PROSPECTUS FEBRUARY 13, 1998
$12,500,000
2,500,000 SHARES OF COMMON STOCK
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
2,500,000 shares of common stock (the "Shares") are being offered hereby by
Heartland Communications & Management, Inc., a Delaware corporation (the
"Company"), on a best-efforts, minimum-maximum basis. (See "Plan of
Distribution.") The Company will be engaged in a broad-based communications and
management business aimed at specific targeted markets, including the
development, production, marketing and syndication of advertising-supported
broadcast programs and print products. (See "The Company -- Specific Projects
Under Consideration.") These products are designed to meet the expanding needs
of the media business for creative content -- especially in those segments,
e.g., AM radio and newspaper publishing, in which syndicated alternatives to
locally-produced content are financially attractive. (See "Prospectus Summary
The Offering - Application of Proceeds.") At the present time, all such
investment opportunities are contingent on the successful completion of this
offering. Each of the currently contemplated joint ventures requires the
Company's investment to be substantially repaid before any revenue sharing
occurs with the creators of the idea(s).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION NOT CONTAINED IN THE PROSPECTUS
IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANY PERSON WITHIN
ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL.
Unless earlier terminated, the Initial Offering Period will be up to two
(2) months from the date hereof unless, in the sole discretion of the Company
and Selling Agent, it is extended for periods up to a total of seven (7)
additional months. The Company is offering a minimum of $2,000,000 up to a
maximum of $12,500,000 of such Shares. (See "Plan of Distribution.") The date
that (1) subscriptions for a minimum of $2,000,000 in Shares have been received
and (2) the Company has accepted such subscriptions will mark the end of the
Initial Offering Period. As described in greater detail in "Plan of
Distribution," the offering is being made pursuant to a Registration Statement
which may be extended for additional periods which will, in the aggregate, not
exceed 18 months from the date of this Prospectus (the "Continuous Offering
Period"). (See "Risk Factors -- No Market For The Company's Shares;
Non-Transferability Of Shares Until This Offering Period Ends."). During both
the Initial and Continuous Offering Periods, Shares will be offered at $5.00 per
share, inclusive of an 8% selling commission (the "Selling Price"). (See "Notes
to the Cover Page.") If a minimum of $2,000,000 of Shares is not sold during the
Initial Offering Period (as it may be extended), investor funds will be promptly
returned with all interest earned thereon. The minimum purchase is $5,000
(except that the Company, in its discretion, may accept IRA accounts with lesser
amounts); additional purchases by existing Shareholders may be made in the
amount of $1,000 or more. (continued on next page)
THESE ARE SPECULATIVE SECURITIES.
SEE "RISK FACTORS" FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
--------------
Potential investors in the Company are advised that an investment in its
Shares is subject to the following considerations, among others:
o Communications and/or management companies can be speculative and
volatile and involve significant risks, including those discussed in
"Risk Factors."
o Specifically, prospective investors are advised that the Company's
auditors have issued an opinion (as is often true for developmental
stage entities) which raises questions about the Company's ability to
continue as a "going concern". (See "Risk Factors - Going Concern Report
Of Certified Public Accountants.")
o The Company has not had significant prior operations, and market
acceptance is beyond the control of management. (See "The Company" and
"Risk Factors.")
o Certain conflicts of interest exist in the management of the Company.
(See "Conflicts Of Interest.")
o The success of the Company is dependent on its management. (See "The
Company -- Management" and "Risk Factors -- Reliance On Management.")
o Investors are advised that the Company is a developmental stage company
and, as such, is the subject of a "going concern" opinion from its
accountants. (See Financial Statements, Appendix I.)
================================================================================
PRICE TO PUBLIC
DURING INITIAL SELLING PROCEEDS TO
OFFERING PERIOD(1)(2)(3) COMMISSION(2)(3) COMPANY(3)
Per Share ........ $ 5.00 $ 0.40 $ 4.60
Total Minimum .... $ 2,000,000 $ 160,000 $ 1,840,000
Total Maximum .... $12,500,000 $ 1,000.000 $11,500,000
================================================================================
(1) During this Offering Period, there is a $5,000 minimum (except that the
Company, in its discretion, may accept IRA accounts with lesser amounts and
existing Shareholders may make additional purchases in the amount of $1,000
or more).
(2) A selling commission of 8% will be paid on all Shares sold. The Company has
agreed to indemnify the Managing Placement Agent (and any additional
Placement Agents) against certain liabilities, including any that may exist
under the Securities Act of 1933. (See "Plan Of Distribution.")
(3) These amounts are before deducting offering expenses (estimated at $205,000
in the case of the minimum offering and $1,112,500 in the case of the
maximum offering payable by the Company.)
UNTIL MAY 12, 1998 (90 DAYS AFTER THE DATE HEREOF), ANY BROKER-DEALER
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A CURRENT COPY OF THIS PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A COPY OF THIS PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO ANY UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE OR, IN THE CASE OF
INFORMATION INCORPORATED HEREIN OR THEREIN BY REFERENCE, THE DATE OF FILING WITH
THE SECURITIES AND EXCHANGE COMMISSION.
MANAGING PLACEMENT AGENT
NORTHRIDGE CAPITAL CORPORATION
<PAGE>
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:
(A) THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA HAS
IMPOSED INVESTOR SUITABILITY STANDARDS OF A MINIMUM OF $65,000 ANNUAL
GROSS INCOME AND $250,000 NET WORTH OR, IN THE ALTERNATIVE, MINIMUM
NET WORTH OF $500,000. (NET WORTH EXCLUDES PRINCIPAL RESIDENCE, HOME
FURNISHINGS AND AUTOMOBILES.) IN ADDITION, THE INVESTOR'S TOTAL
PURCHASE OF SECURITIES MAY NOT EXCEED 10% OF HIS OR HER NET WORTH.
(SEE ALSO ANNEX TO THE SUBSCRIPTION AGREEMENT.); AND
(B) THE SECURITIES COMMISSIONER OF NORTH DAKOTA HAS PROHIBITED THE OFFER
AND SALE OF SHARES TO ANY IRA ACCOUNTS BENEFICIALLY OWNED BY
RESIDENTS OF NORTH DAKOTA.
(4) In the case of a pension, profit sharing plan or trust or any
tax-deferred or tax-exempt entity, including retirement plans, the
trustee or custodian must represent that he, she or it is authorized to
execute such subscription on behalf of the plan and that such investment
is not prohibited by law or the plan's governing documents.
(5) The Company may reject any subscription. All subscriptions received are
irrevocable.
(6) The Company and any Placement Agent must have reasonable grounds to
believe, on the basis of information obtained from the purchaser
concerning his financial situation and needs and any other information
known by the Company and/or any Placement Agent, that (a) the purchaser
is or will be in a financial position appropriate to enable him to
realize to a significant extent the benefits described in the
Prospectus; (b) the purchaser has a net worth sufficient to sustain the
risks inherent in an investment in the Company, including possible
losses on their investment and lack of liquidity; and (c) the Company is
otherwise a suitable investment for the purchaser.
(7) SHARES WILL BE LEGENDED TO RESTRICT TRANSFER UNTIL THE OFFERING
TERMINATES AND MAY BE SUBJECT TO RESTRICTIONS ON TRANSFERS THEREAFTER TO
PERSONS WHO MEET SPECIFIED SUITABILITY REQUIREMENTS. This may reduce the
possibility of any trading market developing in the Shares for an
additional period of time after the close of the offering. (See "Risk
Factors - No Market For The Company's Shares; Non-Transferability Of
Shares Until This Offering Period Ends.")
FOLLOWING THE CONCLUSION OF EACH CALENDAR (WHICH IS ALSO THE FISCAL) YEAR,
SHAREHOLDERS WILL RECEIVE AN ANNUAL REPORT, INCLUDING A BALANCE SHEET,
STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS' EQUITY AND RELATED
FOOTNOTES. THE FINANCIAL STATEMENTS CONTAINED IN THE ANNUAL REPORT WILL BE
AUDITED BY THE COMPANY'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. UNAUDITED
QUARTERLY REPORTS ON OPERATIONS ALSO WILL BE DISTRIBUTED TO SHAREHOLDERS OR MADE
AVAILABLE THROUGH E-MAIL AND/OR THE INTERNET.
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK.]
2
<PAGE>
TABLE OF CONTENTS
DESCRIPTIVE TITLE PAGE
- ----------------- ------
INVESTMENT REQUIREMENTS ............................................ 2
PROSPECTUS SUMMARY ................................................. 5
SUMMARY FINANCIAL DATA ............................................. 7
PRO FORMA FINANCIAL INFORMATION .................................... 9
INTRODUCTORY STATEMENT: WHO SHOULD INVEST .......................... 9
RISK FACTORS ....................................................... 9
CONFLICTS OF INTEREST .............................................. 15
FIDUCIARY RESPONSIBILITY OF THE COMPANY'S MANAGEMENT ............... 19
APPLICATION OF PROCEEDS ............................................ 20
CAPITALIZATION ..................................................... 22
DILUTION ........................................................... 22
THE COMPANY ........................................................ 24
General ........................................................... 24
Introduction ...................................................... 24
Specific Opportunities under Consideration ........................ 26
Fairness Of Consideration ......................................... 33
Management ........................................................ 34
Professional Advisors ............................................. 39
Remuneration ...................................................... 40
Employee Benefits ................................................. 40
Employee Agreements ............................................... 40
Employees ......................................................... 41
Property .......................................................... 41
Litigation ........................................................ 41
Securities Ownership Of Certain Beneficial Owners And Management... 41
SELECTED FINANCIAL DATA ............................................ 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ......................................... 45
ABSENCE OF PUBLIC MARKET AND DIVIDEND POLICY ....................... 53
DESCRIPTION OF CAPITAL STOCK ....................................... 53
PLAN OF DISTRIBUTION ............................................... 55
ERISA CONSIDERATIONS ............................................... 56
LEGAL MATTERS ...................................................... 57
EXPERTS ............................................................ 57
AVAILABLE INFORMATION .............................................. 57
APPENDIX I (FINANCIAL STATEMENTS) .................................. I-1
APPENDIX II (SCHEDULE 15G, "IMPORTANT INFORMATION ON PENNY
STOCKS") .......................................................... II-1
APPENDIX III (FAIRNESS OPINION) .................................... III-1
EXHIBIT A -- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY .......... A-1
3
<PAGE>
[GRAPHIC OMMITTED]
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. All references in this Prospectus to Shares are as
of September 30, 1997, unless otherwise specified. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
Heartland Communications & Management, Inc. is a recently organized
Delaware corporation which will engage in a broad-based communications and
management business aimed at specific targeted markets. At the present time, the
Company has engaged mostly in organizational activities to structure the various
business areas. The Company, directly or indirectly, also has contracts to
market, produce and/or distribute certain syndicated radio programs. (As of the
date of this Prospectus, the Company's talk shows include "Newsmaker" (with Mike
Foudy) and "The Travel Show" (with Larry Gelwix and Danny Kramer).) It is also
performing initial due diligence on various other business development
opportunities. For example, the Company contemplates forming one or more of its
own satellite-transmitted radio networks to sell broadcast time to advertisers
and talk show hosts and a subsidiary of its ATB Productions, L.L.C. affiliate is
attempting to complete the acquisition of three AM radio stations in California
and Washington. In addition, the Company has an option to obtain a substantial
interest in two prospective innovative, national specialty supplements to
newspapers designed to appeal to targeted segments of the mass audience the
Company believes to be under-served: teenagers and sports enthusiasts.
Additional print, broadcast, Internet-based products, management services and
news media components, as well as hybrid combinations, also are contemplated.
They will be developed by the Company or will be part of the Company's
acquisition strategy and/or management services will be offered to clients on a
fee and/or equity basis providing, for example, marketing concepts and
strategies.
The Company was incorporated on March 27, 1996 in Delaware. Its $ .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.")
THE OFFERING
SECURITIES............... 2,500,000 Shares having an aggregate offering price
of $12,500,000 are being offered at $5.00 per Share
(the "Selling Price") during this Offering Period.
(See "Plan of Distribution" and Cover Page.)
OFFERING PERIOD.......... As described in greater detail in "Plan of
Distribution" and on the Cover Page, the offering
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
5
<PAGE>
months from the date of this Prospectus if, as
expected, the $12,500,000 maximum is not achieved
during the Initial Offering Period.
PROCEEDS HELD............ All subscriptions during the Initial Offering
Period will be held in an escrow account with
George Mason Bank, McLean, Virginia. Such proceeds
will not be paid to the Company until receipt of
the minimum offering amount of $2,000,000;
thereafter, if such minimum is achieved, the
offering will continue at the Company's $5.00 per
share Selling Price. If the minimum offering amount
of $2,000,000 is not achieved, the related proceeds
and all interest earned thereon will be returned to
the investors. Even after the Initial Offering
Period (so long as at least the $2,000,000 minimum
is achieved), subscriptions will continue to be
escrowed with George Mason Bank pending (i)
month-end acceptance or (ii) acceptance in
"tranches" of at least $250,000, whichever first
occurs. Investors are reminded that, given the
duration of the Initial Offering Period,
subscriptions may be held in escrow for up to nine
(9) months from the date of this Prospectus. In
addition, while it is expected that interest will
be earned on escrowed funds, there is no assurance
that interest will be earned and, in any event,
interest earned will not be returned to subscribers
unless the $2,000,000 minimum offering is not
achieved.
MINIMUM SUBSCRIPTION..... The minimum purchase (except as to IRA accounts) is
$5,000 and minimum additional purchase(s) by an
existing Shareholder is $1,000. Unless the minimum
is not achieved, interest earned on escrowed
subscriptions will be retained by the Company. (See
"Investment Requirements" and "Plan Of Distribution
-- Subscriptions.")
RISKS AND CONFLICTS
OF INTEREST............... An investment in the Company involves substantial
risks due in part to the costs which the Company
will incur, given the highly speculative nature of
the communications and management business. (See
"Conflicts Of Interest. ") Risks inherent in
investing in the Company are discussed under "Risk
Factors."
