-------------- -------------- ------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
financing activities,
principally from
loans from investors
and sales of
preferred stock 102,000 427,505 647,642 195,650 260,350 1,437,497
-------------- -------------- ------------- ------------------- -------------- ---------------
Increase
(decrease) in cash $ 72 $ 19,615 $ (18,436) $ (4,899) $ 1,829 $ 3,.080
-------------- -------------- ------------- ------------------- -------------- ---------------
-------------- -------------- ------------- ------------------- -------------- ---------------
</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.
Even with the proceeds of preferred stock sales received through December
31, 1996, HCC does 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 March 31, 1997, HCC
has advanced a total of $335,657 to these organizations. However, in 1996,
HCC has reduced these expenditures by over 50% compared to the year ended
December 31, 1995.
(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.
As of December 31, 1996, HCC also has $ 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
38
<PAGE>
for the period ended March 31, 1997 or 1996 due to the existence of net
operating losses. HCC expects to incur a significant net loss for 1996.
(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.
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
$18,000,000 if the maximum offering is achieved and $1,800,000 if the minimum
offering is achieved. (See "Capitalization" below with regard to the
Company's capitalization currently and that which 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, investing in the teen supplement and making 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. Nonetheless, even if only the $2,000,000 minimum offering is
achieved, net proceeds from this offering are expected to fund operations for
12-18 months at anticipated "burn rates." (See "Risk Factors.")
39
<PAGE>
<TABLE>
<CAPTION>
GROSS PROCEEDS
--------------
$2,000,000 $5,000,000 $12,500,000
-------------------------- -------------------------- --------------------------
DOLLAR AMOUNT PERCENTAGE DOLLAR AMOUNT PERCENTAGE DOLLAR AMOUNT PERCENTAGE
-------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Selling Commissions $ 200,000 10% $ 500,000 10% $ 1,250,500 10%
Legal Fees 15,000 .75% 200,000 4% 200,000 1.6%
Other Fees 30,000 1.5% 30,000 0.6% 30,000 0.24%
Printing Costs/ Other Fees 75,000 3.75% 75,000 1.549% 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 100,000 5% 295,000 5.9% 295,000 2.36%
Proposed Investment
Opportunities (2):
Heartland Radio Network 250,000 12.5% 250,000 5% 250,000 2.0%
Communications Companies
Acquisition(s) 305,000 15.25% 1,200,000 24.1% 2,1800,000 17.44%
A Magazine for Teens 1,000,000 50% 2,300,000 46% 2,300,000 18.4%
A National Sports Weekly (3) -- -- -- -- 5,037,500 40.3%
Management and Marketing
Services -- -- 125,000 2% 345,000 2.76%
-------------- --- ------------- ----- ------------- ----------
$2,000,000 100.0% $5,000,000 100.0% $12,500,000 100.0%
-------------- ------- ------------- -------- ------------- ----------
-------------- ------- ------------- -------- ------------- ----------
<CAPTION>
$20,000,000
--------------------------
DOLLAR AMOUNT PERCENTAGE
------------- ----------
<S> <C> <C>
Selling Commissions $ 2,000,000 10%
Legal Fees 200,000 1.0%
Other Fees 30,000 0.15%
Printing Costs/ Other Fees 75,000 0.375%
HCC Indirect Expense
Reimbursement (1) 600,000 3.0%
Accounting Fees 125,000 0.625%
Working Capital 505,000 2.525%
Proposed Investment
Opportunities (2):
Heartland Radio Network 250,000 1.25%
Communications Companies
Acquisition(s) 2,180,000 10.9%
A Magazine for Teens 2,300,000 11.5%
A National Sports 11,265,000 56.325%
Management and Marketing
Services 470,000 2.35%
------------- ----------
$20,000,000 100.0%
------------- ----------
------------- ----------
</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 on a sliding scale basis as
reflected in the above tables. As of
December 31, 1996 and March 31, 1997, the amount owed by the Company to HCC
for these costs, net of repayments, amounted to $220,616 and $289,772,
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
.45% 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 the Company's investment in the
venture would be allocated to additional communications company
acquisitions.
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.
40
<PAGE>
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 acquisitions of
communications properties effected in connection 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 Dividend Rights.")
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as
of March 31, 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 $4.2125 per share
(the "Minimum Offering") and (b) the sale of 4,000,000 shares of Common Stock
(maximum) offered by the Company for estimated net proceeds of $4.25 per
share (the "Maximum Offering"). (See also "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>
MARCH 31, 1997
ACTUAL AS ADJUSTED
---------- ---------------------------
MINIMUM MAXIMUM
------------ -------------
<S> <C> <C> <C>
Shareholders' equity
Common stock, $.001 par value, 50,000,000 Shares
authorized, 1,326,811 Shares outstanding, 1,726,811
(Minimum) and 5,326,811 (Maximum)
Shares to be issued and outstanding, as adjusted $ 1,327 $ 1,727 $ 5,327
Paid-in capital 588,831 2,273,431 17,584,831
Deficit accumulated development stage (347,320) (347,320) (347,320)
---------- ------------ -------------
Total shareholders' equity and total capitalization $ 242,838 $ 1,927,838 $ 27,242,838
---------- ------------ -------------
---------- ------------ -------------
</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.)
<TABLE>
<S> <C> <C> <C> <C> <C>
Dilution For $2,000,000 Offering (1)
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>
41
<PAGE>
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.)
<TABLE>
<S> <C> <C> <C> <C> <C>
Dilution For $2,000,000 Offering (1)
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>
<TABLE>
<CAPTION>
SHARES PURCHASED(1)
TOTAL CONSIDERATION
-------------------- -----------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER % AMOUNT % PER SHARE
--------- --------- ------------ --------- -------------
Existing Shares......................................... 1,326,811 76.84 $ 590,158 22.78 $ 0.445
--------- --------- ------------ --------- ------
--------- --------- ------------ --------- ------
New Shares.............................................. 400,000 23.16 2,0000,00 77.22 $ 5.000
--------- --------- ------------ --------- ------
1,726,811 100.00 $ 2,590,158 100 $ 1.50
--------- --------- ------------ --------- ------
--------- --------- ------------ --------- ------
</TABLE>
- ------------------------
(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.
<TABLE>
<S> <C> <C> <C> <C>
Dilution For $20,000,000 Offering (1)
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 3.425 (68.5%)
Pro forma net tangible book value per Share after offering 3.87 (77.4%)
--------
Total dilution per Share to new Shareholders $ 1.13 (22.6%)
--------
--------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER % AMOUNT % PER SHARE
--------- --------- ------------- --------- ---------------
Existing Shares........................................ 1,326,811 24.91 $ 590,158 2.87 $ .445
New Shares............................................. 4,000,000 75.09 20,000,000 97.13 $ 5.00
--------- --------- ------------- --------- -----
5,326,811 100.00 $ 20,590,158 100.00 $ 3.87
--------- --------- ------------- --------- -----
--------- --------- ------------- --------- -----
</TABLE>
- ------------------------
(1) Assumes issuance and sale of 4,000,000 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.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK GENERALLY
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 is outstanding at this time. 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. Shareholders are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors of the Company out of funds legally available. 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.
REVERSE STOCK SPLIT
In conjunction with the planned public offering, the Board of Directors
proposed a (1) reverse split of the Company's common stock on the basis of one
new share of common stock for each 4.6190302 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 will be reissued a number
of Shares equal to the Shares (4,801,589) being surrendered. Those Shares will
be 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 the exercise of the existing
warrants in six annual increments of 16.67% and their distribution to the
Shareholders 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 therein 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 interests of "new" Shareholders.
43
<PAGE>
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.
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 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), judgment, 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 And Warrants
The Company's articles of incorporation also authorize 10,000,000 shares of
preferred stock (the "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 the holders of
HCC's preferred stock on the basis of one warrant for each two HCC preferred
shares, exercisable at $.50 per Share. 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 currently acts 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.
44
<PAGE>
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 10% 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 Managing Placement
Agents (other SEC-registered, NASD member broker-dealer firms) are engaged to
offer Shares, they will be paid a negotiated portion of the 10% selling
commission. (In addition, the Managing Placement Agent will be reimbursed for
its expenses, the greater of actual expenses or 11/2% of the proceeds of the
offering.) In such capacity in connection with this offering, such Additional
Managing 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 from two (2) to nine (9) months from
the date of this Prospectus, unless earlier terminated. Shares having an
aggregate selling price of $20,000,000 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 $20,000,000 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 $20,000,000 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 IRA accounts with
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 $20,000,0000 maximum offering is not achieved during that period;
in no case will this offering under its current Registration Statement extend
for more than two years from the date of this Prospectus nor will more than
$20,000,000 be raised by the Company during this period.
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 Managing 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.
The management and any additional Managing 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.
45
<PAGE>
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
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 Company 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 the 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 The Heideman Law Group, P.C., Washington, D.C. Certain legal
matters will be passed upon for the Company by Reed Smith Shaw & McClay,
Washington, D.C. Certain legal matters 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.
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 Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the Commission'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 Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. 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 Commission, at the addresses set forth above.
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.
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.
46
<PAGE>
APPENDIX I
FINANCIAL STATEMENTS
I-1
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Heartland Communications & Management, Inc.
(A Development Stage Company and Successor Company)
Independent Certified Public Accountants' Report F-3
Balance sheets as of December 31, 1996 and
March 31, 1997 (unaudited) F-5
Statements of operations for the period March 27, 1996
(date of formation) through December 31, 1996,
the three months ended March 31, 1997 (unaudited)
and the period March 27, 1996 (date of formation)
through March 31, 1997 (unaudited) F-6
Statements of changes in shareholders' equity for the period
March 27, 1996 (date of formation) through December 31,
1996 and the three months ended March 31, 1997
(unaudited) F-7
Statements of cash flows for the period March 27, 1996
(date of formation) through December 31, 1996, the three
months ended March 31, 1997 (unaudited) and the period
March 27, 1996 (date of formation) through
March 31, 1997 (unaudited) F-8
Summary of accounting policies F-10
Notes to financial statements F-14
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Independent Certified Public Accountants' Report F-26
</TABLE>
F-1
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Balance sheets as of December 31, 1995
and 1996 and March 31, 1997 (unaudited) F-28
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 three months ended
March 31, 1996 and 1997 (unaudited) and the period
June 23, 1994 (date of formation) through
March 31,1997 (unaudited) F-29
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 three months ended
March 31, 1997 (unaudited) F-30
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 three
months ended March 31, 1996 and 1997 (unaudited) and
the period June 23, 1994 (date of formation)
through March 31, 1997 (unaudited) F-31
Summary of accounting policies F-33
Notes to financial statements F-38
</TABLE>
F-2
<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 and cash flows and 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.
F-3
<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.
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-4
<PAGE>
<TABLE>
<CAPTION>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Balance Sheets
- -------------------------------------------------------------------------------
MARCH 31,
DECEMBER 1997
31, 1996 (UNAUDITED)
---------- -----------
<S> <C> <C>
Assets
Cash................................................. $ 88 $ 1,214
Accounts receivable from related parties............. 6,406 12,006
-------- ---------
Total current assets................................. 6,494 13,220
-------- ---------
Note receivable from related party (Note 3).......... 172,780 170,535
Deferred offering costs (Notes 7 and 8).............. 648,690 799,591
-------- ---------
Total assets......................................... $ 827,964 $ 983,346
-------- ---------
-------- ---------
Liabilities and Shareholders' Equity
Accounts payable..................................... $ 293,235 $ 414,347
Accrued payroll...................................... 8,970 36,389
Accounts payable to related parties (Note 8)......... 220,616 289,772
-------- ---------
Total current liabilities............................ 522,821 740,508
-------- ---------
Commitments (Notes 5 and 8)
Shareholders' equity (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..... (285,015) (347,320)
-------- ---------
Total shareholders' equity........................... 305,143 242,838
-------- ---------
Total liabilities and shareholders' equity........... $ 827,964 $ 983,346
-------- ---------
-------- ---------
</TABLE>
See accounting summary of accounting policies and notes to financial statements.
F-5
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD MARCH 27, 1996
MARCH 27, 1996 FOR THE (DATE OF
(DATE OF THREE MONTHS FORMATION)
FORMATION) ENDED THROUGH
THROUGH MARCH 31, 1997 MARCH 31, 1997
DECEMBER 31, 1996 (UNAUDITED) (UNAUDITED)
----------------- -------------- -----------------
<S> <C> <C> <C>
Revenues
Marketing commissions received from related party (Note
3)...................................................... $ 3,507 $ 926 $ 4,433
------------- ------------ -----------
Operating expenses
Salaries................................................. 165,084 37,419 202,503
General and administrative............................... 126,337 29,200 155,537
------------- ------------ -----------
Total operating expenses.................................. 291,421 66,619 358,040
------------- ------------ -----------
Operating loss............................................ (287,914) (65,693) (353,607)
Interest income (Note 3).................................. 2,899 3,388 6,287
------------- ------------ -----------
Net loss.................................................. $ (285,015) $ (62,305) $ (347,320)
------------- ------------ -----------
------------- ------------ -----------
Weighted average common shares outstanding................ 1,242,310 1,326,811 1,263,419
------------- ------------ -----------
------------- ------------ -----------
Net loss per share........................................ $ (.23) $ (.05) $ (28)
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
See accompanying 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 Changes in Shareholders' Equity
- -------------------------------------------------------------------------------
For the Period March 27, 1996 (date of formation) through December 31, 1996
and the three months ended March 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.................... -- (285,015) (285,015)
---------- ---------- ---------- ---------- --------- ----------
Balance, December 31,
1996...................... -- 1,326,811 1,327 588,831 (285,015) 305,143
Net loss (unaudited)........ -- -- -- -- (62,305) (62,305)
Balance, March 31, 1997
(unaudited)............... -- 1,326,811 1,327 $ 588,831 $(347,320) $ 242,838
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</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 Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
MARCH 27, 1996 MARCH 27, 1996
(DATE OF FOR THE THREE (DATE OF
FORMATION) MONTHS ENDED FORMATION)
THROUGH MARCH 31, 1997 THROUGH MARCH 31,
DECEMBER 31, 1996 (UNAUDITED) 1997 (UNAUDITED)
----------------- -------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.......................................................... $ (285,015) $ (62,305) $ (347,320)
Adjustments to reconcile net loss to net cash used in operations
Increase in accounts receivable from related parties.............. (6,406) (5,600) (12,006)
Increase in accounts payable...................................... 293,235 121,112 414,347
Increase in accrued payroll....................................... 8,970 27,419 36,389
Increase in deferred offering costs............................... (648,690) (150,901) (799,591)
Increase in accounts payable to related parties................... 220,616 69,156 289,772
----------- ---------- ------------
Net cash used in operating activities............................. (417,290) (1,119) (418,409)
----------- ---------- ------------
Cash flows from investing activities
Loans to related party............................................ (172,780) 2,245 (170,535)
----------- ---------- ------------
Net cash (used in) provided by investing activities............... (172,780) 2,245 (170,535)
----------- ---------- ------------
</TABLE>
F-8
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
MARCH 27, 1996 MARCH 27, 1996
(DATE OF FOR THE THREE (DATE OF
FORMATION) MONTHS ENDED FORMATION)
THROUGH MARCH 31, 1997 THROUGH MARCH 31,
DECEMBER 31, 1996 (UNAUDITED) 1997 (UNAUDITED)
----------------- -------------- ------------------
<S> <C> <C> <C>
Cash flows from financing activities
Increase in subscription receivable and other issuance... 4,958 -- 4,958
Proceeds from exercise of warrants....................... 585,200 -- 585,200
--------- -------- ----------
Net cash provided by financing activities................ 590,158 -- 590,158
--------- -------- ----------
Increase in cash......................................... 88 1,126 1,214
Cash and cash equivalents, beginning of period........... -- 88 --
--------- -------- ----------
Cash and cash equivalents, end of period................. $ 88 $ 1,214 $ 1,214
--------- -------- ----------
--------- -------- ----------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-9
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Company and Nature of Business Heartland Communications & Management, Inc.