PLAN OF DISTRIBUTION..... The Shares are being offered on a best-efforts
basis by registered broker-dealers. (See "Plan Of
Distribution.")
APPLICATION OF PROCEEDS... Proceeds of this offering will be applied to
certain contemplated acquisitions and/or start-ups
outlined herein and for working capital purposes.
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. 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
6
<PAGE>
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 which will be offered to
clients on a fee and/or equity basis providing, for
example, marketing concepts and strategies. If only
the minimum is achieved, the Company will
concentrate its efforts in expanding its Heartland
Radio Network, making communications-related
acquisitions and commencing work in creating the
magazine supplement for teens. In the event more
than the minimum is subscribed, the Company intends
to be more aggressive in implementing its business
plan. (See "Application of Proceeds" and "The
Company.")
SUMMARY FINANCIAL DATA
The Summary Financial Information, all of which (except the information for
the nine months ended September 30, 1996 and 1997) has been derived from audited
financial statements included elsewhere in this Prospectus, reflects the
operations of Heartland Capital Corporation ("HCC" and "Predecessor Company"),
the majority of whose development and contract rights were assigned to the
Company ("Successor Company") on May 17, 1996. This information should be read
in conjunction with the financial statements and "Management's Discussion And
Analysis Of Financial Condition And Results Of Operation."
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK.]
7
<PAGE>
<TABLE>
<CAPTION>
HCC (Predecessor Company) (1)(6)
--------------------------------
DATE OF DATE OF
FORMATION FORMATION
(6/23/94) YEAR YEAR 9 MONTHS 9 MONTHS (6/23/94)
THROUGH ENDED ENDED ENDED ENDED THROUGH
12/31/94 12/31/95 12/31/96 9/30/96 9/30/97 9/30/97
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE $-- $647 $2,847 $10,913 $-- $3,494
COSTS AND EXPENSES $211,372 $568,467 $361,354 $285,960 $140,500 $1,281,693
LOSS FROM OPERATIONS (7) ($211,372) ($567,820) ($358,507) ($275,047) ($140,500) ($1,278,199)
INTEREST EXPENSE (INCOME), NET $8,342 $25,690 $69,880 $3,973 $7,488 $111,400
NET LOSS (4) ($219,714) ($593,510) ($428,387) ($279,020) ($147,988) ($1,389,599)
NET LOSS PER SHARE ($0.03) ($0.07) $(0.05) ($0.03) ($0.02) ($0.17)
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING(2)(5) 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000
- ------------------------------------------------------------------------------------------------------------------------
HCC ( Predecessor Company) (1)(6)
---------------------------------
AS OF AS OF AS OF AS OF
12/31/94 12/31/95 12/31/96 12/31/97
----------------------------------------------------------------------------
BALANCE SHEET DATA:
WORKING CAPITAL (DEFICIENCY) ($245,214) ($333,529) ($32,014) ($301,226)
TOTAL ASSETS $36,274 $184,800 $605,375 $964,089
STOCKHOLDERS'EQUITY (DEFICIT) ($217,714) ($171,379) $340,592 $192,604
ACCUMULATED DEFICIT ($219,714) ($813,224) ($1,246,369) ($1,394,357)
</TABLE>
<TABLE>
<CAPTION>
HCMI (Successor Company)(1)(6)
---------------------------------
DATE OF DATE OF DATE OF
FORMATION FORMATION FORMATION
(3/27/96) (3/27/96) 9 MONTHS (3/27/96)
THROUGH THROUGH ENDED THROUGH
12/31/96 9/30/96 9/30/97 9/30/97
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE $3,507 $-- $4,757 $8,264
COSTS AND EXPENSES $321,421 $224,593 $849,558 $1,170,979
LOSS FROM OPERATIONS (7) ($317,914) ($224,593) ($844,801) ($1,162,715)
INTEREST EXPENSE (INCOME), NET ($2,899) ($739) ($17,025) ($19,924)
NET LOSS (4) ($315,015) ($223,854) ($827,776) ($1,142,791)
NET LOSS PER SHARE ($0.25) ($0.18) ($0.62) ($0.88)
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING(2)(5) 1,270,503 1,242,349 1,326,811 1,298,657
- --------------------------------------------------------------------------------------------------------------
HCMI (Successor Company)(1)(6)
---------------------------------
AS OF AS OF MINIMUM
12/31/96 9/30/97 ADJUSTED (3)
-----------------------------------------------------
BALANCE SHEET DATA:
WORKING CAPITAL (DEFICIENCY) ($516,327) ($1,012,628) ($932,628)
TOTAL ASSETS $797,964 $508,572 $2,143,572
STOCKHOLDERS'EQUITY (DEFICIT) $275,143 ($552,633) $1,082,367
ACCUMULATED DEFICIT ($315,015) ($1,142,791) ($1,142,791)
</TABLE>
<PAGE>
(1)Effective May 17, 1996, the Company was assigned certain development rights
and obligations by HCC, its parent company at that time. Effective May 18, 1996,
the Company was spun off via a dividend to the HCC shareholders. Consequently,
the Company had yet to commence operations and is presented as the "Successor"
to HCC which, in turn, is deemed the "Predecessor" in the above table. (2) For
HCC, common and common equivalent shares outstanding are based on the weighted
average number of shares of common stock equivalents outstanding each period, as
adjusted for the effects of Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No.83. Pursuant to SAB No.83, "cheap" stock and warrants (that
is stock or warrants issued for consideration or with exercise prices below the
initial public offering("IPO") price within a year prior to the initial filing,
or in contemplation of the IPO) should be treated as outstanding for all
reported periods. Consequently, 8,051,000 shares are the common and common
equivalent shares outstanding for all reported periods for purposes of computing
net loss per share for HCC. (3) Assumes completion of the offering and
application of the net proceeds of $1,635,000 in the case of the minimum
offering. (4) There have been no, nor are there expected to be,cash dividends.
(5) For HCMI, based on the weighted average number of shares outstanding during
the period, adjusted retroactively for the reverse stock split approved March
25, 1997. (6) The financial statements from which the above information has been
derived have been prepared assuming the Company and HCC will continue as going
concerns. However, both the Company and HCC have incurred losses since
inception. Such factors, among others, raise substantial doubt about the
Company's and HCC's ability to continue as going concerns. In that regard, see
"Reports of Independent Certified Public Accountants" accompanying the Company's
and HCC's audited financial statements which cite substantial doubt about the
company's and HCC's ability to continue as going concerns. There can be no
assurance that the Company and HCC will achieve profitability and adequate
financing in the future. If the Company or HCC fail to achieve profitability
and/or adequate financing, their growth strategies could be materially adversely
affected.(See "Risk Factors-- Going Concern Report of Independent Certified
Public Accountants.")(7)Includes $618,690 in write-off of deferred offering
costs.
8
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information has not been presented since no significant
business combination has occurred or is probable and, even where possible or
remote, there have been no significant historical operations. Furthermore, where
historical activities have been transferred to the Company, there has been, at
best, minimum historical activity. Consequently, pro forma information would
serve no useful purpose. Furthermore, full financial statements have been
presented which include these transferred activities, notably for Heartland
Capital Corporation and ATB Productions, L.L.C., as well as for the Company.
(See Appendix I.) In addition, summary financial data is provided in "Selected
Financial Data."
INTRODUCTORY STATEMENT:
WHO SHOULD INVEST
PURCHASE OF THE SHARES OFFERED HEREBY SHOULD BE MADE ONLY BY THOSE PERSONS
WHO CAN AFFORD TO BEAR THE RISK OF A TOTAL LOSS OF THEIR INVESTMENT. THE COMPANY
RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION IN WHOLE OR IN PART.
Each subscriber will be required to make certain representations as to his
net worth and income. (See "Investment Requirements" and the Subscription
Agreement and Power of Attorney attached as Exhibit A.) The Company believes
that prospective investors should consider the Shares as a long-term investment.
There is no public market for these Shares, and none is likely to develop for
approximately 6 to 18 months after the date of this Prospectus. (See "No Market
For The Company's Shares; Non-Transferability Of Shares Until This Offering
Period Ends.") Thereafter, unless the Company achieves capitalization sufficient
to allow it to trade on the NASDAQ national market or Small Cap System, it is
not likely that a trading market will develop except for listing in the "Pink
Sheets"; in addition, market makers must be obtained for National Market and
Small Cap Listing and the Managing Placement Agent is not required to serve as a
market maker once this offering is concluded.
In addition, offerees should not purchase Shares with the expectation of
sheltering income.
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before
purchasing the Shares offered hereby.
(1) LIMITED HISTORY OF OPERATION; NET LOSSES TO DATE. While the teen and
sports week weekly supplements in preparation are being assigned to the Company
from an affiliate, Heartland Capital Corporation, the Company is in the early
stage of development and has only a limited history of operations -- which,
through September 30, 1997, have generated aggregate losses of $1,142,791. (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; Net Losses To Date"
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
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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 $12,500,000 would be
sufficient to pursue the specific opportunities already targeted and described
in this Prospectus, such amount would not be sufficient to pursue the Company's
larger business plan - e.g. embarking on a major program of acquiring
communications companies. Hence, as is true for other companies contemplating
significant growth, in due course the Company is expected to require additional
financing. There can be no assurance that any such additional financing that is
required will be available to the Company if and when required, or on terms
acceptable to the Company, or that such additional financing, if available,
would not result in substantial dilution of the equity interests of existing
Shareholders.
(4) MINIMUM/MAXIMUM OFFERING. While $12,500,000 is the maximum offering
contemplated pursuant to this Registration Statement, it is subject to a
$2,000,000 minimum. If such minimum is not achieved during the up to nine (9)
month Initial Offering Period, subscription proceeds will be returned (with pro
rata interest based on amount and timing of the subscription) to subscribers and
the offering will be terminated. (See "Plan Of Distribution.") If the minimum is
achieved, the Company believes it will have sufficient funds for 12-18 months of
operation but at a reduced level than would be the case, of course, for the
maximum offering. (See "Application of Proceeds.")
(5) POSSIBLE ADVERSE IMPACT OF PENNY STOCK REGULATION. The Shares are
subject to the low-priced security (or so-called "penny stock") rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. For any transaction involving a penny stock, the rules require (
among other things) the delivery, prior to the transaction, of a disclosure
schedule required by the Securities and Exchange Commission relating to the
penny stock market. (See Appendix III, SEC Schedule 15G, "Important Information
On Penny Stocks," and Exhibit A, the Subscription Agreement and Power of
Attorney, acknowledging receipt of the Schedule 15G.) The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the customer's account. Because the Shares are
characterized as a penny stock, the market liquidity for the Shares could be
severely affected. In such an event, the regulations relating to penny stocks
could limit the ability of broker-dealers to sell the Shares and, thus, the
ability of purchasers in this offering to sell their Shares in the secondary
market.
(6) RELIANCE ON MANAGEMENT. Although members of management have significant
experience and expertise in the identification, acquisition and operation of
various businesses, none of its members previously has operated such a
broad-based communications and management company. Investors will have no right
or power to take part in or direct the management of the Company. Thus,
purchasers of the Shares offered hereby will be entrusting the funds to the
Company's management , upon whose judgment the investors must depend, with only
limited information concerning management's specific intentions. Accordingly, no
investor should purchase Shares unless such investor is willing to entrust all
aspects of the Company's management, including the selection of businesses
and/or companies to acquire, to its officers and/or directors. This includes the
fact that Shareholders will not be given the opportunity to vote on acquisitions
or review the associated financials prior to such transactions being
consummated. This potential risk is even more important in this offering since
(i) the Company's business is dependent, to a significant degree, upon the
performance of certain key individuals, the departure or disabling of any of
whom could have a material adverse effect on the Company's performance and (ii)
none of those key persons is required to devote their services exclusively to
the Company. (See "The Company - Remuneration.") The Company has entered into an
employment agreement (which contains non-compete provisions) with each of
Michael L. Foudy, Gerald Garcia, Bradford W. Baker and Bradley B. Niemcek; the
loss of the services of any such key personnel could have a material adverse
effect upon the Company. The Company maintains key man life insurance of
$1,000,000 on Mr. Foudy. These
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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 APPLICATION OF PROCEEDS.
A significant portion of the net proceeds of this offering has been allocated,
among other uses, to expand the Company's contemplated communications-related
activities (acquisition of communications-related companies and/or teen and
sports weekly supplements) and/or acquisitions as well as for working capital
purposes. While the Company expects to use proceeds of this offering as outlined
in "Application Of Proceeds," management of the Company retains broad discretion
as to the specific use of such funds. For example, as described in such
discussion $305,000 (15.25%) of funds raised are expected to be used for
communications company acquisitions if the $2,000,000 minimum is achieved but
increases to $1,200,000 (32.5%) at $5,000,000 and $2,180,000 (17.44%) at the
$12,500,000 maximum. In addition, the amounts available for communication
company acquisitions could be further increased in the event preliminary
exploration with potential strategic partners for the Company's national sports
weekly supplement mature to the point that a prospective strategic partner
invests in that venture.
(8) RISKS RELATED TO ADDITIONAL INVESTMENT OPPORTUNITIES. As a result of
this offering, the Company is expected to experience significant expansion,
including expansion into the acquisition of communications-related companies
and/or teen and sports weekly supplements (which neither the Company nor its
management has previously operated). (See "The Company" generally.) In addition,
the Company is pursuing additional opportunities for expansion through the
acquisition of additional communications and/or management companies and, to
that end, is expected to be regularly involved in discussions with third parties
regarding potential acquisitions. Although no agreements have been reached
regarding any such potential acquisition, in light of the Company's pursuit of
additional acquisitions and funding in this and future offerings, it is likely
that the Company will experience significant expansion in the future. It is
possible (as a result of these recent preliminary activities -- and potential
future acquisitions) that the Company's management will be required to manage a
larger business operation than historically has been the case. There can be no
assurance that the Company will be able to effectively implement the
organizational and operational systems necessary for optimal management
integration of its expanded portfolio of activities.
(9) UNSPECIFIED FUTURE ACQUISITIONS. Those contemplated future acquisitions
are fully within the discretion of management and are not subject to Shareholder
prior review of financials and/or approval before being consummated. To expand
its market and diversify its business mix, the Company's business strategy
includes growth through acquisitions and investments. (See "The Company"
generally.) There can be no assurance that future acquisitions will be available
and, if they are, will be consummated on terms favorable to the Company or that
any newly acquired companies will be successfully integrated into the Company's
operations. The Company may use equity or incur long-term indebtedness or a
combination thereof for all or a portion of the consideration to be paid in
conjunction with any future acquisitions. As described in "Application of
Proceeds", unspecified future acquisitions are currently contemplated to
constitute approximately $350,000 (15.25%) of the funds raised at the $2,000,000
minimum.
(10) 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".)
(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
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adversely affect the Company's ability to achieve profitability. For example, to
the extent that ownership of radio stations is consolidated among only a few
owners (see below), there may be a reduction in the market for independently
produced programs the Company has developed or will develop. In addition, as the
Company seeks to increase market penetration, its success will depend, in part,
on its ability to gain market share from established competitors. For example,
the success of each of the Company's talk show activities is dependent, to a
significant degree, upon its audience ratings and share of the overall
advertising revenue within its market. Similarly, the broadcasting and newspaper
publishing industry are highly competitive businesses. The Company will compete
for listeners and/or readers and advertising revenue directly with other radio
networks, print and other media, within their respective markets. The Company's
audience ratings and market share are subject to change, and any adverse change
in a particular market could have a material and adverse effect on the revenue
of the Company and/or publishers located in that market. There can be no
assurance that any one of the Company's properties will be able to attain,
maintain and/or increase its current audience ratings, readership and
advertising revenue market share. (See "The Company" generally.)
(12) POSSIBLE STRATEGIC RELATIONSHIPS. The Company is currently negotiating
various strategic alliances. If successful, such alliances are expected to
dramatically reduce the Company's need for capital and result in additional
acquisitions and expanding of existing activity. (See "The Company" generally.)
While there can be no assurance that such strategic relationships can be
achieved, in fact, the Company has entered into an agreement with ICON
International, Inc. relating to advertising in Xpress Ventures' national sports
weekly. Moreover, the Company's affiliate, ATB Productions, L.L.C., is in the
final stages of negotiations to acquire three AM radio stations.
(13) MARKET STUDIES; DUE DILIGENCE REVIEWS. In formulating its business
plan, the Company has relied on the judgment of management. No formal,
independent market studies concerning the demand for the Company's proposed
products and services have been conducted; however, market studies are expected
to be employed in the future. Moreover, directly or indirectly, the Company will
use certain proceeds of this offering to perform on-going due diligence with
regard to its proposed activities and/or contemplated future acquisitions. (See
"The Company" and "Application of Proceeds".) While the Company's business plan
is believed feasible, to the extent that the Company determines any or part of
its business plan is not feasible, the Company will be unable to develop in
accordance with its business plan and investors may lose all or a portion of
their investment in the Company.
(14) DIVIDENDS AT DISCRETION OF MANAGEMENT; NO CURRENT PLANS TO PAY
DIVIDENDS. Dividends, if any, to Shareholders are in the discretion of
management. To conserve funds for its contemplated activities, management does
not presently intend to pay dividends. (See "Conflicts Of Interest - Dividends
Would Reduce Funds Available For Expanding Operations Or To Make Acquisitions.")
In fact, the Company anticipates that, for the foreseeable future, it will
continue to retain any earnings for use in the operation of its businesses.
Moreover, the Company may be restricted from paying dividends to its
Shareholders under future credit or other financing agreement(s). (See "Absence
Of Public Market And Dividend Policy.")
(15) NO MARKET FOR THE COMPANY'S SHARES; NON-TRANSFERABILITY OF SHARES
UNTIL OFFERING PERIOD ENDS. The Company's Shares are not publicly traded, and
there can be no assurance that a public market ever will develop. Moreover, none
can develop until the end of the Continuous Offering Period (approximately 6 to
18 months after the date of this Prospectus). (See "Plan of Distribution.") In
fact, Shareholders will have their certificates legended to preclude the
transfer of their Shares until the Offering Period ends -- either because the
$12,500,000 maximum offering is achieved or the offering is terminated on a date
not more than 18 months from the date of this Prospectus.
The Managing Placement Agent is not required to serve as a market maker
upon conclusion of this Offering Period. (See "Investment Requirements.") The
Company has been advised by the Managing Placement Agent that it will make a
market in the Shares, if at all, only after the Offering Period as it may be
extended, is concluded. However, any market maker of the Company's Shares may
discontinue such activities at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Shares or that an active
public market will develop or, if developed, will continue. If an
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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.
(16) FINANCING FUTURE ACTIVITIES. While the Company has no long-term debt
currently, the Company anticipates that the proceeds of this offering will be
used to finance future activities and/or acquisitions of communications and/or
management companies, and for general corporate purposes. (See "Application Of
Proceeds." and "Need For Additional Capital.") The Company may issue debt
securities from time to time subject, among other things, to compliance with
applicable securities law considerations and possible future credit or other
financing agreements. Accordingly, the future issuance of debt by the Company
could have a positive or an adverse impact on the Shareholders.
(17) 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. (See "The Company" and "Application of
Proceeds".) Management believes, however, that the Company's pricing strategies,
distribution, production cost structure, marketing strategy and management's
experience mitigate, to some degree, the effects of an economic downturn to the
extent such downturn is regional. Moreover, the diverse nature of its targeted
businesses -- talk radio, a satellite distribution system, targeted print
products, management and marketing services, Internet and related media
components -- should reduce the cyclical risk often associated with
communications companies.
(18) 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.")
(19) DILUTION. This offering will result in immediate and substantial
dilution of the net tangible book value per common share. Investors who purchase
Shares offered hereby will experience immediate dilution based on the difference
between the subscription price and the net tangible book value per common share.
Purchasers of Shares during at least the Initial Offering Period will pay $5.00
per share which, upon completion of this offering, will have a net tangible book
value (based on the Company's balance sheet as of September 30, 1997, after
giving effect to this offering) of approximately $1.50 if the $2,000,000
offering is achieved and $3.42 if the $12,500,000 maximum offering is achieved.
That represents dilution of $3.50 per share (or 70%) at the $2,000,000 level and
$1.58 per share (or approximately 31.6%) at the $12,500,000 level. Nonetheless,
prospective investors are advised that pertinent state securities laws preclude
issuance of stock at a price theat would result in a dilution of greater than
70% -- and such limitation would extend to the Shares contingently issued to
Shareholders but held in escrow unless certain performance (including the 70%
dilution) standards are met. (See "Capitalization," "Dilution" and "Description
Of Capital Stock -- Common Stock Generally; Reverse Stock Split.")
(20) POSSIBLE ISSUANCE OF PREFERRED STOCK. While none is currently issued,
the Company is authorized to issue up to 10,000,000 shares of preferred stock,
par value $.001 per share (the "Preferred Stock"). (See "The Company" and
"Description of Capital Stock.") Any such Preferred Stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the Board of Directors, and may include voting rights, preferences as to
dividends and liquidation, conversation and redemption rights and shrinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue any shares of Preferred Stock, the issuance of Preferred
Stock in the future could adversely affect the rights of the holders of the
underlying common stock and, therefore, reduce their value and/or the voting
power of existing common stock Shareholders. The Board of Directors may issue
any such Preferred Stock without approval or other action by Shareholder;
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any issuance of Preferred Stock could grant conversion or voting rights that
could adversely affect the rights of the common stock which is the subject of
this offering (the " Shares"). In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by the Principal Shareholders and other present owners. However, the
Company will offer preferred stock to directors, officers or 5% or greater
Shareholders only on the same terms as to existing or new Shareholders on, in
the alternative, any such preferred stock issuance must be approved by a
majority of the Directors (meaning they have no interest in the matter) who
must, at Company expense, have access to Company or independent counsel.
(21) CONTROL BY THE PRINCIPAL STOCKHOLDERS. Prior to the offering,
individual officers, directors and more than 10% shareholders (the "Principal
Stockholders") owned in the aggregate approximately 42.3% of the Shares. (See
"The Company -- Management -- Security Ownership Of Certain Beneficial Owners
and Management.") Upon completion of the offering, the Principal Stockholders'
and their affiliates' aggregate ownership Shares in the Company will permit them
to retain approximately 33.3% of the Shares, assuming the $12,500,000 maximum is
raised. Consequently, the Principal Stockholders may be able to effectively
control the outcome on all matters submitted for a vote to the Company's
stockholders (particularly if significantly less than the $12,500,000 maximum is
raised). Specifically, at least initially, the Principal Stockholders will be
able to elect all of the Company's directors. Such control by the Principal
Stockholders may have the effect of discouraging certain types of transactions
involving an 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.
(22) FUTURE SALES OF SHARES. The Principal Stockholders beneficially hold,
excluding escrowed shares, 3,314,500 Shares. All of such Shares held by the
Principal Stockholders are "restricted" as defined in Rule 144 under the
Securities Act ("Rule 144"). All of these "restricted" Shares have been owned
beneficially for more than one year by existing shareholders and may now be sold
in the market pursuant to Rule 144 which permits sales by affiliates if at least
one year have passed from the date of their purchase. (See "Description Of
Capital Stock.") The Company can make no prediction as to the effect, if any,
that sales of Shares, or the availability of Shares for future sale, will have
on the market price of the Shares prevailing from time to time. Sales of
substantial amounts of Shares in the public market, or the perception that such
sales could occur, could depress prevailing market prices for the Shares. Such
sales may also make it more difficult for the Company to sell equity securities
or equity-related securities in the future at a time and price which it deems
appropriate.
(23) LIMITATION OF MONETARY LIABILITY BY 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. Failure
of management to satisfy its fiduciary responsibility to Shareholders could
subject management to certain claims. (See "Fiduciary Responsibility Of The
Company's Management.")
(24) RADIO AND TELEVISION BROADCASTING INDUSTRY SUBJECT TO FEDERAL
REGULATION. The radio and television broadcasting industries are subject to
regulation by the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). Approval of the FCC is required for the issuance, renewal
or transfer of radio and television broadcast station operating licenses.
Because the Company's current plans contemplate marketing for licensees (rather
than ownership of stations), those FCC requirements are expected to have little
effect on the Company for the foreseeable future. It should be noted that
Congress and the FCC may in the future adopt new laws, regulations and policies
regarding a wide variety of matters (including technological changes) which
could, directly or indirectly, affect the operations and ownership of the
Company. For example, the Telecommunications Act of 1995 relaxes the current
limitations imposed on the number and location of broadcasting properties that
may be owned by any one person or entity; such regulations had not permitted any
person or entity to own more than two FM or two AM radio stations in any one
market over a specified size or in excess of 20 FM and 20 AM radio stations in
the aggregate and restricted ownership of licensed properties by foreign
nationals. (See "Competition" above.)
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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 Company-related
persons or entities (such as Shareholders) or acquire businesses identified by
an affiliate. The Company will seek to avoid any actual or perceived conflicts
and will develop procedures with regard to such activities to minimize the
effect of such potential, actual or perceived conflicts. (See "Certain Related
Party Transactions" below.) For example, any director or officer must recuse
themselves from any negotiations or Board consideration if they have any
personal interest in the matter(s) under consideration. Moreover, a majority of
the Board of Directors are precluded form being an officer of the Company or
having a pecuniary interest in its activities beyond those of being a
Shareholder and/or director.
(4) FEES TO, AND TIME COMMITMENTS OF, PROFESSIONAL ADVISORS. The Company
uses the services of professional advisors, certain of which are paid for their
services while others volunteer their time. The time commitment of each varies
from one advisor to the other. The professional advisors may receive
compensation for services in their respective capacity. (See "The Company --
Professional Advisors.") To the extent such professional advisors (or the firms
with which they are associated) receive compensation, the Company believes these
fees are no less favorable than those which could be obtained for comparable
services from unaffiliated third parties.
(5) OTHER RELATIONSHIPS. Mr. B. Eric Sivertsen is a director of the Company
and a director and officer of HCC, an affiliate of the Company. Mr. Michael L.
Foudy is President and Chairman of the Board of the Company and HCC as well as
the managing member and an investor in ATB Productions, L.L.C. ("ATB"). Mr.
Sivertsen, previously an employee of DeRand Corporation of America, the
financial advisor of HCC and an investor in the Company and HCC, is executive
vice president to Telecom Towers, L.L.C. Ms. Linda G. Moore and Ms. Sherri
Schwamb Denora are officers of the Company and Ms. Moore is an investor in ATB.
Messrs. Bradley B. Niemcek, Gerald Garcia and Bradford W. Baker are officers of
the Company; all three have either interests in affiliated entities (Mr. Niemcek
in ATB) and/or possible activities to be pursued by the Company (Messrs. Baker
in the proposed supplement for teens and in the proposed national sports
weekly). (See below and "Certain Related Party Transactions" with regard to
specific situations.)
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(6) GERALD GARCIA AND BRADFORD W. BAKER RELATIONSHIPS. Gerald Garcia was
previously the Chairman of the Company and President of both the Company and HCC
and is currently the Vice President of the Company. To the extent that the
relationships overlap, there may exist a conflict of responsibilities by Mr.
Garcia to such entities. Finally, certain compensation due Mr. Garcia has not
been paid in full and $60,000 has been deferred by the Company. Moreover, Mr.
Garcia (in partnership with Bradford W. Baker) developed the supplement for
teens and national sports weekly concepts. Consequently, the terms negotiated by
the Company, including a 50% joint venture interest being retained by Messrs.
Garcia and Baker (although funding is expected to be provided entirely by the
Company), may have not been established on an arms'-length basis. In the same
context, Mr. Baker is Secretary/Treasurer of the Company and may have similar
conflicts. (See below and "Certain Related Party Transactions" with regard to
specific situations.)