("HCMI" or the "Company") was formed on March
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 as of March 31,
1997, and for the three months then ended.
Similar information as of March 31, 1996, and
for the three months then ended is not
presented since HCMI was formed on March 27,
1996 and had no operations until after April
1, 1996. 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 enterpri-se" 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 Uncertainties HCMI is in the development stage.
Consequently, 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.
</TABLE>
F-10
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Use of Estimates The preparation of financial statements in
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 Between Affiliates All transfers among affiliates are recorded
using the historical carrying value.
Accounts Receivable HCMI provides a reserve for doubtful accounts
based on a specific review of the expected
collectibility of individual outstanding
accounts.
Deferred Offering Costs Direct, incremental costs incurred with
respect to the HCMI offering of common stock
are 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, 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 by HCMI and
reflected as part of the Accounts Payable to
related parties.
Income Taxes HCMI 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-11
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues Marketing commissions are recognized as
commercials are broadcast and related
advertising revenues are received.
Reverse Stock Split On March 26, 1997, the shareholders approved
a 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 Share Net loss per share is based on the weighted
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 Financial Statements The accompanying interim financial statements
as of March 31, 1997 and for the three months
then ended 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
three months ended March 31, 1997 are not
necessarily indicative of the results to be
obtained for the full fiscal year.
Fair Value of Financial Instruments In accordance with the requirements of
Statement of Financial Accounting Standards
(SFAS) No. 107, "Disclosure About Fair Value
of Financial Instruments," HCMI must disclose
the fair value of its financial instruments
as of December 31, 1997 and March 31, 1997.
In the opinion of management, the fair values
of the Company's financial instruments as of
December 31, 1996 and March 31, 1997 are not
materially different from the carrying
amounts shown in the accompanying financial
statements.
</TABLE>
F-12
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Summary of Accounting Policies
(Unaudited as to March 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Recent Accounting Pronouncements 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. HCMI adopted SFAS No. 121 as of March
27, 1996 and its implementation did not have
a material effect on HCMI'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
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.
</TABLE>
F-13
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Reorganization As part of its merchant banking operations, HCC identifies
and Transfer of investment opportuni-ties which can be developed into viable
Certain Rights operations. Several opportunities were identified in 1994, 1995 and
1996, including talk radio, a youth oriented newsp-aper, a
newspaper insert aimed at sports enthusiasts and an investment fund
mana-gement 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 statements, HCMI incurred a
Concern net loss of $285,015 and $62,305 during the period March 27, 1966
(date of formation) through December 31, 1996 and for the three
months ended March 31, 1997, respectively. At December 31, 1996 and
March 31, 1997, HCMI had a working capital deficit of $516,327 and
$727,288, respectively. As of December 31, 1996 and March 31, 1997,
HCMI has also incurred $648,690 and $799,591 of 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 receivable
</TABLE>
F-14
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
of $172,780 as of December 31, 1996 and $170,535 as of March
31, 1997, respectively, from ATB which, in turn, is also a
development stage company. 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 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. HCC Marketing Effective January 1, 1995, HCC entered into a marketing agreement
and Line of with ATB ("the HCC Agreement") whereby HCC provides marketing
Credit services on behalf of ATB. Such services include presenting
Agreements 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 three months end March 31, 1997
amount to $3,507 and $926, respectively. The HCC Agreement
automatically terminates on January 1, 1999, unless extended by
mutual agreement, and it is terminable
</TABLE>
F-15
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 March
31, 1997, no interest payments have been made. 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 March 31, 1997, HCMI had advanced $172,780
and $170,535, respectively, while HCC had advanced $338,695 and
$417,845 as of December 31, 1996 and March 31, 1997, respectively.
Although the total advances ($511,475 and $588,380 as of December
31, 1996 and March 31, 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 $3,388
during the period March 27, 1996 (date of formation) through
December 31, 1996 and the three months ended March 31, 1997,
respectively. Interest income earned by HCC on its share of the
outstanding loans amounted to $3,364, $22,970 and $7,566 for the
years ended December 31, 1995 and 1996 and the three months ended
March 31, 1997, respectively.
</TABLE>
F-16
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
</TABLE>
F-17
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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
March 31, 1997 to purchase HCMI Common Stock is as follows:
</TABLE>
<TABLE>
<CAPTION>
Original Exercise
Warrant Date Date of Price
Holder Issued Expiration* Shares Per Share
----------------- ----------------- ---------------------- ---------- -----------
<S> <C> <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-18
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
CONTINGENT WARRANTS
HCMI Common Stock which is contingently issuable as of December 31, 1996 and
March 31, 1997 upon the occurrence of a specified event is as follows:
<TABLE>
<S> <C> <C>
Event Requiring Shares
Stock of
Issuance Common
Stock
----------------------------------
Employment Performance
(See Note 5) 75,000
----------------------------------
Total 75,000
----------------------------------
</TABLE>
<TABLE>
<S> <C>
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
F-19
</TABLE>
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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. 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.
</TABLE>
F-20
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
5. Employment HCMI has employment agreements (the "Agreements") with three officers and
Agreements employees. The Agreements provide for base annual salaries aggregating
Agreements $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. 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.
</TABLE>
F-21
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
A reconciliation of the income tax benefit at the statutory rate to the
amount actually recorded is as follows:
<CAPTION>
Period
Ended
December 31,
1996
<S> <C> <C>
------------
Income tax benefit at statutory rate $ (99,755)
Valuation allowance related to deferred tax asset 99,755
------------
Income tax benefit $ --
------------
</TABLE>
<TABLE>
<CAPTION>
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
<S> <C> <C>
------------
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 $ --
------------
</TABLE>
F-22
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 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, HCMI established the valuation allowance due to
the uncertain nature of the ultimate realization.
HCMI did not record an income tax provision or benefit in the accompanying
financial statements for the three months ended March 31, 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 Related One of HCMI's shareholders was/is a partner in laws firms which provide
Party Transac services to HCMI. Amounts recorded for legal services provided by these
tions firms in conjunction with the public offering amounted to $106,834 and
$73,539 as of December 31, 1996 and March 31, 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 $9,138
December 31, 1996 and March 31, 1997, respectively. These amounts are
contained in deferred offering costs in the accompanying balance sheets.
8. Proposed HCMI intends to offer 4,000,000 shares of Common Stock in a public
Initial offering at $5 per share, or an aggregate of $20,000,000 before deducting
Public a selling commission, expected to be 10% of the gross proceeds raised, and
Offering other offering costs including a nonaccountable expense reimbursement
expected to be 3% 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 expected to be on a best
efforts basis.
F-23
</TABLE>
<PAGE>
Heartland Communications &
Management, Inc.
(A Development Stage Company and Successor Company)
Notes to Financial Statements (Continued)
(Unaudited as to March 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 4,000,000 shares, 400,000 warrants will be issued). The
warrants will be exercisable for a period of 3 years commencing 24 months
after the date of the Prospectus. The exercise price of the warrants shall
be 120% of the per share offering price.
In conjunction with the public offering, HCC has incurred costs, such as
salaries and rent, which have been allocated to HCMI. These costs
aggregated $300,000 during the period March 27, 1996 (date of formation)
through December 31, 1996 and $50,000 for the three months ended March 31,
1997. By the completion of the public offering, it is expected that such
costs could aggregate approximately $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, solely from the offering proceeds. As of December 31, 1996
and March 31, 1997, the amount owned by HCMI to HCC for these costs, net
of repayments, amounted to $220,616 and $289,774, respectively.
</TABLE>
F-24
<PAGE>
THIS PAGE LEFT
INTENTIONALLY BLANK
F-25
<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 31, 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.
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
F-26
<PAGE>
such expenditures and losses. 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 discussed in Note 2. The
financial statements do not include any adjustments that might result from
this outcome of the uncertainty.
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-27
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Balance Sheets
<TABLE>
<CAPTION>
March 31,
December 31, -------------
-------------------------- 1997
1995 1996 (Unaudited)
----------- ------------- -------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents.............................................. $ 19,687 $ 1,251 $ 3,080
Accounts and notes receivable from related parties (Note 1 and 10)..... 2,963 224,110 293,268
Notes receivable--other (Note 11)...................................... -- -- 70,801
Receivables from employees............................................. -- 7,408 7,654
----------- ------------- -------------
Total current assets................................................... 22,650 232,769 374,803
----------- ------------- -------------
Property and equipment, net of accumulated depreciation of $687 and 3,025
$859................................................................. 2,748 2,577
Note receivable from related party (Note 3)............................ 144,850 338,695 417,845
Accrued interest receivable from related party......................... 5,878 31,163 38,873
Other assets........................................................... 8,397 -- --
----------- ------------- -------------
Total assets........................................................... $ 184,800 $ 605,375 $ 834,098
----------- ------------- -------------
----------- ------------- -------------
Liabilities and Shareholders' Equity (Deficit)
Accounts payable..................................................... $ 105,800 $ 42,391 $ 81,237
Accrued salaries..................................................... 140,152 75,560 75,560
Accrued expenses..................................................... 2,357 27,024 27,024
Notes payable to related parties (Note 6)............................ 100,000 109,284 369,135
Accrued interest payable to related parties (Note 6)................. 7,870 10,524 17,741
----------- ------------- -------------
Total current liabilities.............................................. 356,179 264,783 570,697
----------- ------------- -------------
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, 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 shares issued and 2,169,000 shares and 4,958,000
outstanding at December 31, 1995, and 1996 and March 31, 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) (1,323,560)
----------- ------------- -------------
Total shareholders' equity (deficit)................................... (171,379) 340,592 263,401
----------- ------------- -------------
Total liabilities and shareholders' equity (deficit)................... $ 184,800 $ 605,375 $ 834,098
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-28
<PAGE>
Heartland Capital Corporation
(A Development Stage Company and Predecessor Company)
Statements of Operations
<TABLE>
<CAPTION>
For the period For the For the period
June 23, 1994 three months June 23, 1994
(date Ended March (date of
of formation) For the For the 31, formation)
through year ended year ended ------------------------ through March
December 31, December 31, December 31, 1996 1997 31, 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 $ 2,106 $ 104 $ 3,598
------------------ ----------- ------------ ----------- ----------- --------------
Operating expenses
Salaries (Note
5)............... 112,374 209,885 156,280 65,154 -- 478,539
General and
administrative
(Notes 8 and
9)............... 56,826 127,727 121,936 75,949 48,037 354,526
Write-off of working
capital advances
(Note 4)......... 42,172 180,955 82,451 19,064 30,079 335,657
Program costs (Note
5)............... -- 49,900 -- -- -- 49,900
Depreciation....... -- -- 687 151 172 859
------------------ ------------ ------------ ----------- ----------- --------------
Total operating
expenses........... 211,372 568,467 361,354 160,318 78,288 1,219,481
------------------ ------------ ------------ ----------- ----------- --------------
Operating loss....... (211,372) (567,820) (358,507) (158,212) (78,184) (1,215,883)
------------------ ------------ ------------ ----------- ----------- --------------
Interest expense,
net of interest
income of $ -- in
1994, $4,775 in
1995, $23,492 in
1996, x$3,930 and
$7,710 in the
three months
ended March 31,
1996 and 1997,
respectively and
$35,977 from June
23, 1994 (date of
formation)
through March 31,
1997 (Notes 3, 5
and 6)........... (8,342) (25,690) (69,880) (1,514) 993 (102,919)
------------------ ------------ ------------ ----------- ----------- --------------
Net loss............. $ (219,714) $ (593,510) $ (428,387) $ (159,726) $ (77,191) $ (1,318,802)
------------------ ------------ ------------ ----------- ----------- --------------
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) $ (.02) $ (.01) $ (.16)
------------------ ------------ ------------ ----------- ----------- --------------
------------------ ------------ ------------ ----------- ----------- --------------
</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 Changes in Shareholders' Equity (Deficit)
For the Years Ended December 31, 1995 and 1996
and the Three Months Ended March 31, 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) -- --
Retirement of com-
mon stock......... -- -- (700,000) (700) -- 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)....... -- -- -- -- -- -- (77,191) (77,191)
----------- ----------- -------------- ----------- ----------- ----------- ----------------- ---------
Balance, March 31,
1997 (unaudited).. -- $ -- 4,958,000 $ 4,958 $1,582,003 $ -- $(1,323,560) $ 263,401
----------- ----------- -------------- ----------- ----------- ----------- ----------------- ---------
----------- ----------- -------------- ----------- ----------- ----------- ----------------- ---------
</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 Cash Flows
<TABLE>
<CAPTION>
For the
period
June 23,
For the period For the 1994
June 23, 1994 three months (date of
(date For the For the ended March formation)
of formation) year ended year ended 31, through
through December December ------------------------ March
December 31, 31, 31, 1996 1997 31, 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) $(159,726) $ (77,191) ($1,318,802)
Adjustments to reconcile
net loss to net cash
provided by operations
Depreciation........... -- -- 687 151 172 859
Stock and warrants issued
for compensation....... -- 212,340 302,000 404 -- 514,340
Increase in
receivables............ (1,800) (7,041) (228,555) (92,939) (69,404) (306,800)
x(Increase) decrease in
prepaid expense........ (6,902) 6,902 -- -- (7,710) --
Increase in accrued
interest............... -- -- (25,285) -- -- (32,995)
(Increase) decrease in
other assets........... (27,500) 19,103 8,397 8,397 38,846 --
Increase (decrease) in
accounts payable....... 44,502 61,298 (63,409) 36,027 -- 81,237
Increase (decrease) in
accrued salaries....... 105,000 35,152 (64,592) 19,998 -- 75,560
Increase in accrued
expenses............... -- 2,357 24,667 55,602 -- 27,024
Increase in accrued
interest payable to
related parties........ 4,486 3,384 2,654 5,912 6,717 17,241
-------------- ----------- ----------- ----------- ----------- -----------
Net cash used in
operating activities... (101,928) (260,015) (471,823) (126,174) (108,570) (942,336)
-------------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities
Purchase of equipment.... -- (3,025) (410) -- -- (3,435)
Loan to related party.... -- (144,850) (193,845) (74,375) (149,951) (488,646)
-------------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... -- (147,875) (194,255) (74,375) (149,951) (492,081)
-------------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
Sale (retirement) of
common stock, net of
issuance costs......... 2,000 (700) -- -- -- 1,300
Sale of preferred stock,
net of issuance
costs.................. -- 428,205 643,116 195,650 -- 1,071,321
Proceeds from related
party loans............ 100,000 29,600 9,284 -- 260,350 399,234
Principal repayments to
related parties........ -- (29,600) -- -- -- (29,600)
Dividends................ -- -- (4,758) -- -- (4,758)
-------------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 102,000 427,505 647,642 195,650 260,350 1,437,497
-------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
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 three months (date of
(date For the For the ended March formation)
of formation) year ended year ended 31, through
through December December ------------------------ March
December 31, 31, 31, 1996 1997 31, 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) (4,899) 1,829 $ 3,080
Cash and cash
equivalents, beginning
of period.............. -- 72 19,687 19,687 1,251 --
-------------- ----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period................. $ 72 $ 19,687 $ 14,788 $ 14,788 $ 3,080 3,080
-------------- ----------- ----------- ----------- ----------- -----------
Supplemental Disclosures
of Cash Flow
Information
Interest paid............ $ 3,856 $ 12,111 $ -- $ -- $ -- $ 15,967
-------------- ----------- ----------- ----------- ----------- -----------
-------------- ----------- ----------- ----------- ----------- -----------
Noncash investing and
financing activities
consisted of the
following:
Issuance of common stock
for services........... $ -- $ 85 $ -- $ 404 $ -- $ --
Issuance of stock for
reduction of
liability.............. -- -- -- 100,000 -- 100,000
Conversion of accrued
salaries to notes
payable................ -- -- -- 60,000 2,789 2,789
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-32
<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>
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 enter-prise" 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-33
<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>
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 ac-counting 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. Repay-ment, 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-34
<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>
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 x(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>
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 March 31, 1997 and
December 31, 1996.
</TABLE>
F-35
<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>
As of March 31, 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 on March 31, 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 Company's financial instruments
as of December 31, 1995 and 1996 and March 31, 1997 are not
materially different from the carrying amounts shown in the
accompanying finan-cial statements.
Interim Financial The accompanying interim financial statements for the three months
Statements ended March 31, 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
three months ended March 31, 1997 are not necessarily indicative of
the results to be obtained for the full fiscal year.
Recent Accounting In March 1995, SFAS No. 121, "Accounting for the Impairment of
Pronouncements 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 the financial
statements.
</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>
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 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, 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.
</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>
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. In this regard, HCC has incurred $224,110 and $293,268
of costs through December 31, 1996 and March 31, 1997 relating to
HCMI's planned public stock offering and has reflected this amount,
net of repayments to date, in "Accounts Receivable from Related
Parties" in the accompanying balance sheets as of December 31, 1996
and March 31, 1997. 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, 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.
</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>
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 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 $77,191 for the three months ended
March 31, 1997 and has incurred losses since formation resulting in
an accumulated deficit of $1,246,369 and $1,323,560 at December 31,
1996 and March 31, 1997, respectively. At December 31, 1996 and
March 31, 1997. HCC had working capital deficits of $32,014 and
$195,894, 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 $749,986 as of December
31, 1996 and March 31, 1997, respectively from HCMI and ATB who, in
turn, are both development stage companies. In addition, HCMI's most
recent audit report, dated April 25, 1997, expressed concern about
its "ability to continue as a going concern". 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 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
</TABLE>
F-39
<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>
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.
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, $2,847 and $104 during 1995, 1996 and the
three months ended March 31, 1997, respectively. After the
assignment of the contract, HCMI recognized $3,507 and $926 of
revenues under this agreement during the period March 27, 1996 (date
of formation) through December 31, 1996 and the three months ended
March 31, 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 March 31, 1997, no interest
payments have been made. Any principal and interest outstanding on
the line of credit must be repaid on
</TABLE>
F-40
<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>
December 31, 1999. During 1996, HCMI began co-funding this Credit
Agreement with HCC. As of December 31, 1996 and March 31, 1997, HCC
had advanced $338,695 and $417,845, respectively, while HCMI had
advanced $172,780 and $170,535, respectively. Although the total
advances $511,475 and $588,380 as of December 31, 1996 and March 31,
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 in-come
on the line of credit for HCC amounted to $3,364, $22,970 and $7,566
for the years ended December 31, 1995 and 1996 and the three months
ended March 31, 1997, respectively. Interest income earned by HCMI
on its share of the outstanding loan amounted to $2,899 and $3,388
during the period March 27, 1996 (date of formation) through
December 31, 1996 and the three months ended March 31, 1977,
respectively.
4. Funding and In 1994, 1995, 1996 and during the three months ended March 31,
Services Provided 1997. HCC pro-vided 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 three months ended March 31, 1997, such
advances amounted to $30,079. 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 adver-tising 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
</TABLE>
F-41
<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>
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 Con-vertible 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 Convert-ible 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").
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
ac-crued 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
</TABLE>
F-42
<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>
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 convertible into
common stock. The 12% Preferred Stock will be automatically
converted into common stock immediately prior to the completion of
any public sale of stock.
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
</TABLE>
F-43
<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>
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.
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 "Sup-pliers") 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
</TABLE>
F-44
<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>
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.
Additionally, on January 29, 1996, HCC issued to an underwriter
warrants to pur-chase 90,000 share of common stock at $.50 per
share, contingent on the under-writer 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% Pre-ferred 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-45
<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>
Outstanding Warrants
A summary of the outstanding warrants as of March 31, 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-46
<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>
Contingent Warrants
A summary of warrants as of March 31, 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 $100,0-00, 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 March 31, 1997 was $49,284 and $309,634,
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.
On May 8, 1995, HCC executed a promissory note agreement with
another director. Under the terms of the note agreement, HCC
borrowed $15,000,
</TABLE>
F-47
<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>
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 $5,444 and $6,717 during
the period June 23, 1994 through December 31, 1994, 1995, 1996 and
the three months ended March 31, 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-48
<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>
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-49
<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>
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 three months ended March
31, 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 leases 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
three months ended March 31, 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,
$11,754 and $3,000 for 1994, 1995, 1996 and the three months ended
March 31, 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 $6,704 for
1994, 1995, 1996 and the three months ended March 31, 1996 and 1997,
respectively.
10. HCMI Initial HCMI intends to offer 4,000,000 shares of Common Stock in a public
Public Offering offering at $5 per share, or an aggregate maximum of $20,000,000,
including an expected selling commission of 10% on all shares sold
and a nonaccountable expense allowance of 3% of the gross proceeds.
Sales of HCMI
</TABLE>
F-50
<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>
shares are expected 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 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 March 31, 1997, the net unpaid amount
aggregated $220,616 and $289,774, respectively. HCC's and HCMI's
financial statements reflect approximately $300,000 and $50,000 of
such costs from March 27, 1996 (date of information) through
December 31, 1996 and during the three months ended March 31, 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 will 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-51
<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>
11. Other Loans On March 25, 1997, HCC advanced funds under loan agreements. The
balances of such loans as of March 31, 1997 are as follows:
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
ATB Media, Inc. $ 40,801
Supershield 30,000
- ----------------------------------------------------------------------
$ 70,801
- ----------------------------------------------------------------------
</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 three
months ended March 31, 1997 aggregated $102 for ATB Media, Inc. and
$75 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-52
<PAGE>
APPENDIX II
SCHEDULE 15G
IMPORTANT INFORMATION ON PENNY STOCKS
This statement is required by the U.S. Securities and Exchange Commission
(SEC) and contains important information on penny stocks. You are urged to read
it before making a purchase or sale.
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
II-1
<PAGE>
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.
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
II-2
<PAGE>
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.
(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:
II-3
<PAGE>
- 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.
- 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
II-4
<PAGE>
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.
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
II-5
<PAGE>
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 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
FARINESS OPINION
III-1
<PAGE>
LETTERHEAD
April , 1997
To the Board of Directors
of Heartland Communications & Management, Inc.
We understand that Heartland Communications & Management, Inc. (hereinafter
sometimes referred to as "HCMI" or the "Company"), a development stage
company, is 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 4,801,589 difference
between shares issued and shares outstanding relates to shares placed in
escrow as a result of a one for 4.6190302 share reverse stock split. Shares
held in escrow have no voting or dividend rights and will only be released to
existing shareholders in annual increments over a six year period upon the
occurrence of HCMI 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 a $20,000,000 maximum. The proceeds of the IPO will be used to
fund contemplated investments in certain ventures, including the National
Sports Weekly ("NSW"), Xpress Magazine for Teens ("Xpress"), the Heartland
Radio Network ("HRN"), the Alvery Barlett Fund Management Co. ("ABFM"), and
other unidentified communications company acquisitions, as well as find
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 investments
and ventures identified to date are only developmental options.
The Board of Directors of the Company has requested our opinion (the
"Opinion") as to the fairness of the Offer Price from a financial point of
view to the public shareholders of the Company.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as necessary and appropriate under the circumstances. Among other
things, we have:
1) reviewed a draft of the Heartland Communications & Management, Inc.
Prospectus, dated April , 1997;
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, financial condition and future prospects for the
Company.
<PAGE>
Page 2
To The Board of Directors of
Heartland Communications & Management, Inc.
April __, 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 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.
<PAGE>
Page 3
To The Board of Directors of
Heartland Communications & Management, Inc.
April __, 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
understandings 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
<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 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.
(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
A-1
<PAGE>
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) acknowledges 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.
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.
[Balance of Page Left Blank Intentionally]
A-2
<PAGE>
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 STATE 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
North Carolina $225,000 NW or $60,000 NW and $60,000 AI
Virginia $100,000 NW or $50,000 NW and $50,000 AI
</TABLE>
* 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 And Power
Of Attorney...................................
$20,000,000 OF SHARES OF
COMMON STOCK
HEARTLAND
COMMUNICATIONS
& MANAGEMENT, INC.
---------------------
PROSPECTUS
---------------------
August , 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>
<CAPTION>
Approximate Amount
---------------------------------------
Minimum (1) Maximum(2)
------------- ------------
<S> <C> <C>
Securities and Exchange Commission
registration fee . . . . . . . . . . $ 8,610 $ 8,610
National Association of Securities
Dealers, Inc. filing fee . . . . . . 2,500 2,500
Printing expenses . . . . . . . . . . 45,000 45,000
Brokerage commissions 200,000 2,000,000
HCC indirect expense reimbursement(3) -- 600,000
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 $ 315,000 $ 3,000,000
----------- -----------
----------- -----------
</TABLE>
(1) Costs if the minimum amount of $2,000,000 is raised.
(2) Costs if the maximum amount of $20,000,000 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 HCC for these costs, or at least a portion thereof, on a
sliding scale basis 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 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.
S-1-1
<PAGE>
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
March 31, 1997 (unaudited).
Statements of Operations for the Period March 27, 1996
(Date of Formation) through December 31, 1996 and for
Three Months Ended March 31, 1997 (unaudited) and for
the Period March 27, 1996 (Date of Formation) through
March 31, 1997 (unaudited).
Statements of Changes in Shareholder's Equity for
the Period March 27, 1996 (Date of Formation)
through December 31, 1996 and for the Three Months
Ended March 31, 1997 (unaudited) and for the Three
Months Ended March 31, 1997 (unaudited) and for the
period March 27, 1996 (Date of Formation) thrugh
March 31, 1997 (unaudited).
Statement of Cash Flows for the Period March 27,
1996 (Date of Formation) through December 31, 1996
(unaudited).
Notes to Financial Statements.
(ii) Heartland Capital Corporation
Independent Certified Public Accountants' Report.
Balance Sheets as of December 31, 1995 and 1996 and
March 31, 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
Three Months Ended March 31, 1996 and 1997
(unaudited) and the Period June 23, 1994 (Date of
Formation) through March 31, 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 Three Months Ended March
31, 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 Three
Months Ended March 31, 1996 and 1997 (unaudited),
and the Period June 23, 1995 (Date of Formation)
through March 31, 1997.
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.
S-1-2
<PAGE>
(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.
* 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 an
employee of Registrant).
* 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.
* 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 10.68).
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.
S-1-3
<PAGE>
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, since changes thereto are not material, are not filed herewith and are
hereby incorporated by reference.
S-1-4
<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. 1 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 23rd day of July, 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 July 23, 1997
------------------------- and Director
Michael L. Foudy
/s/Bradford W. Baker Treasurer July 23, 1997
-------------------------
Bradford W. Baker
/s/Linda G. Moore Assistant Treasurer and July 23, 1997
------------------------ Chief Financial Officer
Linda G. Moore
/s/ Ron Alexenburg Director July 23, 1997
------------------------
Ron Alexenburg
/s/ Thomas Burgum Director July 23, 1997
------------------------
Thomas Burgum
/s/Kirby Ralston Director July 23, 1997
------------------------
Kirby Ralston
/s/ B. Eric Sivertsen Director July 23, 1997
------------------------
B. Eric Sivertsen
S-1-5
<PAGE>
EXHIBIT 1.1
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
MANAGING PLACEMENT AGENT AGREEMENT
August ___, 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 4,000,000 shares of common stock, $.001 par value per share (the
"Shares"), in connection with its proposed $20,000,000 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) 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 (400,000) Shares and a maximum of
four million (4,000,000) Shares at five dollars ($5) per share. (Such
1
<PAGE>
commitment is subject to receipt of a fairness opinion described in Section
15, "Termination," and the Registration Statement being declared effective by
the SEC.) Subject to the $20,000,000 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
$20,000,000 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
2
<PAGE>
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 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
3
<PAGE>
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:
(i) a selling commission of 10% 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 nonaccountable basis in the
amount of one and one-half percent (1 1/2 %) of gross proceeds of the
Offering (or actual expenses if greater).
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.
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
4
<PAGE>
and, for the maximum offering of 4,000,000 Shares, 400,000 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 twenty percent (120%) of the per share offering price (for
example, a $6 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, 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
5
<PAGE>
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:
(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.