(7) MICHAEL L. FOUDY RELATIONSHIPS. Mr. Foudy, an investor, Chairman of the
Board and President of the Company and HCC, is also managing director of ATB.
and the majority owner of that entity through a family-owned trust. Finally, Mr.
Foudy has extended loans to the Company and/or HCC and, as of September 30,
1997, has a $478,644 note payable from HCC, an affiliate of the Company.
Finally, certain compensation due Mr. Foudy has not been paid in full and as of
September 30, 1997, $50,000 has been deferred by the Company and $28,500 has
been deferred by ATB. Consequently, there exist certain overlapping rights and
responsibilities by Mr. Foudy to the foregoing entities and, to that degree,
certain conflicts may arise in the future. (See below and "Certain Related Party
Transactions" with regard to specific situations.)
(8) OVERLAPPING RELATIONSHIPS AMONG DENISON, RYAN AND ANGELA SMITH. Denison
is a principal of Financial West Group, a selling group member for the offering.
Denison Smith, in turn, is a principal of DeRand Corporation of America which
serves as a paid ($5,000 monthly plus expenses) advisor to HCC, an affiliate of
the Company, and is a shareholder of DeRand. Moreover, Denison Smith will
significantly benefit, directly or indirectly, if the Company raises all or a
substantial portion of the $12,500,000 offering. This is because Mr. Smith is
expected to be a major seller of Shares, thereby participating in a negotiated
portion of the 8% selling commission on Shares offered and sold. In addition,
since Denison Smith (or his wife, Angela) owns 5,813 post-split shares acquired
for services rendered and/or at a maximum exercise price of $.50 per share as
well as 21,037 escrowed shares, he has a direct economic incentive in having the
Company sell its Shares, all offered at $5.00 per share during both the Initial
and Continuous Offering Periods. Ryan Smith, Denison Smith's son, was previously
a production associate of ATB and continues to be an investor in ATB. Finally,
Angela Smith, the wife of Denison Smith is a registered representative of
Financial West Group and is an investor in ATB.
(9) CERTAIN OVERLAPPING OWNERSHIP INTERESTS. Investors in the Company as of
the date of this Prospectus acquired interests in the Company solely because of
their stock ownership in HCC. (See "Certain Related Party Transactions" and
"Description of Capital Stock..") As a result, at least until such time as the
Company's public offering minimum is achieved, there is common ownership between
HCC and the Company. In turn, a number of the investors in HCC are also
investors in ATB. Likewise, a number of investors in the Company are also
investors in ATB. As a consequence of those overlaps, decisions as to whether to
fund certain deals or terms (such as pricing and amounts negotiated) may be
affected.
(10) NO INDEPENDENT REVIEW. Investors should note that the Company, HCC and
ATB and their management are represented by the same counsel. Therefore, to the
extent the Company and this offering would benefit by an independent review,
such benefit will not be available in this case. Such potential conflict may be
greater in this offering since a partner of the Company's counsel owns Shares
in, and serves as an advisor to, the Company. While it is not expected to have
any adverse consequence (such as undermining professional representation), Max
Miller (a partner of the law firm - Reed Smith Shaw & McClay - that represents
the Company, HCC and ATB) has made an investment in Shares of the Company and
HCC through a pension plan and serves as an advisor to the Company; certain
members of his family also own interests in ATB, HCC and the Company. (See "The
Company -- Management -- Professional Advisors.")
16
<PAGE>
CERTAIN RELATED PARTY TRANSACTIONS
The Company was formed on March 27, 1996 to be a broad-based communications
and management business, including the development, production and syndication
of advertiser supported broadcast programs and print products. Upon formation,
Heartland Capital Corporation ("HCC") subscribed to the Company's common stock.
As of May 17, 1996, HCC paid its stock subscription and the Company was
simultaneously assigned certain development and contract rights and obligations
by HCC. The Company is also related to another entity, ATB Productions, L.L.C.
("ATB"), with which it shares common (but not identical) ownership and to which
it will provide marketing services.
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. Several
opportunities were identified during the preceding three years, including talk
radio, a teen-oriented newspaper and a newspaper insert aimed at sports
enthusiasts. The talk radio venture was furthest along in the development
process, with HCC having provided a line of credit as well as marketing
expertise to ATB which relationship may have been (and continues to be) material
to the Company. The other ventures identified are developmental options and are
intended to be pursued only if funding is achieved (see below) and appropriate
due diligence, which supports the feasibility of the acquisitions, has been
completed. Neither HCC nor the Company has entered into any definitive
agreements with respect to the investment options.
HCC determined that these ventures could not be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned its
option and, in the case of ATB, its contract rights to the Company, its
wholly-owned subsidiary. On May 18, 1996, HCC spun off the Company via a
dividend to the HCC shareholders with the Company effectively replicating the
HCC capital structure by issuing a share of its common stock for each share of
HCC common and preferred stock outstanding as of May 18, 1996. Warrants to
purchase the Company stock were granted to holders of non-contingent HCC stock
purchase warrants, including warrants to the HCC preferred shareholders, as of
May 18, 1996. Additionally, on April 17, 1996, the Company granted HCC warrants
to purchase 1,236,000 shares of its common stock for $.50 per share. (The
contracts and option rights transferred to the Company have no carrying value
because development of, or servicing, the rights is expected to require a
substantial infusion of capital.) It is the Company's intention to obtain
necessary capital through an initial public offering of its common stock.
Effective January 1, 1995, HCC entered into a marketing agreement with ATB
(the " HCC Agreement") whereby HCC will provide marketing services on behalf of
ATB. Such services include presenting programs to sponsors on a worldwide basis,
negotiating sponsorship agreements, and performing related activities. In return
for providing the marketing services, ATB is obligated to pay HCC 40% of its
gross advertising cash receipts and 15% of its non-advertising gross receipts.
The agreement was transferred to the Company on May 18, 1996. The HCC Agreement
automatically terminates on January 1, 1999, unless extended by mutual
agreement, and it is terminable at earlier dates under certain specified
conditions. In the event of termination, the amounts due under the HCC Agreement
then existing shall remain due and payable, notwithstanding the termination, if
certain other conditions are met for the period ending the later of the
automatic termination of the HCC Agreement or two years after its termination
for other reasons. Revenues recognized by HCC under the HCC Agreement aggregated
$647 and $2,847 during 1995 and 1996, respectively. After the transfer, HCMI
recognized $3,507 in revenue from the HCC Agreement through December 31, 1996
and $4,757 during the nine months ended September 30, 1997.
The total number of shares of stock that the Company has the authority to
issue is 60,000,000 (consisting of 10,000,000 shares of preferred stock and
50,000,000 shares of common stock, each respectively par value $.001 per share.)
The Board of Directors of the Company is empowered to provide for the issuance
of shares of preferred stock in series, to establish the number of shares to be
included in each series and to fix the designations, powers, preferences and
rights of the shares of each such series. To date, no series have been issued.
In conjunction with the Company's formation as an HCC subsidiary, HCC
subscribed to 1,030,086 post-split shares of the Company's common stock on March
27, 1996. On May 17, 1996, HCC contributed the par value ($.001) of those shares
to the Company in cash ($4,758) in full payment of its
17
<PAGE>
subscription receivable and 1,030,086 post-split shares were issued to HCC. In
conjunction with the Company's spin-off to the shareholders of HCC, on May 18,
1996, the Company retired those shares and issued 1,030,086 post-split shares of
common stock as follows: 426,280 shares to the existing common shareholders of
HCC and 603,806 shares to the preferred shareholders of HCC.
In addition, the Company issued 1,394,500 of its warrants to the HCC
preferred shareholders who held contingent HCC warrants on the basis of one
warrant for each two HCC preferred shares. Each warrant entitles the holder to
purchase an additional share of the Company's common stock. During May 1996, the
Company notified the holders of its intent to make an initial public offering
(IPO) and that the Shareholders had until July 23, 1996 to exercise their
warrants at $.50 per share -- versus $4 per share thereafter (80% of the
expected IPO price of $5 per share). Through July 24, 1996, warrants to purchase
253,387 post-split shares (1,170,400 pre-split shares) were exercised for an
aggregate purchase price of $580,200, leaving 224,100 warrants outstanding and
excisable under the terms outlined above.
On March 27, 1996, the Company's incorporators reserved 600,000 shares of
common stock for a Stock Option Plan. Conditions of grants, terms, exercise
prices and related terms have yet to be determined by the Board of Directors.
The Shareholders would be required to approve the plan prior to granting
options.
The Company has employment agreements (the "Agreements") with four officers
and employees, Michael L. Foudy, Gerald Garcia, Bradford W. Baker and Bradley B.
Niemcek. (See "The Company -- Management.") The Agreements permit participation
in an annual bonus pool, the amount and conditions of which will be determined
by the Company's Board of Directors and provide as to Messrs. Foudy and Niemcek
base annual salaries aggregating $180,000. In addition, the Agreements provide
that these employees are eligible to annually receive options to buy up to
100,000 shares of common stock at $.10 per Share with terms, other than price,
to be determined by the Board of Directors. The agreement with Mr. Niemcek also
provides for issuance of 75,000 shares of common stock to the employee if he is
employed by the Company for three years from May 1, 1996. The Agreements are
effective as of May 1, 1996 as to Messrs. Foudy, Baker and Niemcek and May 1,
1997 as to Mr. Garcia, have terms of three years and provide for termination for
cause with a cessation in compensation payments. If terminated by the Company
without cause (or by the employees with cause) prior to the end of their term,
the Agreements require payments to be continued at the rate of base salary at
the date of termination for the period after termination through the end of the
terms of the Agreements.
On January 15, 1995, HCC executed a noncollateralized line of credit
agreement with ATB (the "Credit Agreement") which provides ATB with a standby
line of credit in the amount of $360,000. Borrowings under the Credit Agreement
bear interest at a fixed rate of 8% per annum, with payment of interest on any
borrowing commencing January 15, 1997. Through September 30, 1997, interest
payments of $12,950 and $185 have been made to the Company and HCC,
respectively. Any principal and interest outstanding on the line of credit must
be repaid on December 31, 1999. During 1996, the Company began co-funding this
Credit Agreement with HCC. As of December 31, 1996 and September 30, 1997, the
Company had advanced $172,780 and $169,280 respectively, while HCC had advanced
$338,695 and $431,145 as of December 31, 1996 and September 30, 1997,
respectively. Although the total advances ($511,475 and $600,425 as of December
31, 1996 and September 30, 1997) are in excess of the Credit Agreement's standby
line of credit amount ($360,000), the total advances are governed by the Credit
Agreement, including interest rates and due dates. Interest income earned by the
Company on this credit line amounted to $2,899 and $10,310 for the period March
27, 1996 (date of formation) through December 31, 1996 and the nine months ended
September 30, 1997, respectively. Interest income earned by HCC on its share of
the outstanding loans amounted to $3,364, $22,970 and $24,387 for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. A portion of these loans ($44,356) have been used to fund the
acquisition target of ATB Productions (Friendly Media, Inc.) in anticipation of
completion of the acquisition.
In conjunction with the public offering, HCC has incurred direct or
indirect costs, such as salaries and rent, which have been charged to the
Company. By the completion of the public offering, it is expected that such
costs could aggregate approximately $600,000. It is the intent of the Company to
18
<PAGE>
reimburse HCC for these costs, or at least a portion thereof, on a sliding scale
(none if $2,000,000 is raised to $412,500 if $12,500,000 is raised), solely from
the offering proceeds. As of December 31, 1996 and September 30, 1997, the
amount owed by the Company to HCC for these costs, net of repayments, amounted
to $220,616 and $397,350, respectively.
Xpress Ventures, Inc. is a Tennessee corporation whose principals are
Gerald Garcia, (Executive Vice President of the Company) and Bradford W. Baker
(Secretary-Treasurer of the Company). (See "Conflicts Of Interest.") Messrs.
Garcia and Baker entered into a licensing agreement with Xpress Ventures,
delegating all its rights each has in a proposed magazine for teens and a
national sports weekly. In turn, Xpress Ventures, Inc. has now assigned its
rights in such proposed newspaper inserts to the Company in a May 31, 1996
agreement. While Messrs. Garcia and Baker are affiliates and have an interest in
these transactions, all negotiations with the Company have been independently
negotiated by Company principal(s) other than Messrs. Garcia and Baker.
Because the Company has not generated sufficient cash flow to pay all
compensation when due to Mr. Garcia, a portion of such compensation has been
deferred, and the Company has entered into a $60,000 note payable to Mr. Garcia.
A number of activities which the Company intends to pursue with the benefit
of funds raised during this offering are those which have been assigned to the
Company by HCC. Moreover, the management and all current Shareholders of the
Company, as of the date of this Prospectus, are essentially identical to that of
HCC. Accordingly, the economic terms, including compensation and equity
ownership, may not have been the result of arm's-length negotiations. However,
in evaluating this potential conflict of interest, prospective Shareholders
should be aware that a right of first refusal has been granted by HCC and the
Company's management for any activities or acquisitions that fall within the
communications and management charter of the Company so long as on terms
comparable to what an independent third party would pay.