6
<PAGE>
(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 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
7
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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.
(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.
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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 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
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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.
(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
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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.
(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.
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(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.
(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.
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(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.
(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.
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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 the favorable opinion of The Heideman Law Group, P.C., 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,
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permits 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)
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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; 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.
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(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
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.
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(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 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. Right of First Refusal. Subject to sale of at least four
hundred thousand (400,000) Shares in the Offering, HCMI and the Selling Agent
agree that for a period of two (2) years from the date of the definitive
Prospectus, the Selling Agent shall have a non-transferable right of first
refusal to purchase for its account or to sell for the account of HCMI any
equity or debt securities with respect to which HCMI may seek a public offering
or private offering for cash. Specifically excluded from the Selling Agent's
right of first refusal are public or private offerings of HCMI's Shares in
exchange for properties, assets or stock of other individuals or corporations.
HCMI will consult the Selling Agent with regard to any such covered offering for
cash prior to consulting any other prospective
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underwriter and will offer the Selling Agent the opportunity to purchase or sell
any such securities on terms not less favorable to HCMI than it can secure
elsewhere. HCMI shall have thirty (30) days in which to exercise its right of
first refusal. However, HCMI shall not be required to consult with the Selling
Agent concerning any borrowing form banks and institutional lenders or
concerning financing any equipment leading or similar arrangements.
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 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
19
<PAGE>
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 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
20
<PAGE>
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 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.
21
<PAGE>
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 December 31, 1997, the Selling Agent may elect to terminate the Offering.
(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.
22
<PAGE>
(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 The Heideman Law Group, P.C. 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.
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.
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<PAGE>
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
24
<PAGE>
EXHIBIT 1.2
NORTHRIDGE CAPITAL CORPORATION
SELECTED DEALER AGREEMENT
August ___, 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 $20,000,000 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 August ___, 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 August ___,
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 _____________, 1997, 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
3
<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>
EXHIBIT A
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
MANAGING PLACEMENT AGENT AGREEMENT
[TO BE ATTACHED.]
<PAGE>
[LETTERHEAD]
July 24, 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 $20,000,000 of Shares of Common Stock
Gentlemen:
Since June 1, 1997 (when the undersigned became a partner at The Heideman
Law Group, P.C.), this firm has acted as counsel for Heartland Communications &
Management, Inc., a Delaware corporation organized under the Delaware General
Corporate Law (the "Company"), 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 $20,000,000, 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. 1 thereto (hereinafter, collectively "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.
We are admitted to practice law only in the District of Columbia. 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 laws of the District of Columbia and the federal laws of the United States.
<PAGE>
Heartland Communications & Management, Inc.
July 24, 1997
Page 2
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.
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 the Registration Statement.
THE HEIDEMAN LAW GROUP, P.C.
By: /s/ Carl N. Duncan
----------------------------
Carl N. Duncan, Principal
<PAGE>
EXHIBIT 10.1
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of this 23rd day of July, 1997 by
and among HEARTLAND COMMUNICATIONS & MANAGEMENT, INC. (hereinafter, the
"Depositor"), NORTHRIDGE CAPITAL CORPORATION (hereinafter, the "Selling Agent"),
and GEORGE MASON BANK (hereinafter, the "Escrow Agent").
WHEREAS, Depositor intends to solicit subscriptions ("Subscriptions") for
the purchase of an aggregate of up to $20,000,000 in shares of common stock of
Depositor.
WHEREAS, under the method of subscription described in Depositor's draft
Prospectus dated as of August ___, 1997 (the "Offering"), payment of the
subscription price must be by check, to the order of HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC. ESCROW ACCOUNT (each being a "Subscription Payment"), and the
resulting proceeds from Subscriptions (the "Subscription Proceeds") are required
to be held by an independent depository in escrow;
WHEREAS, the Selling Agent has been appointed by the Depositor to receive
all Subscription Payments and deposit with the Escrow Agent all Subscription
Proceeds; and
WHEREAS, the Depositor and the Selling Agent desire the Escrow Agent to
serve as the depository for the receipt and investment of Subscription Proceeds
and the Escrow Agent is agreeable to serving as such depository;
NOW, THEREFORE, in consideration of the foregoing promises and the
covenants and agreements hereinafter set forth, it is hereby agreed as follows:
1. Escrow Agent.
George Mason Bank is hereby appointed and hereby accepts the appointment,
to serve as Escrow Agent for the Depositor in connection with the Offering on
the terms provided herein.
2. Establishment of Escrow Account and Investment of Funds
a. Upon execution of this Agreement, there shall be established a
separate account for the deposit of the Subscription Proceeds to be
designated as "Heartland Communications & Management, Inc. Escrow Account"
(the "Escrow Account").
b. Any and all Subscription Proceeds shall be forwarded by the
Selling Agent to the Escrow Agent by noon of the business day immediately
following their receipt from subscribers and shall be accompanied by a copy
of each Subscription to which the Subscription Proceeds relate. The Escrow
Agent shall promptly deposit the Subscription
<PAGE>
Proceeds into the Escrow Account. The Subscription Proceeds shall be held
in the Escrow Account until disbursed in accordance with the provisions of
paragraph 3.
c. Any Subscription Proceeds placed or held in the Escrow Account
("Escrow Funds") shall be maintained and invested as the Depositor shall
from time to time direct by written notice to the Escrow Agent in FDIC
insured money market accounts or certificates of deposit, or direct United
States Government obligations which can be readily liquidated on
twenty_four hours notice. The Escrow Agent shall not be required to invest
Escrow Funds until three (3) business days after receipt of any
subscriber's check drawn on a local bank, or seven (7) business days after
receipt of any subscriber's check drawn on an out-of-state bank as
stipulated by Banking Regulation CC. During any such clearing period, said
deposits may remain uninvested. No investment of funds will be made for
checks received during the last three (3) business days of the Funding
Deadline (defined below).
d. The Escrow Agent shall notify the Selling Agent and the Depositor
immediately in writing if any check representing a Subscription Payment is
returned to the Escrow Agent for any reason and shall provide a copy of
such returned check to the Selling Agent and the Depositor.
3. Funding Deadline; Disbursement of Funds.
a. The Offering will terminate two (2) months from the effective date
of Depositor's Form S-1 Registration Statement unless the Offering is
extended by the Depositor by written notice to the Escrow Agent to a date
to coincide with the conclusion of the up to nine (9) month Initial
Offering Period as defined in the Prospectus (the "Funding Deadline" for
purposes of this Agreement).
b. All Escrow Funds received during the Initial Offering Period shall
be released to the Depositor pursuant to the instructions of the Depositor
and Selling Agent and only if by the Funding Deadline: (1) Subscriptions
Proceeds of at least $2,000,000 have been deposited in the Escrow Account
and cleared ("Required Funding"); and (2) the Escrow Agent has received an
affidavit from the Depositor signed respectively by the Depositor's
Representative and by the Selling Agent"s Representative (as such
signatures appear on Exhibits A and B hereto) which certifies that the
Depositor has accepted all Subscriptions for which money has been deposited
with the Escrow Agent.
c. If, at the end of the Funding Deadline, the conditions specified
in (b) above have not occurred, the Escrow Agent shall accept no further
Subscription Payments, and the Depositor and the Selling Agent shall notify
the Escrow Agent by written affidavit that the Depositor has not received
the Required Funding by the Funding Deadline. Upon receipt of such
affidavit, the Escrow Agent shall promptly remit the Subscription Proceeds
and accrued interest to the subscribers in proportion to their respective
interests
2
<PAGE>
according to information to be supplied by Depositors as soon after the
Funding Deadline as is reasonable in light of the bookkeeping and other
tasks such return will entail.
d. All disbursements by the Escrow Agent hereunder may be made by a
check or draft drawn on the institution in which the Escrow Funds are
deposited and shall be mailed by first class, United States mail, postage
prepaid, to the name and address of the subscriber appearing on each
Subscription. All funds remitted to subscribers pursuant to this Agreement
shall be with interest accrued, less any deductions hereunder. The Escrow
Agent shall be entitled to charge the Depositor the fees customarily
charged by the Escrow Agent in connection with issuing checks or drafts as
necessary to return all Escrow Funds to subscribers. The Escrow Agent may
off-set against any interest due to the Depositor hereunder any such
charges and all expenses incurred by the Escrow Agent hereunder.
e. Any and all interest earned on the investment of the Escrow Funds,
less any proper deductions for sums due from the Depositor to the Escrow
Agent, shall be credited on at least a weekly basis.
f. From time to time, the Company shall deliver to the Bank a list of
subscribers that specifies the taxpayer identification numbers, mailing
addresses and respective interests of such subscribers in the Escrow Funds,
which list shall be kept current by the Depositor. The Depositor agrees to
indemnify the Bank for any and all losses (including attorneys' fees) which
the Escrow Agent might incur as a result of paying interest with respect to
the Escrow Funds to such taxpayers in accordance with this Agreement and
the information contained on such lists.
g. In the event that the Escrow Agent has not received instructions
from the Depositor or the Selling Agent by the end of business on the
Funding Deadline, the Escrow Agent shall promptly thereafter proceed to
return the Escrow Funds to the subscribers whose names appear on the
Subscriptions with interest accrued, less deductions hereunder.
4. Subsequent Closings; Disbursement of Funds
a. Subject to the $2,000,000 minimum offering being achieved by the
Fund Deadline provided for in Section 3 of this Agreement (marking the end
of the Initial Offering Period), the Escrow Account will be maintained with
the Escrow Agent.
b. The Offering will terminate on the Funding Deadline unless the
Offering is extended by the Depositor by written notice to the Escrow Agent
to a date no later than 18 months from the date of the Prospectus (the
"Continuous Offering Period," as defined).
3
<PAGE>
c. All Escrow Funds received during the Continuous Offering Period
shall be released pursuant to the instructions of the Depositor and Selling
Agent (1) at a date that coincides with (a') each month-end or( b')
subscriptions for at least $250,000 are accepted, whichever first occurs;
and (2) the Escrow Agent has received an affidavit from the Depositor
signed by the Depositor's Representative and by the Selling Agent's
Representative (as such signatures appear on Exhibits A and B hereto) which
certifies that the Depositor has accepted all Subscriptions for which money
has been deposited with the Escrow Agent.
d. If, for each Subsequent Closing, the conditions specified in (b)
above have not occurred, the Escrow Agent shall accept no further
Subscription Payments, and the Depositor and the Selling Agent shall notify
the Escrow Agent by written affidavit that the Depositor has not received
the Required Funding by the Subsequent Closing. Upon receipt of such
affidavit, the Escrow Agent shall promptly remit the Subscription Proceeds
and accrued interest to the subscribers in proportion to their respective
interests according to information to be supplied by Depositor as soon
after the Subsequent Closing as is reasonable in light of the bookkeeping
and other tasks such return will entail.
e. All disbursements by the Escrow Agent hereunder may be made by a
check or draft drawn on the institution in which the Escrow Funds are
deposited and shall be mailed by first class, United States mail, postage
prepaid, to the name and address of the subscriber appearing on each
Subscription. All funds remitted to subscribers pursuant to this Agreement
shall be with interest accrued, less any deductions hereunder. The Escrow
Agent shall be entitled to charge the Depositor the fees customarily
charged by the Escrow Agent in connection with issuing checks or drafts as
necessary to return all Escrow Funds to subscribers. The Escrow Agent may
off-set against any interest due to the Depositor hereunder any such
charges and all expenses incurred by the Escrow Agent hereunder.
f. Any and all interest earned on the investment of the Escrow Funds,
less any proper deductions for sums due from the Depositor to the Escrow
Agent, shall be credited on at least a weekly basis.
g. From time to time the Depositor shall deliver to the Escrow Agent
a list of subscribers that specifies the taxpayer identification numbers,
mailing addresses and respective interests of such subscribers is the
Escrow Funds, which list shall be kept current by the Depositor. The
Depositor agrees to indemnify the Escrow Agent for any and all losses
(including attorneys' fees) which the Escrow Agent might incur as a result
of paying interest with respect to the Escrow Funds to such taxpayers in
accordance with this Agreement and the information contained on such lists.
h. In the event that the Escrow Agent has not received instructions
from the Depositor or the Selling Agent by the end of business at each
Subsequent Closing, the
4
<PAGE>
Escrow Agent shall promptly thereafter proceed to return the Escrow Funds
to the subscribers whose names appear on the Subscriptions with interest
accrued, less deductions hereunder.
5. Standard of Care of Escrow Agent.
5.1 The Escrow Agent shall be responsible only for performance of its
duties as specified in this Agreement, and no implied covenants, duties or
obligations shall bind or be enforceable against the Escrow Agent. The
Escrow Agent shall not be liable to the Depositor, the Selling Agent, the
Subscribers or any other person or entity for any act or failure to act
other than its gross negligence or willful misconduct.
5.2 The Escrow Agent shall not be liable for any action taken or
omitted by it, or any action suffered by it to be taken or administered in
good faith, and in the exercise of its own best judgment, and may rely
conclusively and shall be protected in acting upon any order, notice,
demand, certificate, opinion of counsel, other advice of counsel (including
counsel selected by the Escrow Agent), statement, instrument, report or
other document (not only as to its due execution and the validity and
effectiveness thereof, but also as to the truth and acceptability of any
information therein contained) which is reasonably believed by the Escrow
Agent to be genuine and to be signed by the proper person or persons.
5.3 The Escrow Agent shall not be bound by any notice or demand, or
any waiver, modification, termination or rescission of this Agreement or
any of the terms hereof, unless executed in writing by the parties to this
Agreement and delivered to the Escrow Agent.
6. Indemnification of Escrow Agent.
The Depositor agrees to indemnify and hold the Escrow Agent harmless
against any damage, liability, cost or loss which it may incur by reason of its
appointment or performance as Escrow Agent or its identification as such in
Depositor's Prospectus, including, without limitation, reasonable attorney's
fees, except for any damage, liability, cost or loss resulting from the willful
misconduct or gross negligence of the Escrow Agent.
7. Termination.
Escrow Agent's responsibilities hereunder shall cease upon the closing of
the Escrow Account and its disbursement of all of the Escrow Funds pursuant to
paragraph 3 of the Agreement, provided however, that this Agreement shall
terminate on the effective date of the resignation of the Escrow Agent in
accordance with paragraph 10. Notwithstanding the foregoing, the Depositor's
obligations under paragraphs 4 and 5 of this Agreement shall survive the
termination of Escrow Agent's responsibilities hereunder.