THE COMPANY BELIEVES THAT ANY PAST TRANSACTIONS WITH ITS AFFILIATES HAVE
BEEN AT PRICES AND ON TERMS NO LESS FAVORABLE TO THE COMPANY THAN TRANSACTIONS
WITH INDEPENDENT THIRD PARTIES. THE COMPANY MAY ENTER INTO TRANSACTIONS WITH ITS
AFFILIATES IN THE FUTURE. HOWEVER, THE COMPANY INTENDS TO CONTINUE TO ENTER INTO
SUCH TRANSACTIONS ONLY AT PRICES AND ON TERMS NO LESS FAVORABLE TO THE COMPANY
THAN TRANSACTIONS WITH INDEPENDENT THIRD PARTIES. IN THAT CONTEXT, THE COMPANY
WILL REQUIRE ANY DIRECTOR OR OFFICER WHO HAS A PECUNIARY INTEREST IN A MATTER
BEING CONSIDERED TO RECUSE THEMSELVES FROM ANY NEGOTIATIONS. IN ANY EVENT, ANY
DEBT INSTRUMENTS OF THE COMPANY IN THE FUTURE ARE EXPECTED GENERALLY TO PROHIBIT
THE COMPANY FROM ENTERING INTO ANY SUCH AFFILIATE TRANSACTION ON OTHER THAN
ARM'S-LENGTH TERMS. IN ADDITION, A MAJORITY OF THE BOARD IS (AND MUST CONTINUE
TO BE) NEITHER AN OFFICER NOR HAVE A PECUNIARY INTEREST (OTHER THAN AS A
SHAREHOLDER OR DIRECTOR) IN ANY TRANSACTIONS WITH THE COMPANY. IN TURN,
COMMENCING IMMEDIATELY, A MAJORITY OF THE INDEPENDENT BOARD OF DIRECTORS MEMBERS
(DEFINED AS HAVING NO PECUNIARY INTEREST IN THE TRANSACTION UNDER CONSIDERATION)
WILL BE REQUIRED TO APPROVE ALL MATTERS INVOLVING INTERESTED PARTIES. MOREOVER,
IT IS EXPECTED THAT ADDITIONAL INDEPENDENT DIRECTORS WILL BE ADDED TO THE BOARD
AND AN INDEPENDENT ESCROW AGENT/REGISTRAR WILL BE APPOINTED, NO LATER THAN THE
INITIAL CLOSING FOR THIS OFFERING, TO ASSURE PROPER ISSUANCE OF STOCK TO
SHAREHOLDERS.
FIDUCIARY RESPONSIBILITY OF THE COMPANY'S MANAGEMENT
Counsel has advised the Company's management it has a fiduciary
responsibility for the safekeeping and use of all assets of the Company. (See
"Conflicts Of Interest" and "Risk Factors -- Conflicts Of Interest.") Management
is accountable to each Shareholder and required to exercise good faith and
integrity with respect to its affairs. (For example, whether under SEC and/or
general fiduciary principles, management cannot commingle property of the
Company with the property of any other person, including that of management.)
Cases have been decided under the common or statutory law of corporations
in certain jurisdictions to the effect that a shareholder may institute legal
action on behalf of himself and all other similarly situated shareholders (a
class action) to recover damages from management for violations of fiduciary
duties, or on behalf of a corporation (a corporation derivative action), to
recover damages from a third
19
<PAGE>
party where management has failed or refused to institute proceedings to recover
such damages. On the basis of federal and/or state statutes, including most
critically the Delaware General Corporation Law, and rules and decisions by
pertinent federal and/or state courts, accordingly, (a) shareholders in a
corporation have the right, subject to the provisions of the Federal Rules of
Civil Procedure and jurisdictional requirements, to bring class actions in
federal court to enforce their rights under federal securities laws; and (b)
shareholders who have suffered losses in connection with the purchase or sale of
their shares may be able to recover such losses from a corporation's management
where the losses result from a violation by the management of SEC Rule 10b-5,
promulgated under the Securities Exchange Act of 1934, as amended. It should be
noted, however, that in endeavoring to recover damages in such actions, it would
be generally difficult to establish as a basis for liability that the Company's
management has not met such standard. This is due to the broad discretion given
the directors and officers of a corporation to act in its best interest.
The SEC has stated that, to the extent any exculpatory or indemnification
provision purports to include indemnification for liabilities arising under the
Securities Act of 1933, as amended, it is the opinion of the SEC that such
indemnification is contrary to public policy and, therefore, unenforceable.
Shareholders who believe that the Company's management may have violated
applicable law regarding fiduciary duties should consult with their own counsel
as to their evaluation of the status of the law at such time.
APPLICATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of common stock
(the "Shares") offered hereby (after selling commissions and associated
organization and offering expenses) are estimated to be approximately
$10,387,500 if the maximum offering is achieved and $1,650,000 if the minimum
offering is achieved. (See Capitalization" below with regard to the Company's
capitalization currently and that will exist if the minimum or maximum offering
is achieved.) The Company expects that such net proceeds will be used to finance
expansion of existing activities and future acquisitions as well as for general
corporate purposes. The Company reviews potential acquisition opportunities on
an ongoing basis and periodically engages in discussions with acquisition
candidates. The Company has not, however, entered into any definitive agreements
with respect to the acquisition of any properties.
In the event only the minimum amount of funding is subscribed, the Company
will concentrate its efforts primarily on expanding its Heartland Radio Network,
possible communications-related acquisition(s) and creating the magazine
supplement for teens. In the event that more than the minimum is subscribed, the
Company intends to be more aggressive in implementing its business plan and
further develop operations, personnel and projects. Anticipated application of
proceeds below does not, however, include cash flow from revenue. The Company
anticipates receiving revenues from operations, but there can be no assurance
that such revenues will be sufficient to generate positive cash flow before
proceeds from this offering are expended to fund operations for 12-18 months at
anticipated "burn rates." (See "Risk Factors.")
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK.]
20
<PAGE>
<TABLE>
<CAPTION>
GROSS PROCEEDS
-------------------------------------------------------------------------------
$2,000,000 $5,000,000 $12,500,000
-------------------------- -------------------------- -------------------------
DOLLAR DOLLAR DOLLAR
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------- ------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Selling Commissions ......................... $ 160,000 8% $ 400,000 8% $ 1,000,000 8%
Non-accountable Expense Allowance ........... 40,000 2% 100,000 2% 250,000 2%
Legal Fees .................................. 15,000 .75% 200,000 4% 200,000 1.6%
Due Diligence Fee ........................... 50,000 2.5 % 50,000 1.0% 50,000 0.4%
Printing And Related Costs .................. 60,000 3.75% 75,000 1.5% 75,000 0.6%
HCC Indirect Expense Reimbursement (1) ...... -- -- -- -- 412,500 3.3%
Accounting Fees ............................. 25,000 1.25% 50,000 1% 125,000 1.0%
Working Capital (2) ......................... 95,000 4.0 % 250,000 5.0% 275,500 2.2%
Proposed Investment Opportunities: ..........
Heartland Radio Network .................... 250,000 12.5 % 250,000 5.0% 250,000 2.0%
Communications Companies Acquisition(s) 305,000 15.25% 1,200,000 24.0% 2,180,000 17.44%
A Magazine for Teens ....................... 1,000,000 50 % 2,300,000 46% 2,300,000 18.4%
A National Sports Weekly (3) ............... -- -- -- -- 5,037,000 40.3%
Management and Marketing Services .......... -- -- 125,000 2.5% 345,000 2.76%
---------- ------ ---------- ----- ----------- ------
Gross Proceeds .............................. $2,000,000 100.0% $5,000,000 100.0% 12,500,000 100.0%
========== ====== ========== ===== =========== ======
Less Offering Expenses ...................... $ 350,000 $ 875,000 2,112,500
---------- ---------- -----------
Net Proceeds ................................ $1,650,000 $4,125,000 $10,387,500
========== ========== ===========
</TABLE>
- ----------
(1) In conjunction with the public offering, HCC has incurred costs, such as
salaries and rent, which have been allocated to the Company. By completion
of the public offering, it is expected that such costs could aggregate
approximately $600,000. It is the intent of the Company to reimburse HCC for
these costs, or at least a portion thereof, as reflected in the above
tables. As of December 31, 1996 and September 30, 1997, the amount owed by
the Company to HCC for these costs, net of repayments, amounted to $220,616
and $397,350, respectively.
(2) A portion of the proceeds of this offering are expected to be used to pay
net salaries of the Company's management, such amounts projected to
aggregate $90,000 in 1997 (and thus from 4.5% - at the minimum offering to
0.7% at the maximum).
(3) The Company is currently conducting exploratory discussions with potential
strategic partners for its national sports weekly supplement. Should these
relationships develop, it is expected that the Company's investment in the
venture would be allotted to additional communications company acquisitions.
EXCEPT AS TO SELLING COMMISSIONS AND, AT THE MINIMUM, LEGAL AND ACCOUNTING
FEES, THE COMPANY RESERVES THE RIGHT TO CHANGE THE APPLICATION OF PROCEEDS
DEPENDING ON UNFORESEEN CIRCUMSTANCES AT THE TIME OF THIS OFFERING. THE INTENT
IS TO IMPLEMENT THE COMPANY'S BUSINESS PLAN TO THE EXTENT POSSIBLE WITH FUNDS
RAISED IN THIS OFFERING. UNFORESEEN EVENTS, TIMING, THE GENERAL STATE OF THE
ECONOMY AND THE COMPANY'S ABILITY OR INABILITY TO GENERATE REVENUE COULD GREATLY
ALTER THE APPLICATION OF PROCEEDS FROM THAT SHOWN ABOVE.
As part of the Company's business strategy, the Company will evaluate
potential acquisitions of communications and/or management-related activities
and businesses. However, the Company has no present understanding, commitment or
agreement with respect to any acquisitions. Future acquisition of communications
properties effected in connections with the implementation of the Company's
expansion strategy are expected to be financed from cash flow from operations,
bank or other financial institution borrowings, debt or additional equity
financings or a combination of those methods.
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1997, and (ii) the pro forma capitalization of the Company on the
same date, reflecting (a) the sale of the 400,000 shares of Common Stock offered
by the Company hereby for estimated net proceeds of $4.0875 per share (the
"Minimum Offering") and (b) the sale of 2,500,000 shares of Common Stock
(maximum) offered by the Company for estimated net proceeds of $4.155 per share
(the "Maximum Offering"). (See "Application of Proceeds" and "Description of
Capital Stock." -- including "Reverse Stock split" -- and footnote (4) to "The
Company -- Securities Ownership of Certain Beneficial Owners and Management.")
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
AS ADJUSTED
---------------------------------
ACTUAL MINIMUM MAXIMUM
--------------- --------------- ---------------
<S> <C> <C> <C>
Shareholders' equity ........................................
Common stock, $.001 par value; 50,000,000 Shares authorized;
1,326,811 Shares issued and outstanding; 1,726,811 (Minimum)
and 3,826,811(Maximum) Shares to be issued and outstanding,
as adjusted ................................................ $ 1,327 $ 1,727 $ 3,827
Paid-in capital ............................................. 588,831 2,223,431 10,973,831
Deficit accumulated during the development stage ............ (1,142,791) (1,142,791) (1,142,791)
------------ ------------ ------------
Total shareholders' equity and total capitalization ......... $ (552,633) $ 1,082,367 $ 9,834,867
============ ============ ============
</TABLE>
DILUTION
The following table sets forth the percentage of equity the investors in
this offering will own compared to the percentage of equity owned by the present
stockholders, and the comparative amounts paid for the Shares by the investors
as compared to the total consideration paid by the present stockholders of the
Company. (See "Description of Capital Stock," "Risk Factors" and
"Capitalization" for a more complete discussion of total number of Shares and
associated rights and consequences.)
DILUTION FOR $2,000,000 OFFERING (1)
<TABLE>
<S> <C> <C>
Initial public offering price per Share ....................... $ 5.00(100.0%)
Net tangible book value per Share before offering ............ $ 0.445 (8.9%)
Increase per Share attributable to new Shareholders .......... 1.055(21.1%)
----------------
Pro forma net tangible book value per Share after offering..... 1.50(30.0%)
-----------------
Total dilution per Share to new Shareholders .................. $ 3.50(70.0%)
=================
</TABLE>
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Shares ......... 1,326,811 76.84 $ 590,158 22.78 $ 0.445
New Shares .............. 400,000 23.16 2,000,000 77.22 $ 5.00
--------- ------ ---------- ------ =======
1,726,811 100.00 $2,590,158 100.00 $ 1.50
========= ====== ========== ====== =======
</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.
22
<PAGE>
DILUTION FOR $12,500,000 OFFERING
<TABLE>
<S> <C> <C>
Initial public offering price per Share ...................... $ 5.00(100.0%)
Net tangible book value per Share before offering ........... $ 0.445(8.9%)
Increase per Share attributable to new Shareholders ......... 2.975(59.5%)
---------------
Pro forma net tangible book value per Share after offering . 3.42(68.4%)
----------------
Total dilution per Share to new Shareholders ................. $ 1.58(31.6%)
================
</TABLE>
The above does not assume the exercise of warrants reserved for the
underwritten since their exercise, at 120% of the Selling Price, would be
anti-dilutive.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Shares ......... 1,326,811 34.67 $ 590,158 4.51 $ .445
=======
New Shares .............. 2,500,000 65.63 12,500,000 95.49 $ 5.00
--------- ------ ----------- ------ -------
3,826,811 100.00 $13,090,158 100.00 $ 3.42
========= ====== =========== ====== =======
</TABLE>
- ----------
(1) Assumes issuance and sale of 2,500,000 of the Company's Shares during this
Offering Period in addition to the1,326,811 Company Shares currently
outstanding.
(2) Due to the need to meet an economic performance standard in order to
exercise warrants, their exercise is not viewed as probable and, therefore,
their effect on the above is not reflected herein.
23
<PAGE>
THE COMPANY
GENERAL
Heartland Communications & Management, Inc. (the "Company") was organized
March 27, 1996. The Company's offices are located at 1320 Old Chain Bridge Road
- -- Suite 220, McLean, Virginia 22101. Its telephone number is (703) 883-1836 and
its web site address is www.setmefree.com. The Company intends to raise capital,
perform support services and pursue specific targeted business development
opportunities as its basis for growth and profitability. The Company has
identified several service and support areas where it intends to establish
profit centers. These include, but are not limited to, business areas such as
radio talk show programming, newspaper supplements and inserts publishing and
other communications- and management-related activities. (See "Specific
Opportunities Under Consideration.") The Company has investigated business
opportunities for investment and has performed preliminary due diligence on
certain projects. It is the intent of management to use a part of the proceeds
of this offering to continue the due diligence process on these projects (which
will include third party feasibility studies where management considers such
studies prudent to complete the required due diligence).