5
<PAGE>
8. Notices.
Any notices, requests, directions, certifications or the like given by the
Depositor, Depositor's Representative, Selling Agent's Representative or the
Escrow Agent in connection with this Escrow Agreement shall be delivered in
person or mailed, certified mail, postage prepaid, to the following addresses:
If to the Escrow Agent:
George Mason Bank
1320 Old Chain Bridge Road
McLean, Virginia 22101
Attn: Glen Kinard
If to the Depositor:
Heartland Communications & Management, Inc.
1320 Old Chain Bridge Road -- Suite 220
McLean, Virginia 22101
Attn: Michael L. Foudy
If to the Selling Agent:
Northridge Capital Corporation
625 Colonial Park Drive -- Suite 102
Roswell, Georgia 30075
Attn: Anthony Negus
9. Conflicting Demands.
In the event conflicting demands are made upon the Escrow Agent with
respect to this Agreement, the Escrow Account or any of the Escrow Funds, the
Depositor and the Selling Agent acknowledge and agree that the Escrow Agent
shall have the absolute right to elect to do either or both of the following:(a)
cease all further performance under this Agreement by the Escrow Agent; or (b)
file a suit in interpleader and obtain an order from a court with jurisdiction
over such matter which requires the parties to interplead and litigate in such
court their several claims and rights against each other. In the event an
interpleader suit is brought, the Escrow Agent, at its election, shall be fully
released and discharged from obligations to further perform any and all duties
or obligations imposed upon it under this Agreement, the Depositor agrees to pay
and reimburse the Escrow Agent for all costs, expenses and reasonable attorney's
fees expended or incurred by it in the defense or prosecution of such
interpleader suit in such amounts as shall be fixed and deemed reasonable by the
court.
10. Relationships Among Parties.
The parties hereto expressly recognize that this Agreement does not create
any legal relationship whatsoever among the parties hereto other than as
expressly set forth herein. The
6
<PAGE>
parties agree that the Subscription Proceeds deposited with the Escrow Agent
shall be deemed held in trust by the Escrow Agent for the benefit of the
Depositor and the Subscribers and shall not be commingled with any other funds
of the Depositor, the Selling Agent or any of their affiliates, in the
possession or custody of the Escrow Agent, or under its control.
11. Resignation of Escrow Agent.
The Escrow Agent may at any time resign and be discharged of the escrow
responsibilities hereby created by giving written notice to the Depositor and
the Selling Agent, specifying the date upon which it desires that such
resignation shall take effect. Such resignation shall take effect on the date
specified in such notice, which date shall be the earlier of: (i) five (5) days
after giving such notice; or (ii) the date upon which the successor to the
Escrow Agent (the "Successor Escrow Agent") shall have been chosen by the
Depositor and the Selling Agent and shall have accepted its appointment as such.
Upon such acceptance, the Escrow Funds may be transferred to an escrow account,
if necessary or desirable, established by the Successor Escrow Agent pursuant to
the provisions of this Agreement. The Successor Escrow Agent shall administer
the Escrow Fund and assume all other duties of the Escrow Agent as set forth in
this Agreement. If no Successor Escrow Agent shall have been appointed as of the
effective date of the resignation of the Escrow Agent as set forth above, the
Escrow Agent or the Depositor may petition a court of competent jurisdiction for
the appointment of a Successor Escrow Agent.
12. Amendments and Modifications.
This Agreement shall not be amended, modified or supplemented except by a
writing executed among the parties hereto.
13. Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
14. Governing Law.
This Agreement shall be governed by and construed under the applicable laws
of Georgia, without giving effect to any choice of laws or rules which may
otherwise be applicable.
15. Applicability of Rule 15c2-4.
Notwithstanding anything herein to the contrary, all of the obligations and
duties of the parties hereto shall be subject to and consistent with Rule
15c2-4
under the Securities and Exchange Act of 1934.
7
<PAGE>
16. Fees and Expenses of Escrow Agent.
Escrow Agent shall be paid a $750 escrow fee. Expenses paid the Escrow
Agent shall be determined in accordance with the fee schedule attached as
Exhibit C. All such fees and expenses shall be paid by the Depositor.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date and year above specified.
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
By: Micheal L. Foudy
-----------------------------
Michael L. Foudy, President
GEORGE MASON BANK
By: Glen Kinard
------------------------------
Glen Kinard, Authorized Officer
NORTHRIDGE CAPITAL CORPORATION
By: Anthony John Negus
---------------------------------
Anthony John Negus, President
<PAGE>
EXHIBIT "A" TO ESCROW AGREEMENT
Signature of Authorized Representative of
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
Micheal L. Foudy
------------------------------
Michael L. Foudy
<PAGE>
EXHIBIT "B" TO ESCROW AGREEMENT
Signature of Authorized Representative of
NORTHRIDGE CAPITAL CORPORATION
Anthony John Negus
--------------------------------
Anthony John Negus
<PAGE>
Fee
Schedule
Business Accounts
George
Mason Bank
Where smart money banks
<PAGE>
Fee Schedule -- Business Accounts
<TABLE>
<CAPTION>
<S> <C>
Deposit Accounts Overdraft--Insufficient Funds
Per item charge...........................$25.00
Business Checking*
Minimum deposit to open.....................$100 Returned Check--Insufficient Funds
Monthly Maintenance Fee for daily Per item charge...........................$25.00
account balance under $2,000.............$10.00
Telephone Transfers
Business Interest Checking* Transfers in amounts under $500............$4.75
Minimum deposit to open.....................$100
Monthly Maintenance Fee for Stop Payment, Regular Check................$25.00
daily account balance under $750..........$9.50
Attachments, Tax Liens,
Mason Money Market Account* Garnishments...............................$75.00
Minimum deposit to open...................$1,000
Monthly Maintenance Fee for Cashier's Check--Customers..................$5.95
daily account balance under $2,000........$9.50 --Non-Customers.............$12.95
Charge for third-party payments in
excess of legal maximum..........per item $9.50 Money Order.................................$5.95
Business Savings Accounts* Certified Check............................$14.95
Limit one account per Social Security/Tax ID number.
Minimum deposit to open.....................$100 Charged Back Item...........................$4.75
Quarterly Maintenance Fee for
daily account balance under $200..........$6.00 Other Services
Teller window withdrawal charge
in excess of six per quarter (per item)...$0.95 Research or Reconcilement
Per half hour.............................$11.50
Dormant Checking and Savings Accounts Minimum charge............................$11.50
Subject to regular monthly account charges.
Collection Items
Special Statement...........................$4.75 Bond Coupon, per envelope charge...........$7.50
Individual item
within statement................$0.05 per item+ Sight Drafts......................per item $10.00
(plus research costs)
Securities Purchased or Sold...............$60.00
+Customers whose checks are not returned with
statement are allowed 2 items per month at no charge. Traveler's Cheques (per $100)...............$1.50
*Charge for account closure Traveler's Cheques for Two (per $100).......$1.75
within 90 days of opening.................$17.50
Does not apply to account consolidations. Fee Schedule continues on back panel
</TABLE>
<PAGE>
Coins, per roll.................................$0.07
Currenty, per strap.............................$0.35
Night Deposit Bag purchase, per bag............$12.00
Wire Transfers
Outgoing Domestic, per wire charge...........$15.00
Outgoing Foreign, per wire charge............$30.00
(plus any additional correspondent bank charges)
Incoming, Non-Customers......................$25.00
Smart Money Talks
(24-hour account information)
Last five debits...........................No Charge
Last five credits..........................No Charge
Balance inquires...........................No Charge
Specific check.............................No Charge
Transfer...........................Not available for
business accounts
Safe Deposit Box Services
Safe Deposit Box Size" Annual Rent
2"x 5"x24" $25.00
3"x 5"x24" $32.50
5"x 5"x24" $47.50
3"x10"x24" $54.50
5"x10"x24" $77.50
10"x10"x24" $127.50
*All sizes not available at all branches
George Mason Bank reserves the right to amend the terms and
conditions contained herein.
Each depositor is insured up to $100,000 by the
Federal Deposit Insurance Corporation
PLUS LOGO EQUAL HOUSING LENDER LOGO MOST LOGO
http://www.georgemasonbank.com
Member FDIC
<PAGE>
EXHIBIT 10.61
TEEN MAGAZINE VENTURE
AMENDED AND RESTATED AGREEMENT
The Agreement, made effective as of April 1, 1996 between Xpress Ventures,
Inc. ("XVI") and Heartland Communications & Management Inc. ("HCMI"),
(collectively, the "Parties"), is hereby amended and restated effective October
1, 1996.
The Parties agree as follows:
1. ENTITY FORMATION; BUSINESS TO BE CONDUCTED. XVI and HCMI shall
jointly form a limited liability company (the "Company") to further develop,
market, distribute and otherwise operate a business to market and distribute
worldwide a newspaper supplement specialty teen magazine to be named by the
Company. The Company name shall be chosen by mutual agreement of the Parties.
2. CONTRIBUTION OF THE PARTIES.
A. XVI shall contribute to the Company its License Agreement dated
as of January 1, 1996 in connection with the teen magazine supplement
sometimes referred to as Xpress.
B. HCMI shall commit to contribute $2,300,000 cash ("Funding"),
contingent on raising $5,000,000 in a public offering of HCMI common
stock.
3. PROFIT SHARING INTEREST; CAPITAL INTEREST. XVI and HCMI shall each
bear 50% of the costs and expenses of the Company against income. Net income
(as determined in accordance with generally accepted accounting principles) of
the Company shall be distributed as follows:
A. During the first five years from the date Funding occurs: (i)
HCMI shall receive 100% of the first $2,000,000 of the Company's
annual net income; (ii) XVI shall receive 100% of the Company's annual
net income over $2,000,000 up to a maximum of $1,000,000; and (iii)
XVI and HCMI shall each receive 50% of the Company's annual net income
in excess of $3,000,000.
B. If, after the fifth anniversary date of the Funding, HCMI has
received income from the Company at least equal to its investment in
the Company plus 8% cumulative annualized interest, then thereafter
HCMI and XVI shall each receive 50% of the Company's annual net
income.
Notwithstanding the foregoing, in the event that in any given year there is
insufficient net cash flow to meet the annual income distribution
obligations set forth in this section, such
<PAGE>
amounts as cannot be distributed shall become liabilities of the
Company, and shall be paid by the Company on a priority basis when
sufficient income is available.
4. OPERATING AGREEMENT. The Parties agree to negotiate and execute a
written operating agreement. Such operating agreement shall contain the
following terms and conditions:
A. Company Management. The Company shall be managed by the Parties
as its initial members ("Initial Members"). However, the members shall
have the authority, by majority vote thereof, to elect or appoint managers
or officers to conduct the day-to-day business of the Company.
B. Chief Executive Officer. XVI shall have the right to name the
Company's chief executive officer who shall be its President. Said
President shall have such power and authority as is normal for a President
of a corporation formed under Virginia law, including the right to hire and
fire operating personnel and operations support staff, all subject to the
approval of the chief financial officer, which approval may not be
unreasonably withheld. For purposes of the preceding sentence and
subparagraph C of this paragraph 4, any non-approval for any reason other
than a sound financial reason shall be deemed unreasonable.
C. Financial Officers; Outside Accountants/Auditors. HCMI shall
have the right to name the Company's chief financial officer or employee,
who shall have the right to hire and fire financial and administrative
personnel subject to the approval of the President, which approval may not
be unreasonably withheld; HCMI shall also have the right to name the
Company's outside independent accountant/auditors subject to the reasonable
approval of XVI.
D. Unanimous Consent of Initial Members. The following actions
shall require the unanimous consent of the Initial Members:
i. Sale of Company tangible or intangible assets outside the
ordinary course of business.
ii. The borrowing of money over and above a revolving credit
line that shall be established by mutual agreement of the Initial
Members.
iii. Entering into contracts with parties related to the members
or their employees, officers or directors.
iv. Changing the compensation of the chief executive officer,
executive vice president or chief financial officer.
<PAGE>
v. Entering into contracts to acquire furniture, fixtures,
equipment, goods or services lasting more than one year or with a
dollar value in excess of $50,000.
vi. Entering into any lease or rental agreement for more than
twenty-four months or with a dollar commitment greater than $50,000.
vii. Modification of the Operating Agreement.
E. Arbitration. All disputes under the Operating 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.
F. Restrictions on Transfer by Members. Except as specifically
authorized in the Operating Agreement or as approved in writing by all the
Members, none of the Members shall or may sell, exchange, deliver or assign,
dispose of, bequeath or give, pledge, mortgage, hypothecate or otherwise
encumber, transfer or permit to be transferred, whether voluntarily,
involuntarily or by operation of law (including, without limitation, under the
laws of bankruptcy, insolvency, creditors' rights, intestacy, descent and
distribution and succession), all or any of the Member Interests now owned or
hereafter acquired by such Member.
G. Rights of First Refusal:
1. Receipt of Bona Fide Offer. In the event that a Member
shall receive a legally enforceable offer in writing containing appropriate
terms and conditions (a "Bona Fide Offer") to purchase all (but not less than
all) of such Member's Member Interests and in the further event that such Member
shall desire to accept such Bona Fide Offer, such Member (hereinafter in this
paragraph G.1. referred to as the "Offering Member") shall promptly send notice
to the Company and to all Members except the Offering Member (such Members shall
be, for the purposes of this paragraph G.1., the "Other Members), offering to
sell the Offering Member's Member Interests to the Company and to the Other
Members at the same price and upon the same terms and conditions as are
contained in the Bona Fide Offer. The Company and the Other Members shall then
have such rights and privileges, for the prescribed time periods, as are set
forth in paragraph G.2. hereof. Without limitation of the provisions in
paragraph G.1. hereof, no Member shall or may sell, transfer, encumber or
otherwise dispose of his Member Interests except pursuant to a Bona Fide Offer
(subject to the provisions of this paragraph G.) unless otherwise specifically
authorized by this Operating Agreement.
2. Procedure.
2.1. Whenever, under paragraph G.1. hereof, a Bona Fide
Offer to purchase Member Interests has been received and notice of the Bona Fide
Offer has been sent by the Offering Member, the following procedure shall be
complied with: For a period of 30 days
<PAGE>
from its receipt of such notice, the Company shall have the right to elect to
purchase all or any part of the Member Interests so offered; provided,
however, that an election by the Company to purchase less than all of the
Member Interests so offered shall be ineffective unless the Other Members
shall purchase the balance of the Member Interests so offered. If the
Company shall not elect to purchase all of the Member Interests so offered
within such 30 day period (for any reason other than the Offering Member's
default hereunder), then the Other Members shall each have the right, at
each Other Member's sole option, for a period of 30 days after the expiration
of such 30 day period, to elect to purchase all (but not less than all) of
the Member Interests offered as aforesaid to the Company and not elected to
be purchased by the Company, on a pro rata basis (i.e., in proportion to
their respective Member Interests ownership) or in such other manner as they
shall agree upon.
2.2. If the Company and/or any of the Other Members, as the
case may be, elect to exercise any option as set forth in paragraph G.2.1.
above, the electing party or Parties shall provide notice of such election(s) to
the Offering Member within their respective election period(s). For purposes of
this paragraph G.2.2., the purchaser(s) of Member Interests whether it be the
Company and/or any of the Other Members, may sometimes hereinafter be referred
to individually or collectively, as the case may be, as the "Interest
Purchaser(s)." If the Company and any of the Other Members together constitute
the Interest Purchaser(s), then they shall act in tandem (but not as guarantors
of each other) to fulfill the obligations of the Interest Purchaser hereinafter
set forth. Settlement shall be held on the purchase of the Offering Member's
Member Interests under this paragraph G. at the principal office of the Company
or its current legal counsel at such time and date as shall be specified in the
notice sent by the Interest Purchaser of the exercise of its (and/or his) option
pursuant to this paragraph G.2., which date shall not be earlier than 30 days,
nor more than 120 days, after the Company's receipt of the Offering Member's
notice describing the Bona Fide Offer. At settlement on the purchase of the
Offering Member's Member Interest under this paragraph G., the Offering Member
shall resign as a Managing Member and/or officer of the Company (if applicable)
and shall deliver to the Interest Purchaser(s) all of the Certificates of Member
Interest owned by him to the current legal counsel for the Company. The
Interest Purchaser(s) shall deliver to the Offering Member the consideration
stated in its (and/or his) notice electing to exercise the option(s) set forth
hereinabove.
2.3. If the Company and the Other Members shall not,
individually or together, purchase (for reasons other than the Offering Members'
default hereunder), within the prescribed time periods, all of the Member
Interests covered by the Bona Fide Offer, then the Offering Member shall have
the right to accept the Bona Fide Offer in whole (but not in part) and to sell
such Member Interests, subject to all of the provisions and restrictions of this
Operating Agreement, but only in strict accordance with all of the provisions of
the Bona Fide Offer and only if the sale is fully consummated within 180 days
after the Company's receipt of the Offering Member's notice pursuant to
paragraph G. hereof. In the event that such sale is not fully consummated
within 180 days after the Company's receipt of the Offering Member's notice
pursuant to paragraph F hereof, the provisions of this paragraph G.1. must again
be complied with by the Offering Member before the Offering Member may sell or
otherwise dispose of his Member Interests pursuant to this paragraph G.
<PAGE>
H. Deadlock Resolution:
1. Push-Shove; Sale or Purchase.
1.1. In the event of a Deadlock (as defined below) in the
management of the Company between groups of Members owning an equal number of
Member Interests, the Members shall exercise their best efforts to resolve such
deadlock through negotiation. For the purposes of this paragraph H., "Deadlock"
shall mean that, following a good faith effort at mediation, the Initial Members
or officers are still deadlocked in the management of the Company affairs, the
Members are still unable to break the deadlock, and irreparable injury to the
Company is threatened or being suffered, or the business and affairs of the
Company can no longer be conducted to the advantage of the Members generally,
because of the deadlock. In the event of Deadlock, either group (in either
case, the "Initiating Group") may give notice to the other group (the "Offeree
Group") that the Initiating Group, jointly and severally, desires either (i) to
purchase all (but not less than all) of the Member Interests held by the Offeree
Group or (ii) to sell all (but not less than all) of the Initiating Group's
Member Interests to the Offeree Group. Such notice shall designate a price per
Member Interests and such other reasonable terms and conditions pursuant to
which the Initiating Group is willing either to purchase or sell the Member
Interests as aforesaid. Simultaneously with the sending of such notice, the
Initiating Group shall deposit in escrow by cashier's or certified check with
the independent or certified public accountant then servicing the Company (such
person hereinafter referred to as "Escrow Agent"), who shall act as a bona fide
Escrow Agent, an amount equal to five percent of the total price offered for all
of the Member Interests held by the Offeree Group.
1.2. Within 90 days after receipt of the notice from the
Initiating Group pursuant to paragraph G1.1., the Offeree Group shall elect
either (i) to sell all (but not less than all) of the Offeree Group's Member
Interests to the Initiating Group at the previously designated price per share
and terms and conditions, or (ii) at the Offeree Group's sole option, to
purchase all (but not less than all) of the Member Interests of the Initiating
Group at the designated price per share and terms and conditions. Such election
shall be made by notice to the Initiating Group and to the Escrow Agent. In the
event that the Offeree Group elects to purchase all (but not less than all) of
the Member Interests of the Initiating Group, then simultaneously with the
sending of such notice, the Offeree Group shall deposit in escrow with the
Escrow Agent an amount equal to five percent of the total price for all of the
Member Interests of the Initiating Group.
1.3. In the event that the Offeree Group shall elect, under or
pursuant to paragraph H.1.1., to purchase all (but not less than all) of the
Member Interests of the Initiating Group, the Escrow Agent shall promptly return
to the Initiating Group the deposit placed by the Initiating Group in escrow.
The failure or refusal by the Offeree Group to elect either alternative afforded
the Offeree Group under and pursuant to this paragraph H.1.1., and/or the
failure or refusal by the Offeree Group to comply fully, within the prescribed
time periods, with all provisions of this paragraph H.1.1., shall be
conclusively deemed for purposes of this paragraph H.1.1. to constitute its
electing, jointly and severally, to sell all (but not less than all) of the
Offeree Group's Member
<PAGE>
Interests to the Initiating Group at the previously designated price per
Member Interests and terms and conditions.
2. Settlement. Subject to the provisions of paragraph H.3.,
settlement on the purchase of all (but not less than all) of either the
Initiating Group or the Offeree Group (as the case may be) under this Article 6
shall be held at the principal office of the Company within 60 days after the
expiration of the 90 day period set forth in paragraph H.1.2. hereof or within
60 days after the Offeree Group's election, by the notice specified in H.1.2.
hereof, whichever occurs sooner, upon the following terms and conditions: the
entire purchase price for the Member Interests being conveyed (less the amount
previously placed in escrow, which amount shall be released by the Escrow Agent
at settlement to the group whose Member Interests is being so conveyed) shall be
paid in cash or by cashier's or certified check at settlement. Upon settlement,
any officer or Managing Member whose Member Interests is being so conveyed shall
resign as officer of Managing Member of the Company (if applicable) and shall
have no further interest or claim to or against the Company or its assets or
property, tangible or intangible, liquid or illiquid. Upon the consummation of
such settlement, the individuals or entities whose Member Interests is being
purchased shall cease to own or hold any Member Interests, shall no longer be
Members, and shall be entitled only to the purchase price described in this
paragraph H. in respect of the transferred
3. Guaranteed Obligations. Notwithstanding the foregoing provisions
of this paragraph H., if the Company, at the time the "push-shove" procedure
herein is invoked, has outstanding obligations that are personally guaranteed by
a Member that is part of a group that is otherwise obligated to sell its Member
Interests pursuant to this paragraph H., such group shall not be required to
consummate such sale unless and until all members included in such selling group
are released from their respective personal guaranties on such guaranteed debt
by the creditor thereof, or in lieu thereof, such indemnification of the selling
group by the purchasing group is provided as shall be consented to by the
selling group, which consent shall not be unreasonably withheld.
5. 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.
6. DEFAULTS. If XVI fails to abide by the obligations of this
Agreement, HCMI shall have the option to cancel this Agreement by providing 45
days' written notice to XVI. XVI shall have the option of preventing the
termination of this Agreement by taking corrective action that cures the
default, if such corrective action is taken prior to the end of the time period
stated in the previous sentence, and if there are no other defaults during such
time period.
7. TRANSFER OF RIGHTS. This Agreement shall be binding on any
successors of the Parties. Neither party shall have the right to assign its
interests in this Agreement to any other party, unless the prior written consent
of the other party is obtained.
<PAGE>
8. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
Parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the Parties.
9. SEVERABILITY. If any provision 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.
10. 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
11. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Virginia.
HEARTLAND CAPITAL CORPORATION, INC.
By: [Illegible]
----------------------------------------------
Title: President
----------------------------------------------
XPRESS VENTURES, INC.
By: [Illegible]
----------------------------------------------
Title: President
----------------------------------------------
<PAGE>
EXHIBIT 10.62
NATIONAL SPORTS MAGAZINE VENTURE
AMENDED AND RESTATED AGREEMENT
The Agreement, made effective as of April 1, 1996 between Xpress Ventures,
Inc. ("XVI") and Heartland Communications & Management Inc. ("HCMI"),
(collectively, the "Parties"), is hereby amended and restated effective October
1, 1996.
The Parties agree as follows:
1. ENTITY FORMATION; BUSINESS TO BE CONDUCTED. XVI and HCMI shall
jointly form a limited liability company (the "Company") to further develop,
market, distribute and otherwise operate a business to market and distribute
worldwide a newspaper supplement specialty national sports magazine to be named
by the Company. The Company name shall be chosen by mutual agreement of the
Parties.
2. CONTRIBUTION OF THE PARTIES.
A. XVI shall contribute to the Company its License Agreement dated
as of January 1, 1996 in connection with the teen magazine supplement
sometimes referred to as Xpress.
B. HCMI commits to contribute $4,737,500 cash ("Funding"),
contingent on raising $12,500,000 in a public offering of HCMI common
stock. HCMI commits to contribute up to an additional $6,862,500 if
it raises $20,000,000 in a public offering of HCMI common stock.
3. PROFIT SHARING INTEREST; CAPITAL INTEREST. HCMI and XVI shall each
bear 50% of the expenses of the Company against income. Net income of the
Company (as determined by generally accepted accounting principles) shall be
distributed as follows:
A. During the first five years from the date Funding occurs: (i)
HCMI shall receive 100% of the first $7,500,000 of the Company's
annual net income; (ii) XVI shall receive 100% of the Company's annual
net income over $7,500,000 up to a maximum of $1,500,000; and (iii)
XVI and HCMI shall each receive 50% of the Company's annual net income
in excess of $9,000,000.
B. If, after the fifth anniversary date of the Funding, HCMI has
received income from the Company at least equal to its investment in
the new entity plus 8% cumulative annualized interest, then thereafter
HCMI and XVI shall each receive 50% of the Company's annual net
income.
Notwithstanding the foregoing, in the event that in any given year there is
insufficient net cash flow to meet the annual income distribution
obligations set forth in this section, such
<PAGE>
amounts as cannot be distributed shall become liabilities of the Company,
and shall be paid by the Company on a priority basis when sufficient
income is available.
4. OPERATING AGREEMENT. The Parties agree to negotiate and execute a
written operating agreement. Such operating agreement shall contain the
following terms and conditions:
A. Company Management. The Company shall be managed by the Parties
as its initial members ("Initial Members"). However, the members shall
have the authority, by majority vote thereof, to elect or appoint managers
or officers to conduct the day-to-day business of the Company.
B. Chief Executive Officer. XVI shall have the right to name the
Company's chief executive officer who shall be its President. Said
President shall have such power and authority as is normal for a President
of a corporation formed under Virginia law, including the right to hire and
fire operating personnel and operations support staff, all subject to the
approval of the chief financial officer, which approval may not be
unreasonably withheld. For purposes of the preceding sentence and
subparagraph C of this paragraph 4, any non-approval for any reason other
than a sound financial reason shall be deemed unreasonable.
C. Financial Officers; Outside Accountants/Auditors. HCMI shall
have the right to name the Company's chief financial officer or employee,
who shall have the right to hire and fire financial and administrative
personnel subject to the approval of the President, which approval may not
be unreasonably withheld; HCMI shall also have the right to name the
Company's outside independent accountant/auditors subject to the reasonable
approval of XVI.
D. Unanimous Consent of Initial Members. The following actions
shall require the unanimous consent of the Initial Members:
i. Sale of Company tangible or intangible assets outside the
ordinary course of business.
ii. The borrowing of money over and above a revolving credit
line that shall be established by mutual agreement of the Initial
Members.
iii. Entering into contracts with parties related to the members
or their employees, officers or directors.
iv. Changing the compensation of the chief executive officer,
executive vice president or chief financial officer.
<PAGE>
v. Entering into contracts to acquire furniture, fixtures,
equipment, goods or services lasting more than one year or with a
dollar value in excess of $50,000.
vi. Entering into any lease or rental agreement for more than
twenty-four months or with a dollar commitment greater than $50,000.
vii. Modification of the Operating Agreement.
E. Arbitration. All disputes under the Operating 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.
F. Restrictions on Transfer by Members. Except as specifically
authorized in the Operating Agreement or as approved in writing by all the
Members, none of the Members shall or may sell, exchange, deliver or assign,
dispose of, bequeath or give, pledge, mortgage, hypothecate or otherwise
encumber, transfer or permit to be transferred, whether voluntarily,
involuntarily or by operation of law (including, without limitation, under the
laws of bankruptcy, insolvency, creditors' rights, intestacy, descent and
distribution and succession), all or any of the Member Interests now owned or
hereafter acquired by such Member.
G. Rights of First Refusal:
1. Receipt of Bona Fide Offer. In the event that a Member
shall receive a legally enforceable offer in writing containing appropriate
terms and conditions (a "Bona Fide Offer") to purchase all (but not less than
all) of such Member's Member Interests and in the further event that such Member
shall desire to accept such Bona Fide Offer, such Member (hereinafter in this
paragraph G.1. referred to as the "Offering Member") shall promptly send notice
to the Company and to all Members except the Offering Member (such Members shall
be, for the purposes of this paragraph G.1., the "Other Members), offering to
sell the Offering Member's Member Interests to the Company and to the Other
Members at the same price and upon the same terms and conditions as are
contained in the Bona Fide Offer. The Company and the Other Members shall then
have such rights and privileges, for the prescribed time periods, as are set
forth in paragraph G.2. hereof. Without limitation of the provisions in
paragraph G.1. hereof, no Member shall or may sell, transfer, encumber or
otherwise dispose of his Member Interests except pursuant to a Bona Fide Offer
(subject to the provisions of this paragraph G.) unless otherwise specifically
authorized by this Operating Agreement.
2. Procedure.
2.1. Whenever, under paragraph G.1. hereof, a Bona Fide
Offer to purchase Member Interests has been received and notice of the Bona Fide
Offer has been sent by the Offering Member, the following procedure shall be
complied with: For a period of 30 days
<PAGE>
from its receipt of such notice, the Company shall have the right to elect to
purchase all or any part of the Member Interests so offered; provided,
however, that an election by the Company to purchase less than all of the
Member Interests so offered shall be ineffective unless the Other Members
shall purchase the balance of the Member Interests so offered. If the
Company shall not elect to purchase all of the Member Interests so offered
within such 30 day period (for any reason other than the Offering Member's
default hereunder), then the Other Members shall each have the right, at
each Other Member's sole option, for a period of 30 days after the expiration
of such 30 day period, to elect to purchase all (but not less than all) of
the Member Interests offered as aforesaid to the Company and not elected to
be purchased by the Company, on a pro rata basis (i.e., in proportion to
their respective Member Interests ownership) or in such other manner as they
shall agree upon.