More specifically, the Company will engage in the broad-based
communications and media business, including (but not limited to) the
development, production, marketing and syndication of advertising-supported
broadcast programs and print products. These products will be designed to meet
the expanding needs of the media business for creative content -- especially in
those segments, e.g., AM radio and newspaper publishing, in which syndicated
alternatives to locally-produced content are financially attractive. Its radio
operation will not only assist in the development of programming by outside
producers, secure syndication opportunities for them and share in their revenue
but also produce news, information and talk programming of its own, the latter
effected through an affiliate, ATB Productions, L.L.C. The Company expects to
own a specific, negotiated portion (typically 10% to 60%) of the gross
advertising receipts and/or net income of several radio productions. The Company
contemplates forming one or more of its own satellite-transmitted radio networks
to sell broadcast time to advertisers and talk show hosts and a subsidiary of
its ATB Productions, L.L.C. affiliate is currently completing the acquisition of
up to three AM radio stations in California and Washington. In addition, if the
Company provides the associated funding, the Company has the option to obtain a
50% interest in two prospective innovative, national specialty supplements to
newspapers designed to appeal to targeted segments of the mass audience which
the Company believes are under-served: teens and sports enthusiasts. Additional
print, broadcast, Internet-based products, information services and news media
components, as well as hybrid combinations, also are contemplated. Such
activities will be developed by the Company or will be part of the Company's
acquisition strategy and/or management services will be offered to clients on a
fee and/or equity basis.
INTRODUCTION
Though recently organized, many of the Company's contemplated activities to
be pursued during the early years of operations will be based on opportunities
developed by Heartland Capital Corporation ("HCC"), a private merchant banking
business advisory firm which was incorporated in June 1994 to pursue a broad
spectrum of investment opportunities. To the date of this public offering, HCC
has concentrated much of its activities in communications-related businesses,
most specifically the support of talk show programs and a contemplated radio
network. Because of the faster than expected progress of HCC's efforts in the
communications arena and the slower than expected development of other areas,
the HCC Board of Directors determined that the best strategy was to take an
affiliate public at this time. Specifically, the decision was made by HCC to
assign all contracts, business opportunities and performance obligations meeting
certain investment development criteria to the Company with existing HCC
shareholders receiving the same number of shares and associated rights that they
owned in HCC, including the right to exercise warrants for Shares of the
Company, by paying a variable exercise price (ranging from $.001 up to $.50 per
share). (Some limited merchant banking activities may take place in the Company
as well.) Accordingly, on May 17, 1996, HCC assigned these opportunities to the
Company, which was a wholly-owned subsidiary on that date, and HCMI thereafter
was responsible for pursuing
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development of these opportunities. Because the Company has assumed the rights
previously negotiated and owned by HCC and there continues to be common
ownership and management, the Company and HCC may be deemed to be affiliated.
For a discussion of the associated conflicts, see "Conflicts of Interest. "
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. Several targeted
opportunities were identified in 1994 and 1995, including talk radio, a
teen-oriented supplement to newspapers and a newspaper insert aimed at sports
enthusiasts. The talk radio venture was furthest along in the development
process, with HCC having provided a line of credit as well as marketing
expertise to ATB. The other ventures identified to date are only developmental
options.
HCC has determined that these ventures cannot be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned its
option (and in the case of ATB, its contract) rights to the Company. Formed as a
wholly-owned subsidiary of HCC, the Company received on May 17, 1996 the
development and contract rights and obligations and the assumed responsibility
for costs to be associated with the future development of these activities. On
May 18, 1996, HCC spun off the Company via a taxable dividend to the HCC
stockholders with the Company replicating the HCC capital structure, including
replicating HCC's outstanding non-contingent stock options and warrants and
issuing 301,903 of the Company's warrants to the HCC preferred shareholders, who
held contingent warrants, on the basis of one warrant for each two HCC preferred
shares. A share of the Company's common stock was issued to each HCC common and
preferred shareholder for each share of HCC common and preferred stock
outstanding May 18, 1996. Warrants to purchase the Company's stock were granted
to holders of non-contingent HCC stock purchase warrants as of May 17, 1996.
Additionally, on April 17, 1996, HCC itself was granted warrants, exercisable
until April 16, 2001, to purchase 267,589 Shares of the Company's common stock
for $.50 per share. The contracts and option rights transferred to the Company
have no net book value because development or servicing the rights is expected
to require a substantial infusion of capital. It is HCMI's intention to obtain
the necessary capital through this initial public offering of its common stock
to develop these rights and associated activities.
The activities to date principally relate to "Newsmaker" with Michael Foudy
and "The Travel Show" (with Larry Gelwix and Danny Kramer). There are a number
of other related talk show programs under development which are expected to be
added to the existing line-up, thereby enabling the Company to develop a network
of its own. This would permit stations around the country to pick and choose
from the Company's stable of talk shows. Such an arrangement permits economies
in production and enhances cross selling opportunities to maximize advertising
revenues and revenues from sponsorship of these programs. (However, see "Risk
Factors.")
HCC also has obtained rights to acquire working and/or equity interests in
specialized newspaper supplements (described in greater detail in "Specific
Opportunities Under Consideration"); while expected to cost considerably more to
develop, they are believed to be quite promising. Accordingly, as a function of
the amount of monies raised, it is intended that a series of special interest
supplements be developed and distributed by newspapers around the country. The
supplements can best be analogized to the Parade insert that goes into many
Sunday newspapers around the country. These new products will be value-added
supplements distributed by local newspapers either within the newspaper or as
stand-alone supplements to segments of the non-subscribing market. The Company
believes its proposed magazine for teens and a national sports weekly have
unique attributes. Based upon its market research, actual experience and/or
proprietary concepts (including their expected distribution through existing
newspapers), the Company believes that a large readership can be developed
relatively quickly. (See, however, "Risk Factors.") (The "national sports
weekly" and "magazine for teens" names are working titles only; all materials
and editorial content will be protected by pertinent trademark and copyright
laws.)
As described in greater detail under each of the individual sections which
follow, the ownership interests will be negotiated independently for each
activity. For example, individual radio programs might be based upon a fee or a
percentage of gross advertising revenues generated and/or a percentage
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of net profits without any actual ownership in the talk show itself. In
contrast, the proposed magazine for teens and national sports weekly are
expected to be separate joint ventures between the Company and the creators of
such concepts with each party sharing on a 50/50 basis after all expenses and
the Company has been repaid its original investment(s). Such expenses include
paying royalties aggregating 5% annually; during the first five years, the
Company will receive a royalty of 1.25% annually and its creators (or an entity
Messrs. Garcia and Baker control) will receive 3.75%; thereafter, the 5% royalty
payment will be paid entirely to its creators (or an entity they control.) (See
"Conflicts Of Interest - Gerald Garcia And Bradford W. Baker Relationships" with
regard to the relationship of such creators of these specialized newspaper
supplements to the Company.)
SPECIFIC OPPORTUNITIES UNDER CONSIDERATION
The Company has identified several projects for which it proposes to
provide funding. No fixed commitments have been made for any of these projects.
The projects listed below are in different states of due diligence and are
intended to be pursued once, and only if, the funding contemplated from this
offering is achieved and the appropriate due diligence has been completed.
Therefore, at present, these projects cannot be viewed as probable acquisitions.
This list is not complete and those identified below are subject to being
discontinued if warranted after its due diligence review is concluded.
Management intends to fund projects strictly based on satisfactory completion of
appropriate due diligence and based on investment guidelines as they may evolve
over time. Any specific opportunities pursued will relate to communications,
broadcast or print, and/or management activities.
The Company intends to consider many other development projects and intends
to continue to raise capital to take advantage of opportunities, thus providing
income and asset growth for its shareholders based on its planned investment and
development strategy. The Company intends to develop strict guidelines for
investment, first considering preservation of capital, then equity participation
and liquidity. In most situations, it will endeavor to maintain a preferred
position with emphasis on an exit strategy with earnings and a residual equity
position. Actual liquidation of an investment will be based on management's
assessment of growth and earnings potential of each investment. HOWEVER,
INVESTMENTS AS SUGGESTED HEREIN ARE INHERENTLY RISKY, AND THERE CAN BE NO
ASSURANCE THAT THESE RISKS CAN BE MITIGATED TO THE EXTENT THAT LOSSES WILL NOT
OCCUR, AND THERE CAN BE NO ASSURANCE THAT INVESTORS IN THIS OFFERING WILL NOT
LOSE ALL OF THEIR INVESTMENT. POTENTIAL INVESTORS ARE ADVISED TO CONSULT THEIR
OWN LEGAL AND ACCOUNTING COUNSEL AS TO THEIR SUITABILITY FOR INVESTMENT IN THE
COMPANY.
(1) HEARTLAND RADIO NETWORK
The Company has established radio program marketing and, directly and/or
through contractual arrangements with ATB, production (in addition to station
ownership/operation) as one of its primary activities. It will market those
services to the $11.5 billion advertiser -- supported commercial radio
broadcasting market. (Source: National Association of Broadcasters 1995 Annual
Report.) The Company has a variety of other communication properties, broadcast
and/or print, under development and/or consideration. The Company, directly or
through ATB, will acquire, create, develop and own creative content that it
markets for domestic and international broadcasters with the production being
done by its affiliate, ATB. (See "Conflicts Of Interest.").
The Company believes most nationally syndicated and locally produced talk
shows adopt a conservative political slant, attempting to emulate the success of
Rush Limbaugh's 15-year-old program by appealing to the so-called "angry white
male" which typically feels under-served by other media outlets. The general
tenor of talk radio has therefore become negative, angry and anti-government,
with much of the content provided by listeners themselves. This has made some
advertisers reluctant to advertise on talk radio programming.
Because talk radio has largely ignored alternatives to conservative, "sound
off" themes, the Company believes the potential for talk radio which is
non-partisan and which presents alternative viewpoints emphasizing the search
for solutions to societal problems (rather than just complaining about those
problems) is considerable. (In fact, the 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
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develop and sustain -- may have peaked.) Support for this theory can be found in
the success of ethnic-oriented programming and National Public Radio ("NPR")
programming such as "All Things Considered" and "Morning Edition." The NPR
programs air in morning and afternoon drive times; however, the economic
potential of such programs is largely untested because of their non-profit,
non-commercial nature.
There are approximately 11,500 radio stations in America; about half of
these are AM stations, and most of them are co-owned and operated with FM
affiliates. Many AM radio stations lose money; about 1,200 of them have a
news/talk format, the only format to emerge in the past 20 years which has
consistently demonstrated the potential for profit on AM stations -- which do
not have the bandwidth required for the successful programming of music formats.
(Source: Broadcasting & Cable 1996 Yearbook.) Complicating this inequity has
been the inclination of packaged goods advertisers to concentrate their messages
on younger audience segments, as they have on television. Thus, the share of
advertising revenues flowing to AM stations has steadily declined since 1975,
and joint AM/FM licensees have concentrated their energies on FM programming.
Operators spend relatively little on AM program content. In fact, almost 1,000
AM operators merely "simulcast" on their AM outlets the programming that is
produced on their FM outlets, although the Federal Communications Commission
("FCC") frowns on the practice.
The limited local spending on local AM programming content has provided a
major opportunity for programmers who provide a national service distributed
inexpensively by satellite. As a result, AM radio, once thought of as the
prototypically local medium, is today heavily reliant on national programs.
Most syndicated programs are provided to the local affiliate on a barter
(free, in exchange for advertising time) basis. Typically, the national program
receives one-quarter to one-half of the total commercial time (up to 15 minutes
total) available per hour in exchange for providing the program content itself.
Some programs are distributed on a cash basis only. Talk radio programs can be
broken down into several categories -- entertainment/humor, advice/information,
host opinion and listener driven.
Several networks have sprung up to provide additional syndicated
programming on a barter basis, including Talk America, Sun Network, Chancellor
Radio Network, Talk Radio Network and the Business Radio Network. These networks
typically sell production and transmission services to the program hosts, who
then sell national advertising time to cover their costs.
Syndicated talk shows air from one to six hours per day -- most often two
to three hours -- and most have 15 to 60 local affiliates. Most affiliates are
in medium to small markets or cover portions of larger markets (radio coverage
areas are substantially smaller than TV coverage areas). The Company believes
station operators and programmers face a paradox in designing talk radio
formats. According to listener surveys at the station level and in the media
which cover them, controversial programs draw the largest audiences and are
therefore the most desirable. However, most nationally syndicated advertisers
avoid controversial program formats for fear of having their product(s)
identified with a particular controversial political viewpoint. Thus, nationally
syndicated talk shows may have great difficulty selling their advertising time.
As a recently formed, development stage company, the Company has only
recently begun to have business activities. Many of these activities are those
that were assigned from HCC, incorporating pre-existing business relations,
contractual rights and opportunities. In that context, ATB has been producing
and distributing a number of radio shows as described above or has a number
under development. To expand those activities and to create a focus, the talk
radio programs have been cross marketed to prospective radio stations and
newspapers under the trade style, the "Heartland Radio Network" ("HRN"). Under
those pre-existing agreements, ATB enters into the contracts and the Company
receives various percentages of the gross revenues generated. As described
above, those interrelated transactions constitute an affiliated relationship
among the Company, ATB and HCC. Because ATB is an integral part of the
communications business contemplated by the Company, it is possible that a
merger between the two will be affected at some time in the future. Because the
communications activities developed by HCC have already been spun-off and HCC
will continue to function as a mer-
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chant 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 inherent opportunity in this
situation. Specifically, ATB has obtained agreements with various nationally
syndicated talk shows (of the host opinion and advice/information type) and a
talk radio network to market their availabilities. By combining buys in several
programs, the Company can assemble an audience sufficient to justify an
advertising buy for national advertisers who have minimum audience-coverage
requirements. In addition, HRN will work to place advertising in targeted local
talk shows in major markets to assure appropriate coverage.
By delivering sponsors to struggling talk show hosts, the Company believes
it has the opportunity to demonstrate to those hosts how they can be financially
and politically independent. The Company expects the resulting increase in
diversity of its talk radio programming by programmers seeking to exploit
targeted markets will serve to build audience size and interest. The Company
believes this will help AM broadcasters become financially viable and help
attract both hosts and advertisers to the Company and HRN. Moreover, the Company
believes it can assemble a team of professionals with experience and expertise
in media who will assure quality programming, provide personalized service to
advertisers and develop excellent affiliate relations.
A substantial portion of the Company's revenues initially will be generated
from the sale of advertising and production services for broadcast on its talk
show programs in various market niches. Additional broadcasting revenue will be
generated from production services agreements and other miscellaneous
transactions. Local advertising sales will be made by each talk show's sales
staff (or that of their affiliates). National advertising sales are made by
firms specializing in radio advertising sales on the national level in exchange
for a commission from the Company (based on its gross revenues from the
advertising contained on the respective talk show programs).
The Company believes that radio is one of the most efficient and
cost-effective means for advertisers to reach specific demographic groups.
Advertising rates charged by talk shows are based primarily on (i) the program's
penetration of demographic groups targeted by advertisers; (ii) the number of
stations in the market competing for the same demographic group; (iii) the
supply of, and demand for, radio advertising time; and (iv) certain qualitative
factors. (Because of a larger audience, rates are generally higher during
morning and afternoon commuting hours.)
In large markets, where national and regional advertisers are particularly
active, radio stations live and die on the strength of their ratings. A
station's ability to deliver audiences of specific demographic type is evaluated
by advertisers and used by their representatives when negotiating advertising
contacts with broadcasters. The radio broadcast industry's principal ratings
service is Arbitron, which publishes the results of quarterly ratings surveys in
the largest markets and which maintains databases on station ratings in smaller
markets as well, for use by subscribers. These survey data, contracted through
Marketron, are an important tool used by the Company in fashioning program
production strategies and setting advertising rates for its programs.
Broadcasters in smaller markets, and the program suppliers who serve them,
frequently do not have Arbitron data available to them. Moreover, broadcasters
in some cases ignore these data even when they are available because the
broadcasters specialize in developing audiences among niche population segments
not counted by Arbitron. Ethnic minorities who speak neither English nor Spanish
constitute a growing niche market. Serving these market segments is a growing
business for radio broadcasters, particularly among AM licensees located on the
fringes of major markets. Typically, the station rely on their on-air
personalities to develop their ethnic audience coverage and to market
advertising time to local businesses serving those niches. The stations sell air
time to these personalities in hour-long blocks (and thereby are relieved of the
heavy financial burden of maintaining their own staffs of personalities and
advertising sales specialists).
The Company is assisting its ATB affiliate in entering this market. Working
with Texas businessman, Fred Lundgren, ATB Media, Inc. - a new ATB subsidiary -
is attempting to acquire three distressed AM licensed stations in California,
Washington and other states and converting them to block--
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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 acquisition as well as assisting in the management of them and, as a
consequence, will receive a share of station revenues through its contractual
relationship with ATB.
Future expansion in this area would include producing programs for possible
television and/or cable television syndication as well.
(2) COMMUNICATIONS COMPANIES ACQUISITIONS
As of this date, the Company has been engaged principally in organizational
activities and limited operations. Nonetheless, the Company has identified a
number of investment opportunities that it intends to continue investigating
when capitalized. While the Company has performed limited due diligence on these
projects to date, it intends to continue to investigate them (and other
opportunities) adequately as capital becomes available. Any specific
opportunities pursued will relate to communications, broadcast or print, and/or
management activities.
The Company will continue to identify (and expects to pursue) acquisitions
of communications-related activities in situations where the Company believes it
can successfully apply its operating strategy and where such businesses can be
acquired on economically attractive terms. The Company expects to grow by
emphasizing internal growth of its business and by making targeted acquisitions
of companies in the communications sector with above average growth potential
(at least 20%) at prices believed by management to be attractive, even
under-valued, and which fit synergistically in a regional concept that will aid
in the targeted marketing and promotion of the Company -- i.e., a community
newspaper and a community radio station working together to cross-market
programs and products targeted at specific demographic and/or psychographic
niche markets. Management will continue to emphasize strategic acquisitions and
dispositions, internal growth, operating efficiencies and cost reduction. As a
result, management believes that the Company is positioned to achieve internal
growth and to benefit from the general economic recovery as well as from the
current recovery in the communications industry.
The Company has had preliminary discussions with a competitive talk show
network with regard to possible acquisition. To date, those discussions would
have to be characterized as preliminary. Nonetheless, it is expected that once
at least $2,000,000 has been raised, those discussions could result in future
acquisitions -- for example, other radio network(s) or portions thereof and/or
at least access to another network's transponder. (See "Application Of
Proceeds.")
Other communications companies which might be sought would include
community newspapers and Internet-related businesses. (For example, one talk
radio network recently became the first to offer its programming in real time on
the Internet 7 days a week, 24 hours a day.) Because of the current lack of
funding to actively pursue potential targets, possible future acquisitions might
occur fairly rapidly once funding of at least $12,500,000 has been achieved.
Moreover, as a public company, it is possible that Shares of the Company will be
exchanged for interests in those companies or facilities.
As part of this strategy, the Company envisions acquiring certain
properties. This is felt to have certain advantages under a "cluster" theory
that has proven quite successful for other communications companies.
Specifically, if one advertises on talk radio, those same prospective
advertisers may want to advertise in local newspapers, particularly smaller
suburban newspapers. This same principle can be expanded to specific niche
newspapers in certain geographic areas.
One of the Company's contemplated activities is to provide management in
integrated marketing communication services. Because of the breadth of
experience of its principals, this provides tremendous cross-marketing
opportunities across the local spectrum of media -- local newspaper and/or radio
and/or television. This provides a cost-effective mechanism for products and
programs to be advertised. This is typically arranged through 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
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the standard industry commission/advertising agency rate of 15% of the gross
value of the transaction. Accordingly, even if the media involved are not
affiliated and no money changes hands, the Company would nonetheless be paid its
contemplated commission.
(3) A NATIONAL SPORTS WEEKLY MAGAZINE
Because sports are an integral part of the American way of life, the
Company believes those viewing and participating in sports are a very large, but
underserved, print market niche. The Company believes sports are universal
activities that cut across age, sex, income, ethnic and other demographics. Like
the magazine for teens described in the following section, the Company intends
to bring the proposed national sports weekly to market through a joint venture
with the creators of the concept, Gerald Garcia (Executive Vice President and
formerly President) and Bradford W. Baker (Secretary-Treasurer of the Company)
in return for the Company providing needed funding (approximately $5,037,000 if
$12,500,000 is raised). (See "Conflicts Of Interest.")
The proposed national sports weekly (hereinafter called "NSW") will use
distribution channels similar to the proposed magazine for teens (see discussion
following), thereby permitting economies of scale. NSW will be published as a
national medium for advertisers to reach adults 18 -- 54. A national sports
weekly also would lend itself to being co-sponsored by commercial networks or
companies associated with sports.
With a staff of top sports editors and writers, NSW will provide a fully
formatted tabloid-size magazine to newspapers on a weekly basis. While most
people's first choice today for printed information is their local newspapers,
those publications cannot afford the staff to report in depth on all of the
major sports beyond the news of franchise and college teams in or near the
newspaper's coverage area, much less provide coverage of the less popular
sports.
The Company anticipates signing up a reasonable percentage of the nation's
newspapers to distribute NSW. The overhead and production structure of NSW is
expected to be highly efficient. The Company expects it will be able to offer
advertisers a media product with a high circulation at a low cost-per-thousand.
In fact, the Company expects its weekly reach will be significantly higher than
other sports-oriented media, including television sports shows, but at a
cost-per-thousand that is highly competitive.
For example, Parade Magazine, printed independently and then distributed
through newspapers, has a circulation of 37,614,000. (Source: AdWeek's Guide to
Media, 1995. ) Most print publications are printed and distributed
independently, resulting in significantly lower circulation and higher costs.
For example, Sports Illustrated's circulation is 3,465,000, Inside Sports'
circulation is 675,000, Sporting News' circulation is 515,000 and Baseball
Weekly's circulation is 303,409. (Source: AdWeek's Guide to Media, 1995 and ABC,
1994.) While the market penetration for NSW may not be as high as Parade
Magazine's 37.614 million circulation, the Company believes it can achieve a
reasonable penetration rate.
Network and cable television also will be considered a competitor of NSW
because it is an efficient means of reaching a large audience cost-effectively.
At the currently projected cost-per-thousand, NSW rate will be very competitive
against all "day parts" (a media term meaning all segments of the programming
day), delivering a readership that may equal or exceed that of a typical prime
time show.
NSW will be created weekly at NSW's headquarters, then distributed
electronically to subscribing newspapers. National advertising will be sold
directly by the staff of NSW. Participating newspapers can add local advertising
by either deleting certain identified editorial content or by adding more pages.
These newspapers also can add their own local editorial content, if desired.
The targeted advertisers for NSW are those companies that have a desire to
generate immediate sales, have a need to disseminate printed information (for
image, couponing, schedules, etc.) and who want to supplement their electronic
advertising.
The Company will commit approximately $5,037,000 of this offering's net
proceeds to create NSW. The Company has executed an agreement with ICON
International, Inc., a media barter and trade company, for $11,800,000 in
advertising placement over a five year period. Based upon the potential
represented by such agreement, the Company believes NSW is viable (with
operations capable of commencing as early as September 1998).
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Such funds will be used for purposes relating to bringing NSW to fruition,
including research and development to further fine-tune the competitive
advantages as well as exposing any potential obstacles among the Company's three
target audiences (newspaper publishers, advertisers and readers); hire an
editorial and sales staff to create, sell and distribute NSW; maximize sales
with an extensive advertising and public relations campaign to promote their
product; and build customer support services to handle the demands created by
the influx of advertisers and participating newspapers. In addition, there will
be a negotiated royalty fee to the copyright owners for the national sports
weekly concept. (See last paragraph of "Introduction.") However, the Company is
currently exploring potential strategic partners for its national sports weekly.
Should these relationships develop, the Company's investment in this venture may
be reduced. (See "Application Of Proceeds.")
(4) A MAGAZINE FOR TEENS
The Company intends to create a magazine for teens which will be developed
for the purpose of delivering a cost-effective medium for advertisers to reach
the targeted teen and pre-teen (ages 11 -- 18) market. The Company intends to
bring such magazine for teens to market through a joint venture with the
creators of the concept, Gerald Garcia ( Executive Vice President and formerly
President of the Company) and Bradford W. Baker (Secretary-Treasurer of the
Company) in return for the needed funding (approximately $2,300,000). (See
"Conflicts Of Interest.")
While there have been electronic means (such as MTV) to reach the $60
billion teen market (Source: AdWeek's Guide to Media, 1995), the Company is not
aware of one national print publication that can reach a large audience at one
time. Similarly, a 1994 survey reported that teenagers spend their money on
food, electronics, entertainment and health and beauty aids. (Source: Find/SVP
1994.) Advertisers also desire to establish a relationship with teens because of
not only their buying power but also their influence on household purchases. The
Find/SVP 1994 study revealed teenagers influence household purchases amounting
to more than $161 billion annually.
The Company is now in the development phase of a magazine for teens. From
1989 to 1991, XPRESS was published for the Knoxville, Tennessee area teen market
as a joint venture between the Knoxville Journal and The Creative Network, Inc.,
and its two principals, Garcia and Baker. (XPRESS was discontinued in 1991 after
the sale of the Knoxville Journal). Originally tested as a monthly, the magazine
was distributed in East Tennessee schools. Written by and for students, XPRESS
was the first publication of its kind. Teen acceptance was extremely high with a
circulation of more than 20,000 monthly. This publication also set new standards
in the field of computerized pre-production -- e.g., XPRESS was one of the first
publications in the country to be produced entirely on computer. (See "Specific
Opportunities Under Consideration.")
The proposed magazine for teens will be aimed at middle and high schools
(grades 7-12) and will be published weekly. It will be created at the magazine's
headquarters, then distributed electronically to subscribing newspapers which
will distribute it to students at schools in their market area as part of their
"Newspapers in Education" program.
National advertising will be sold directly by the magazine. Participating
newspapers can add local advertising by either deleting certain identified
editorial content or by adding additional pages. These newspapers also can add
their own local editorial content, if desired.
The targeted advertisers for the magazine are those companies that have a
desire to reach the affluent teen market -- companies such as Coca-Cola, Taco
Bell, Pepsi, Levi's, Blockbuster, The Gap and McDonald's. The Company believes
it can attract advertisers who know teens spend (especially when it comes to
food, clothes and fun) and help such advertising entities to generate immediate
sales and establish future brand loyalty. In turn, this influences the buying
decisions of parents of teens. According to market research, teens have
increasingly more money to spend, do a disproportionately large portion of the
family shopping and are more apt to try a new product than would be their
parents. (Source: Find/SVP Study, 1994.) The Company business plan was developed
on the premise that the magazine will permit the Company to tap into such
favorable demographics.
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Future product development by the Company will include the targeting of
other demographic niche market groups such as 50+ adults, African Americans,
Hispanics and Native Americans, as well as other products that can be
distributed in a manner similar to the magazine.
The Company will commit a portion of the offering's net proceeds to: create
the magazine for teens, including hiring an initial editorial and sales staff to
create, distribute and sell the magazine; maximize sales with an extensive
campaign to promote the magazine; build customer support services to handle the
demands created by the influx of advertisers and participating newspapers; and
use research and development to create other products capable of being
distributed through pre-existing newspaper networks. In addition, a negotiated
royalty fee for the magazine's concept will be paid to its copyright owners.
(See "Introduction" with regard to the fee and "Conflicts Of Interest -- Gerald
Garcia And Bradford W. Baker Relationships" with regard to the relationship
between such creators and the Company).