2.2. If the Company and/or any of the Other Members, as the
case may be, elect to exercise any option as set forth in paragraph G.2.1.
above, the electing party or Parties shall provide notice of such election(s) to
the Offering Member within their respective election period(s). For purposes of
this paragraph G.2.2., the purchaser(s) of Member Interests whether it be the
Company and/or any of the Other Members, may sometimes hereinafter be referred
to individually or collectively, as the case may be, as the "Interest
Purchaser(s)." If the Company and any of the Other Members together constitute
the Interest Purchaser(s), then they shall act in tandem (but not as guarantors
of each other) to fulfill the obligations of the Interest Purchaser hereinafter
set forth. Settlement shall be held on the purchase of the Offering Member's
Member Interests under this paragraph G. at the principal office of the Company
or its current legal counsel at such time and date as shall be specified in the
notice sent by the Interest Purchaser of the exercise of its (and/or his) option
pursuant to this paragraph G.2., which date shall not be earlier than 30 days,
nor more than 120 days, after the Company's receipt of the Offering Member's
notice describing the Bona Fide Offer. At settlement on the purchase of the
Offering Member's Member Interest under this paragraph G., the Offering Member
shall resign as a Managing Member and/or officer of the Company (if applicable)
and shall deliver to the Interest Purchaser(s) all of the Certificates of Member
Interest owned by him to the current legal counsel for the Company. The
Interest Purchaser(s) shall deliver to the Offering Member the consideration
stated in its (and/or his) notice electing to exercise the option(s) set forth
hereinabove.
2.3. If the Company and the Other Members shall not, individually
or together, purchase (for reasons other than the Offering Members' default
hereunder), within the prescribed time periods, all of the Member Interests
covered by the Bona Fide Offer, then the Offering Member shall have the right to
accept the Bona Fide Offer in whole (but not in part) and to sell such Member
Interests, subject to all of the provisions and restrictions of this Operating
Agreement, but only in strict accordance with all of the provisions of the Bona
Fide Offer and only if the sale is fully consummated within 180 days after the
Company's receipt of the Offering Member's notice pursuant to paragraph G.
hereof. In the event that such sale is not fully consummated within 180 days
after the Company's receipt of the Offering Member's notice pursuant to
paragraph F hereof, the provisions of this paragraph G.1. must again be complied
with by the Offering Member before the Offering Member may sell or otherwise
dispose of his Member Interests pursuant to this paragraph G.
<PAGE>
H. Deadlock Resolution:
1. Push-Shove; Sale or Purchase.
1.1. In the event of a Deadlock (as defined below) in the
management of the Company between groups of Members owning an equal number of
Member Interests, the Members shall exercise their best efforts to resolve such
deadlock through negotiation. For the purposes of this paragraph H., "Deadlock"
shall mean that, following a good faith effort at mediation, the Initial Members
or officers are still deadlocked in the management of the Company affairs, the
Members are still unable to break the deadlock, and irreparable injury to the
Company is threatened or being suffered, or the business and affairs of the
Company can no longer be conducted to the advantage of the Members generally,
because of the deadlock. In the event of Deadlock, either group (in either
case, the "Initiating Group") may give notice to the other group (the "Offeree
Group") that the Initiating Group, jointly and severally, desires either (i) to
purchase all (but not less than all) of the Member Interests held by the Offeree
Group or (ii) to sell all (but not less than all) of the Initiating Group's
Member Interests to the Offeree Group. Such notice shall designate a price per
Member Interests and such other reasonable terms and conditions pursuant to
which the Initiating Group is willing either to purchase or sell the Member
Interests as aforesaid. Simultaneously with the sending of such notice, the
Initiating Group shall deposit in escrow by cashier's or certified check with
the independent or certified public accountant then servicing the Company (such
person hereinafter referred to as "Escrow Agent"), who shall act as a bona fide
Escrow Agent, an amount equal to five percent of the total price offered for all
of the Member Interests held by the Offeree Group.
1.2. Within 90 days after receipt of the notice from the
Initiating Group pursuant to paragraph G1.1., the Offeree Group shall elect
either (i) to sell all (but not less than all) of the Offeree Group's Member
Interests to the Initiating Group at the previously designated price per share
and terms and conditions, or (ii) at the Offeree Group's sole option, to
purchase all (but not less than all) of the Member Interests of the Initiating
Group at the designated price per share and terms and conditions. Such election
shall be made by notice to the Initiating Group and to the Escrow Agent. In the
event that the Offeree Group elects to purchase all (but not less than all) of
the Member Interests of the Initiating Group, then simultaneously with the
sending of such notice, the Offeree Group shall deposit in escrow with the
Escrow Agent an amount equal to five percent of the total price for all of the
Member Interests of the Initiating Group.
1.3. In the event that the Offeree Group shall elect, under or
pursuant to paragraph H.1.1., to purchase all (but not less than all) of the
Member Interests of the Initiating Group, the Escrow Agent shall promptly return
to the Initiating Group the deposit placed by the Initiating Group in escrow.
The failure or refusal by the Offeree Group to elect either alternative afforded
the Offeree Group under and pursuant to this paragraph H.1.1., and/or the
failure or refusal by the Offeree Group to comply fully, within the prescribed
time periods, with all provisions of this paragraph H.1.1., shall be
conclusively deemed for purposes of this paragraph H.1.1. to constitute its
electing, jointly and severally, to sell all (but not less than all) of the
Offeree Group's Member
<PAGE>
Interests to the Initiating Group at the previously designated price per Member
Interests and terms and conditions.
2. Settlement. Subject to the provisions of paragraph H.3.,
settlement on the purchase of all (but not less than all) of either the
Initiating Group or the Offeree Group (as the case may be) under this Article 6
shall be held at the principal office of the Company within 60 days after the
expiration of the 90 day period set forth in paragraph H.1.2. hereof or within
60 days after the Offeree Group's election, by the notice specified in H.1.2.
hereof, whichever occurs sooner, upon the following terms and conditions: the
entire purchase price for the Member Interests being conveyed (less the amount
previously placed in escrow, which amount shall be released by the Escrow Agent
at settlement to the group whose Member Interests is being so conveyed) shall be
paid in cash or by cashier's or certified check at settlement. Upon settlement,
any officer or Managing Member whose Member Interests is being so conveyed shall
resign as officer of Managing Member of the Company (if applicable) and shall
have no further interest or claim to or against the Company or its assets or
property, tangible or intangible, liquid or illiquid. Upon the consummation of
such settlement, the individuals or entities whose Member Interests is being
purchased shall cease to own or hold any Member Interests, shall no longer be
Members, and shall be entitled only to the purchase price described in this
paragraph H. in respect of the transferred
3. Guaranteed Obligations. Notwithstanding the foregoing provisions
of this paragraph H., if the Company, at the time the "push-shove" procedure
herein is invoked, has outstanding obligations that are personally guaranteed by
a Member that is part of a group that is otherwise obligated to sell its Member
Interests pursuant to this paragraph H., such group shall not be required to
consummate such sale unless and until all members included in such selling group
are released from their respective personal guaranties on such guaranteed debt
by the creditor thereof, or in lieu thereof, such indemnification of the selling
group by the purchasing group is provided as shall be consented to by the
selling group, which consent shall not be unreasonably withheld.
5. 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.
6. DEFAULTS. If XVI fails to abide by the obligations of this
Agreement, HCMI shall have the option to cancel this Agreement by providing
45 days' written notice to XVI. XVI shall have the option of preventing the
termination of this Agreement by taking corrective action that cures the
default, if such corrective action is taken prior to the end of the time
period stated in the previous sentence, and if there are no other defaults
during such time period.
7. TRANSFER OF RIGHTS. This Agreement shall be binding on any
successors of the Parties. Neither party shall have the right to assign its
interests in this Agreement to any other party, unless the prior written
consent of the other party is obtained.
<PAGE>
8. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
Parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the Parties.
9. SEVERABILITY. If any provision 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.
10. 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
11. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Virginia.
HEARTLAND CAPITAL CORPORATION, INC.
By: [Illegible]
-------------------------------------------
Title: President
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XPRESS VENTURES, INC.
By: [Illegible]
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Title: President
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<PAGE>
EXHIBIT 10.64
ALVERY BARTLETT FUND MANAGEMENT CO.
AMENDED AND RESTATED
INVESTMENT AGREEMENT
THE INVESTMENT AGREEMENT, dated as of May 17, 1996, made and entered into
by and between Alvery Bartlett Fund Management Co. ("ABFM") and Heartland
Communications & Management, Inc. ("HCMI") is hereby amended and restated,
effective as of October 1, 1996.
HCMI and ABFM hereby agree as follows:
1. INVESTMENT.
A. ABFM UNITS
(i) HCMI agrees to acquire 7.5 Units of ABFM for a cash consideration
of Three-Hundred Eighty Thousand U.S. Dollars ($380,000.00). The $380,000
consideration shall be used for general corporate purposes including the
formation of a "hedge fund."
(ii) Each full Unit of ABFM shall consist of : (i) 140 shares of ABFM
nonvoting Class A, Series 1 Common Stock, par value $.01 and (ii) 20 shares
of ABFM nonvoting Class A 12% Cumulative Preferred Stock, par value $.01
(collectively "a Unit"). After acquisition of the 7.5 Units (the "Units"),
HCMI will hold 1050 shares of the nonvoting common stock and 150 shares of
the preferred stock in ABFM. At such time and after ABFM exercises its
call option with respect to the ABFM nonvoting common and preferred stock,
HCMI will own approximately 6.5% of the issued and outstanding stock in
ABFM.
(iii) The obligation to acquire the Units is contingent on HCMI
raising two million five hundred thousand dollars ($2,500,000) in an
initial public offering of its voting common stock.
(iv) As long as HCMI acquires the Units and holds at least 300
shares of the nonvoting common stock in ABFM, HCMI shall have the right to
nominate Michael Foudy to the ABFM Board of Directors. Alvery Bartlett
together with other shareholders of ABFM holding a sufficient number of
shares of ABFM stock necessary to elect such nominee to ABFM's Board shall
execute an agreement to vote their shares to elect HCMI's nominee to ABFM's
Board. In the event HCMI's nominee of right (named above) shall be unable
or declines to serve on ABFM's Board, subject to the approval of Alvery
Bartlett or the affirmative disapproval of ABFM shareholders holding 33% or
more of ABFM's issued and outstanding voting common stock, HCMI may
substitute a member of
<PAGE>
its Board of Directors for its nominee of right (named above). Alvery
Bartlett may withhold said approval for any or no reason and the
shareholders constituting holders of 33% of the issued and outstanding
voting common stock need have no reason for disapproval. At such time as
ABFM is financially able to and in fact acquires director and officer
liability insurance, ABFM shall indemnify HCMI's Board representative for
his or her acts or omissions as an ABFM Board member to the full extent
of the state corporation law applicable to ABFM; provided however, said
indemnity shall not exceed the amount and type of the directors and
officers insurance coverage available to ABFM and other ABFM Board
members.
B. FUND VENTURE
(i) Management Fees. Subject to and conditioned on HCMI raising
seven million dollars ($7,000,000) from an initial public offering of its
voting common stock, HCMI agrees to provide one million one hundred
thousand dollars ($1,100,000) to ABFM to complete the cost and expense of
forming, marketing, distributing and managing an "inflation index fund" to
be formed by ABFM. ABFM shall provide investment advisory services to the
"inflation index fund" for which ABFM will receive management and incentive
fees. In exchange for said $1.1 million, ABFM agrees that HCMI shall be
entitled to and shall receive 50% of all management, incentive or other
allowable fees (the "Gross Fees") due ABFM from the "inflation index fund"
under any contract or agreement between ABFM and the "inflation index fund"
for management of or advisory services to such fund. ABFM and HCMI agree
to share equally those costs and expenses listed on Schedule A attached
hereto (the "Schedule A Expenses") in connection with the "inflation index
fund."
(ii) Timing. ABFM shall pay HCMI its 50% share of the Gross Fees due
from the "inflation index fund," net of HCMI's 50% share of Schedule A
Expenses, on or before the forty fifth (45th) day following the day on
which payment of any Gross Fees is due to be paid to ABFM by the "inflation
index fund."
(iii) Other Funds. ABFM agrees that in the event ABFM starts a
fund other than the "inflation index fund" (the "other fund") after the
"hedge fund" is started, HCMI shall have the option, but not the
obligation, to substitute the "inflation index fund" with that "other fund"
and HCMI shall be paid 50% of all fees ABFM receives for services rendered
to the "other fund," less costs and expenses specifically identified as
connected to the "other fund" and otherwise agreed to by the parties.
Provided, however, that if the funding requirements for the "other fund"
exceed $1.1 million, then HCMI's share of the ABFM fees (and costs and
expenses) shall be equal to 50% multiplied by the ratio of $1.1 million
over the total actual funding obtained to start said other fund. HCMI
shall have the right to contribute the difference between its $1.1 million
funding obligation and the actual funding need for the "other fund," in
which case HCMI
<PAGE>
shall be due the 50% of fees (and obligated to pay 50% of costs and
expenses) specified above.
(iv) Right of First Refusal. In addition to the options outlined
in this Section B above, HCMI shall have the right of first refusal,
superior to any other investor, to invest in any future investment fund
developed by ABFM.
(v) Profits Preference. Notwithstanding the foregoing, any
investment funds contributed by HCMI for "inflation index fund," or "other
fund," shall be repaid out of the first profits earned by the inflation
index fund or "other fund", until such investment funds are repaid in full.
(vi) Noncompete Agreement. ABFM and Alvery Bartlett hereby agree
not to compete with the "inflation index fund" or any "other funds"
(collectively, the "Funds") funded or financed by HCMI and ABFM.
Furthermore, Alvery Bartlett shall execute a separate, detailed non-compete
agreement satisfactory to HCMI prior to and effective upon HCMI's funding
of the first Fund. HCMI's funding of any Fund is contingent upon Alvery
Bartlett's execution of a satisfactory non-compete agreement.
(viii) Best Efforts. ABFM will exercise its best efforts to ensure
that, in the event that Mutual Benefit Life Insurance Company does not fund
the All City Trust fund, but HCMI elects to fund the All City Trust fund
and Mutual Benefit agrees to sell its 21.4% interest in ABFM or the All
City Trust fund, Mutual Benefit's 21.4% net income participation interest
in All City will be funded and shared equally by ABFM and HCMI. HCMI
agrees to provide a promissory note in an amount not exceeding $100,000.00
at the time such note becomes necessary for this purpose.
(ix) Accounting; Right To Inspect.
a. Accounting. ABFM shall maintain records, which are audited
at least annually by a certified public accountant, in sufficient detail
for purposes of determining the amount of the fee due HCMI. ABFM shall
provide to HCMI a written accounting that sets forth the manner in which
the fee was calculated with each fee payment and a year end summary
statement, which shall be audited by a certified public accountant.
b. Right to Inspect. HCMI, or HCMI's agent, shall have the
right to inspect ABFM's records for the limited purpose of verifying the
calculation of the fee, subject to such restrictions as ABFM may reasonably
impose to protect the confidentiality of the records. Such inspections
shall be made during reasonable business hours as may be set by ABFM.
<PAGE>
(x) Relationship of Parties. Nothing in this Agreement shall be
understood as establishing Alvery Bartlett or ABFM as a registered
representative or a broker/dealer for the purposes of this Agreement.
There has been no selling agreement executed among the above parties.
2. TERM. This Agreement shall be effective until May 31, 1997.
Notwithstanding the immediately foregoing sentence, after May 31, 1997 this
Agreement and HCMI's right to exercise its rights under paragraph 1 above
shall continue until thirty days after ABFM gives HCMI notice that it has
received a bona fide offer from a third party for any of the investment
opportunities specified in paragraph 1 above and HCMI shall have thirty
days from said notice to exercise its investment option and make its
required cash investment.
3. NOTICES. Notices required or permitted to be given hereunder
shall be in writing and shall be deemed to be given when personally
delivered (including delivery by an express or overnight delivery service),
when received by facsimile transmission or when sent by registered mail,
return receipt requested, addressed, if to ABFM, at the address appearing
on the signature page hereof, and if to the HCMI: Heartland Communications
& Management, Inc. 1320 Old Chain Bridge Road, Suite 220, McLean, Virginia
22101 or to such other address as may be furnished from time to time by
notice given in accordance with this Section.
4. WAIVER. Failure of either party to exercise any right or remedy
under this Agreement, or delay by a party in exercising same, will not
operate as a waiver thereof. No waiver by a party will be effective unless
and until it is in writing and signed by the party affected.
5. GOVERNING LAW; SEVERABILITY. This Agreement shall be enforced,
governed and construed in accordance with the laws of the State of Missouri
without regard to its conflict of laws principles or rules. In the event
that any term or provision of this Agreement is invalid or enforceable
under any applicable statute or rule of law, then such term or provision
shall be deemed inoperative to the extent that it may conflict therewith
and shall be deemed modified to conform with such statute or rule of law.
Any term or provision hereof which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other term
or provision hereof.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth below.
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
1320 Old Chain Bridge Road, Suite 220
McLean, VA 22101
By: /s/ Michael Foudly
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ALVERY BARTLETT FUND MANAGEMENT CO.
8182 Maryland Avenue - Suite 103
St. Louis, Missouri 63105
By: /s/ Alvery A Bartlett
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Alvery Bartlett
<PAGE>
Alvery Bartlett Fund Management Company
Investment agreement dated as of May 17, 1996
SCHEDULE A OF EXPENSES
All direct or third party costs including but not limited to:
Distribution/Broker-dealer expenses
Shareholder servicing expenses
Transfer agency/custodian expenses
Sub-advisory expenses
Expense CAP overage expenses
Possible carried interest of Mutual Benefit Life
for All City Trust
Plus all indirect or reasonably allocable operational or apportionable costs
including but not limited to:
Employee compensation and benefits
Rent, equipment, furniture, leases
Travel
Phone
Legal and accounting
General administration
The basis for allocation should be subject to the mutual agreement of the
parties. If the parties cannot agree to the allocation, a mutually agreeable
CPA firm should be hired to resolve the allocation issue.
ALVERY BARTLETT FUND HEARTLAND COMMUNICATIONS &
MANAGEMENT CO. MANAGEMENT, INC.
8182 Maryland Avenue, Suite 103 1320 Old Chain Bridge Rd., Suite 220
St. Louis, Missouri 63105 McLean, VA 22101
By: /s/ Alvery A Bartlett By: /s/ Michael Foudly
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Date: 11/13/96 Date: 11/17/96
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<PAGE>
EXHIBIT 10.65
HCMI
Heartland Communications & Management, Inc.
Target Marketing Concepts on the Leading Edge
HCMI, a communications and management company, will identify and exploit
profitable "niche market" opportunities in the rapidly developing world of
broadcasting, print and on-line media, and provide marketing/communication
counsel to clients and venture partners in all those media. In broadcasting, the
company will focus on AM radio station operations and the production of talk and
information programming; in publishing, on the development of demographically
targeted editorial/advertising supplements for newspaper publishers; in
Cyberspace, and in the more convential marketplace, on assisting clients and
venture partners in the development of effective communication strategies. The
Company believes these target marketing concepts position HCMI on the leading
edge for the 21st century.
RADIO OPERATIONS
Despite unprecedented investment in local radio outlets in the past year, the
AM segment of the $11.5 billion radio broadcasting industry remains undervalued
as an investment opportunity and under-served by programmers. News/Talk Radio
has been the only programming format on AM stations to consistently perform
profitably.
HCMI's radio network will develop, produce and market programming designed to
meet the expanding and varied needs of local AM broadcasters for thoughtful
news and information content and it will acquire, format and operate stations to
meet the unmet needs of growing ethnic audience groups.
NEWSPAPER SUPPLEMENTS
Today, lucrative demographic market segments are often difficult and expensive
for advertisers to reach effectively.
The American teens market is one such attractive segment. Teens spend $60
billion a year and influence more than $160 billion in purchases, according to
ADWeek's Guide to Media, 1995, and a 1992 study by Find/SVP.
Advertisers prize, but have limited ability to impact, this market
cost-effectively. HCMI is developing a magazine for teens which will
cost-effectively bring teen-oriented information and name brand advertising to
young people across America and has additional niche market editorial products
under development.
NEW MEDIA
Using the same niche or target marketing approaches, HCMI will assist contract
clients and venture partners in the development of communication strategies
which bridge the gap between the conventional and the new, on-line media.
For established consumer marketers and new enterprises alike, the
rapidly-expanding media landscape offers expensive and risky new opportunities,
but opportunities which cannot safely be ignored.
Drawing on the extensive media and marketing experience of its staff and its
corps of advisors, HCMI will provide expert evaluation of new media
opportunities and counsel on strategies for their effective use.
Innovation n Creativity n Experience HCMI
<PAGE>
RADIO: "New Look" Medium
Informative. Enlightening. Entertaining. Profitable.
Radio is becoming as diverse an industry as the audiences it serves. As such, it
is perfectly positioned as the broadcast medium able to serve the niche
advertising markets of the 21st Century. HCMI's Heartland Radio Network (HRN) is
pursuing a two-pronged strategy to establish a stake in this remarkable,
post-deregulation industry. First, it will develop innovative national
programming for syndicated distribution to cost-conscious AM broadcasters. And,
second, it will invest, through its ATB Productions, L.L.C. affiliate, in the
acquisition of radio stations in specially-targeted geographic markets.
ATB currently contributes to the production of four nationally-distributed
talk/information programs, and has several others under development, including
one innovatively linked to a national retail products catalog operation.
Heartland Radio Network (HRN) is marketing these shows to more than 140 radio
stations across the country and to potential advertisers. The shows focus on
diverse subjects, including politics, travel, entrepreneurship, international
investment and the American music industry and are beamed to local station
affiliates by the Talk America and United Broadcasting networks. Revenues from
these programming and marketing activities come in the form of production and
talent fees as well as advertising and retail product sales.
HRN is also assisting ATB Productions become an owner and operator of radio
stations. ATB Media, Inc. (a new subsidiary of ATB Productions) is acquiring
distressed stations, typically AM licensees in outlying areas of major markets,
moving or re-orienting their transmission equipment to more advantageous
locations and then re-formatting the stations to serve multi-lingual audience
segments. The stations avoid costly investment in talent and marketing staff in
favor of selling block airtime to programming entrepreneurs who sell advertising
in their programs to the niche audiences they serve. At this writing, ATB Media
has acquired or is in the process of acquiring four stations and is operating a
fifth under lease contract, in the Houston, Los Angeles and Seattle markets.
The potential to leverage an ownership position in AM radio stations is
considerable, in both the near- and far-term, and multi-market ownership
opportunities are abundant under the Telecommunications Reform Act of 1996.
A new tower means a stronger signal
for KHPY Radio in Moreno Valley, California.
"Newsmaker" host Mike Foudy on the air with producer
Brad Niemcek and guest Durga Pokhrel.
RADIO NETWORK
<PAGE>
A Magazine for Teens
An innovative, unique concept to reach the critical teen market
Sample cover from successful market test.
There are nearly 40 million teens in America. While electronic means, such as
MTV, reach many teens, there has never been one national print publication to
effectively reach this large and lucrative audience.
Weekly editions will be electronically transmitted to
local newspapers for distribution.
HCMI's magazine for teens will be an up-tempo publication with sports, fashions,
entertainment and other features geared to today's teen lifestyle and interests.
The teen magazine will be a potentially wider reaching and more interactive
medium than any existing high school student-oriented publication or TV/cable
programming. It will offer advertising coupons empowering teens to save on
their favorite brands.
National advertisers to be targeted are companies such as Coca Cola,
Blockbuster, Taco Bell, Pepsi, Levi's, McDonald's and others which recognize
the value of establishing early customer loyalty.
Distributed by existing newspapers and organizations, HCMI believes this
approach will enable the magazine to establish readership quickly.
Xpress Ventures' Gerald Garcia, implemented the first successful test of the
teen magazine concept.
While the publication will be created at HCMI's national headquarters and
feature national advertising, subscribing newspapers can add local editorial
content and advertising, making it an even more financially lucrative product.
HCMI believes its design, content and national brand coupons will make its teen
magazine a publication that America's youth will look forward to receiving every
week.
<PAGE>
Other HCMI Concepts
Acquisitions
HCMI has devised a growth strategy that blends development of already existing
operations and/or operational plans with carefully selected media industry
acquisitions. The combination of internal growth and strategic acquisitions can
result in a collection of operations with not only individual profit potential
but a portfolio of media opportunities whose synergy is of special appeal to
advertisers. Acquisition candidates may include radio programs, program
networks or their production and satellite transmission infrastructures.
Management
The Company believes its management and marketing services will be an
expanding component in the future. As the Company markets its radio programs and
print products, personnel hired to develop those activities (or brought into the
Company through acquisitions) will complement its existing personnel and give
the Company added strength in its talent pool. That talent can then provide
synergistic and targeted opportunities to the Company's core businesses and the
cross-marketing concepts across local media.
- -------------------------------------------------------
HCMI Speciality Communications for the 21st Century
For information on investing in HCMI and a copy of our prospectus, please fill
in this card and mail to: Northridge Capital Corporation, 625 Colonial Park
Drive, #102, Roswell, GA 30075
NAME_________________________________________________________________________
ADDRESS______________________________________________________________________
CITY, STATE, ZIP_____________________________________________________________
PHONE - WORK ____________________________ HOME______________________________
INTERNET/E-MAIL ADDRESS________________________ FAX_________________________
- -------------------------------------------------------
HCMI FIRST
1320 Old Chain Bridge Road, #220 CLASS
McLean, VA 22101 POSTAGE
HERE
<PAGE>
Exhibit 10.66
[Heartland Letterhead]
PROMISSORY NOTE/Standby Line of Credit
$360,000 January 15,1995
FOR VALUED RECEIVED, America The Beautiful Productions ("Maker")
promises to pay to Heartland Capital Corporation, ("Payee") at 1320 Old Chain
Bridge Road, Suite 220, McLean Virginia 22101, (or such other place as Payee
from time to time may designate in writing to Maker), the principal sum
advanced by Payee to Maker provided however that such sum shall not exceed
Three Hundred Sixty Thousand and 00/100 dollars, ($360,000.00) in lawful
money of the United States, together with interest thereon at eight percent
(8%) per annum. Provided further however that Maker shall not be able to draw
sums pursuant to this agreement so long as the sponsorship agreement between
ATB Productions and the Houston Post shall remain in effect.
1. Interest: Interest shall accrue on the principal amount then outstanding
hereunder based on the calendar month and the number of days elapsed in a 365
day year.
2. Interest Payment: Interest shall be payable on a monthly schedule of
payments to the Payee beginning January 15, 1997.
3. Principal Payment: The entire unpaid principal sum along with any unpaid
interest is due and payable upon December 31, 1999.
4. Applicable Law: This note shall be governed by, and construed and
enforced in accordance with the laws of the Commonwealth of Virginia.
6. Assignment: Neither Maker nor Payee may assign any of their rights or
obligations under this Note without the prior written consent of the other,
which consent may be withheld at such party's sole discretion.
Executed as of the date set forth above.
/s/ Michael Foudy
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Maker: America The Beautiful
By Michael L. Foudy
<PAGE>
EXHIBIT 10.67
MUTUAL TERMINATION
As of May 17, 1996, Alvery Bartlett Fund Management Co. ("ABFM") and
Heartland Communications & Management, Inc. ("HCMI") (ABFM and HCMI
collectively the "Parties") entered into an Investment Agreement, which was
amended and restated effective October 1, 1996 (as amended and restated the
"Investment Agreement").
The Parties mutually agree that due to unforeseen circumstances and/or
impossibility of performance it is mutually beneficial for the Parties to
terminate the Investment Agreement.
Therefore, effective this 24th day of July, 1997, the Parties agree that
the Investment Contract is hereby terminated and that neither party will
hereafter have any rights or obligations pursuant thereto.
This Mutual Termination may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this MUTUAL TERMINATION as
of this 24th day of July, 1997.
ALVERY BARTLETT FUND HEARTLAND COMMUNICATIONS &
MANAGEMENT CO. MANAGEMENT, INC.
/s/ Alvery Bartlett [Illegible]
By: ------------------------------ By: ----------------------------------
Alvery Bartlett Vice President
<PAGE>
EXHIBIT 24.1
CONSENT OF COUNSEL
We hereby consent to the reference to us in the prospectus constituting
part of this Pre-Effective Amendment No. 1 to the Registration Statement for
Heartland Communications & Management, Inc. under the caption "Legal
Matters.''
THE HEIDEMAN LAW GROUP, P.C.
Washington, D.C.
July 24, 1997
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Heartland Communications & Management, Inc. and
Heartland Capital Corporation
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,
on our audits of the financial statements of Heartland Communications &
Management, Inc. and Heartland Capital Corporation, 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.
July 24, 1997