There is no niche market teen-oriented national publication that can reach
a large teen audience. Magazines such as Sassy and Seventeen reach at best 1.9
million subscribers per issue and are targeted to females. (Source: AdWeek's
Guide to Media, 1995.) There are even fewer choices in male teen publications
(Boy's Life and Sports Illustrated for Kids), reaching only 1,300,000 and
950,000, respectively. (Source: AdWeek's Guide to Media, 1995.) Electronic media
have been successful at reaching teens; however, their reach is generally less
than commonly perceived -- for example, MTV's audience is currently
approximately 328,000 per quarter hour between 1:00 a.m. and 3:00 a.m. and
656,200 between 7:00 p.m. and 3:00 a.m. (Source: A.C. Nielsen, 1995.)
While the Company believes the magazine for teens will be more interactive
and wider-reaching than MTV-like products, it is also complementary with them
(since the magazine is a printed product) with respect to their use by major
advertisers. For example, the magazine's printed format allows for couponing and
can be used as a cross-selling device.
XPRESS was distributed in Knoxville to 90% of the high schools (18 of 20)
and 83% (20,000 of 24,000) of the students at those schools actually read it.
(Source: Knoxville Journal, 1991.) While the market penetration on a national
basis is not expected to be as high as in the Knoxville experience, the Company
believes a reasonable penetration rate of the targeted 37 million, $60 billion
teen audience can be achieved. (Source: Ad Week's Guide to Media, 1995.)
(5) MANAGEMENT AND MARKETING SERVICES
While currently a limited activity of the Company, it is expected that
integrated communications management services will constitute a growing portion
of the Company's business. Once funding is in place, for example, it is
anticipated that new personnel will be engaged to complement the Company's
existing personnel. The contemplated activities would be associated with
representing clients for cash fees (and possible equity-based) compensation for
management advisory services. Because the Company intends to embark upon an
active acquisition strategy, it is felt that these management and consulting
services would complement the Company's other activities since it would already
be seeking comparable information and generally be in the "information flow." It
is believed attractive economies for upcoming business activities will result,
thereby permitting the Company to acquire poorly managed companies that could
benefit from professional management techniques.
One of the Company's contemplated activities is to provide management in
integrated marketing communication services. Because of the breadth of
experience of its principals, the Company believes there are promising
cross-marketing opportunities across the local spectrum of media -- local
newspaper and/or radio and/or television. This provides a cost effective
mechanism for products and programs to be advertised. This is typically 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.
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The Company believes this will introduce attractive economies because, once
an advertiser uses a particular medium, it is a good candidate for doing more
advertising on related medium and programming in the community. This approach
also ties into the phenomenon that most advertising (approximately 53%) is done
in print and the balance is allocated between television, radio and other media.
(Source: Advertising Age, September 1995.) (See "Communications Companies
Acquisitions.")
One of the principal functions of the marketing services function will be
to develop marketing concepts, ideas and strategies for a fee to non-affiliated
entities. This will constitute the generator of new revenue sources and provide
value-added service to advertisers on the Company's radio programming. It is
believed that the Company can develop new marketing and promotion strategies
based upon this basic concept.
In the same vein, much of the Company's strategy is to avoid traditional
distribution networks but rather to deliver directly in bulk -- whether the
proposed magazine for teens, a contemplated national sports weekly or any other
specialty publication. This permits the Company to get incremental returns in an
existing market with little or no costs.
FAIRNESS OF CONSIDERATION
On June 26, 1996, the Company retained the valuation firm of Houlihan
Valuation Advisers, Inc. ("Houlihan") to review the proposed terms of the $5.00
per share initial public offering (the "IPO") price. Houlihan was selected from
among a number of investment banking firms and consultants on the basis of its
lack of affiliation with the Company, its affiliates or possible underwriters,
as well as its experience, expertise and national reputation. Houlihan was
retained for the sole purpose of opining whether or not the proposed transaction
was fair from a financial point of view to prospective investors in the IPO. No
limitation was placed on the scope of Houlihan's investigation. The Company
believes Houlihan is qualified to render the opinion because of its extensive
experience in valuing companies, including those going public for the first
time.
Houlihan has rendered an opinion to the Company, attached to this
Prospectus as Appendix III (the "Fairness Opinion"), to the effect that the
offering price to the public shareholders is fair from a financial point of
view. In preparing to render the Fairness Opinion, Houlihan reviewed the
Company's Prospectus, financial statements, forecasts and management reports,
budgets and projections, met with the Company's management, members of the Board
of Directors and conducted such other studies, analysis and inquiries as the
firm deemed appropriate to discuss the businesses and prospects and made such
other investigations as it considered necessary. Houlihan visited with the
Company's officers but did not cause any physical assets of the Company to be
appraised.
The Company paid a $30,000 fee to Houlihan and has agreed to reimburse
Houlihan for certain expenses in connection with rendering the Fairness Opinion
and to indemnify it against certain costs, expenses and liabilities to which it
may become subject arising from services rendered in connection with the
Fairness Opinion. During the five years prior to being retained by the Company,
Houlihan had not performed any services for the Company or any of its
affiliates.
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MANAGEMENT
(1) Introduction
By way of summary, the following table reflects the names, ages and
positions of the Company's executive officers and directors. See the pertinent
individual's specific biographical information which follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- ------------------------------------------------
<S> <C> <C>
Michael L. Foudy .............. 47 President, Chief Executive Officer and Chairman
of the Board of Directors
Gerald Garcia ................. 55 Vice President
Bradley B. Niemcek ............ 58 Vice President-Operations and Director-Elect
Bradford W. Baker ............. 43 Secretary-Treasurer
Linda G. Moore ................ 51 Assistant Treasurer and Chief Financial Officer
Sherri Schwab Denora .......... 37 Assistant Secretary
Ron Alexenburg ................ 51 Director
Thomas Burgum ................. 63 Director
Kirby S. Ralston .............. 46 Director
B. Eric Sivertsen ............. 46 Director
Gregory Jackson ............... 56 Director-Elect
Sharon M. Murphy .............. 58 Director-Elect
</TABLE>
(2) 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 "Nesmaker" which is broadcast on 119 radio
stations by the United Broadcasting Network. He has diverse experience in public
affairs, integrated marketing communications, strategic planning, management,
entrepreneurship, finance, writing and broadcasting. Mr. Foudy's accomplishments
include creation of a 30,000 member Utility Shareholder's Association to
intervene in rate legal cases and winning over $400 million in increased rate
base. During the 1992 Presidential primary campaign, he was actively engaged in
organizing a movement to draft an independent candidate for President (which
activities generally would permit an independent candidate for President to
obtain ballot access in all U.S. jurisdictions).
During 1974, while in law school, Michael Foudy founded a small marketing
communications Company in Tucson. When he sold his interest in the Company
thirteen years later, WFC/Westcom had grown to be the largest public
affairs/public relations Company in Arizona with billings of over $7 million,
with offices in Tucson, Phoenix and San Diego, a staff of twenty-five
professionals, a base of "blue chip" clients and a history of profitability.
Since 1987, Mr. Foudy has undertaken a variety of projects on behalf of
distressed clients. These range from a comprehensive marketing audit for the
owners of Garfinckel's Department Stores in Washington, D.C. to preparation of
promotional and sales materials for the liquidation of $86 million of commercial
property and the auction of 4,000 residential properties once owned by First
City Bank of Houston, Texas. He directed the successful repositioning of a
master planned golf and retirement community owned by Fairfield Homes in Green
Valley, Arizona and designed a comprehensive marketing communications program
which doubled home sales for the troubled home builder. He also supervised the
restructuring/liquidation of Compass Publishing based in Chicago, Illinois and
Sarasota, Florida.
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Mr. Foudy wrote the book Reinventing America which was published by the
Institute for American Democracy. He serves on the Board of Directors of
Heartland Capital Corporation, which he co-founded, and is Of Counsel to the DCM
Group, an integrated communications strategy firm based in McLean, Virginia. Mr.
Foudy has been active in a variety of charitable and community organizations
including the Tucson Free Clinic, Tucson Community Food Bank, Arizona Opera
Company and Southwestern Film Consortium. He currently serves on the foundation
for American Liberty and the American Initiative Committee Board of Directors
and is Editor of the American Initiative Newsletter.
GERALD GARCIA, born 1943, Vice President and formerly Chief Executive
Officer and Chairman of the Board of Directors, graduated from Texas A&M
University in 1967. Mr. Garcia joined the Company from The Houston Post, where
he was vice president and editor. During his three-years there, The Post was
honored regularly for journalistic excellence. Prior to his return to his native
Texas, Mr. Garcia was editor and publisher of the Knoxville Journal and
president and publisher of the Maryville Daily Times, its nearby sister
publication. Mr. Garcia had a significant impact on both newspapers. He
supervised the transformation of the Daily Times to a morning paper, redesigned
the Journal and led both papers to journalistic excellence and economic
vitality. During his tenure, the Journal was credited with having developed the
"Best Sports Section in the Country" for newspapers of 50,000 circulation and
under and the Daily Times was named "Tennessee's Best Newspaper" by the
Tennessee Press Association in 1990 and 1991. While Mr. Garcia was editor of the
Journal and Daily Times, respectively, market penetration grew for both
newspapers at rates superior to industry standards for newspapers of comparable
size.
Mr. Garcia began his career at the Brenham Banner-Press while attending
Texas A&M. He held the positions of reporter, sports editor and managing editor
there. After receiving his B.A. degree in Journalism, he moved to the Corpus
Christi Caller-Times as sports reporter and sports news editor and then on to
the Fort Worth Star-Telegram as a sports reporter and his first significant
newsroom management responsibilities.
In 1976, Mr. Garcia went to the Kansas City Star and Times where he was
director of newsroom operations and assistant to the publisher. He later also
assumed directorship of the Capital Cities' Minority Training Program. Mr.
Garcia moved next to the Gannett Company where he was general executive of the
San Bernadino Sun and then editor and publisher of the Tucson Citizen. In 1983,
he was named vice president of Gannett West Newspaper Group.
Mr. Garcia played an integral role in the launch of USA Today, supervising
the building of Gannett's print site in Phoenix. He returned to the home of his
alma mater in 1986 to be publisher of the Bryan-College Station Eagle before
moving to Knoxville in 1988.
In 1984, Mr. Garcia received the Ruben Salazar award for his achievements
in publishing. Mr. Garcia has been a community leader wherever he has lived,
most notably in Tucson, where he is credited with creating "The New Pueblo"
concept. He served a two-year term, in 1989-1991, as chairman of the American
Newspaper Publishers Association's Task Force on Minorities in the Newspaper
Business.
BRADLEY B. NIEMCEK, born 1940, Vice President-Operations and director-elect
of the Company, is a 1965 Journalism graduate of Marquette University and is
currently pursuing, on a part-time basis, a graduate degree in International
Telecommunications at George Mason University. He plays and active role in the
Heartland Radio Network, which not only provides marketing and management
services to ATB Productions , L.L.C. but also has other broadcast activities
under development. Mr. Niemcek is a 30-year veteran of the communications
industry. He spent his early years as a newspaper reporter, television news
writer and public relations executive. In addition, Mr. Niemcek for the past two
decades has worked for, or established and built his own, companies specializing
in client services based on emerging communications technologies. Mr. Niemcek
began his career as a reporter and writer for the Milwaukee Sentinel and the NBC
affiliates in that city, WTMJ radio and TV. He was recruited into the corporate
public relations field in 1967 by Carl Byoir & Associates in Chicago and, after
one year there, moved to its New York headquarters. Mr. Niemcek departed Byoir
in 1974 to undertake a series of entrepreneurial enterprises in the sports
promotion field, television syndication and in newsletter publishing. In 1982,
he founded Newslink, Inc. to develop and market a satellite distribution service
to connect public relations enterprises with the nation's local TV newsrooms. By
1988, the firm had ex-
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panded to include offices in New York and Washington, D.C. and diversified into
providing facilities management satellite services for broadcast and cable TV
clients as well; its largest client was Cable News Network ("CNN"). Mr. Niemcek
sold his interest in Newslink in 1988 and formed TV People, Inc., a television
facilities management firm and, from his new base in the Washington, D.C. area,
consulted on the development of a number of local and regional political
campaigns.
BRADFORD W. BAKER, born 1955, Secretary -Treasurer of the Company, attended
the University of Dallas from 1974 -- 1975. Mr. Baker's professional experience
spans 20 years of advertising, sales management and marketing. He is currently
President and partner of The Creative Network, Inc., an award winning
full-service advertising agency located in Knoxville, Tennessee. Prior to
helping form The Creative Network, Mr. Baker was a VP/Account Supervisor at
Charles Tombras Advertising, Inc. in Knoxville and at Caraway Kemp
Communications in Jacksonville, Florida. He has worked on both the client and
agency sides of the business and won several awards and distinctions including:
Who's Who in Advertising, a Presidential Citation for Private Sector Initiative,
two 1990 Telly Awards, a 1992 National ADDY award from the American Advertising
Foundation and a 1996 Knoxville ADDY Best of Show. Mr. Baker has extensive
experience in creating, marketing and publishing various media vehicles. These
include:
o Boating Magazine: The Creative Network is the agency of record for this
industry-leading publication. Work for this client includes all marketing
facets, with heavy concentration on trade advertising and positioning.
o Xpress, a magazine for teens. (See "Specific Opportunities Under
Consideration -- A Magazine For Teens.")
o 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 The Creative Network.
o 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 to 1970 and, in 1971and 1972,
was Assistant to the Deputy Chairman of the Republican National Committee.
During 1973, Ms. Moore was Office Manager of Donnelly Marketing's National
Political Office. She was Office Manager and held the office of
Secretary-Treasurer from 1974 to 1996 of ESD and has served on its Board of
Directors since 1974.
SHERRI SCHWAMB DENORA, born 1961, Assistant Secretary of the Company, is a
1983 graduate of Mary Washington College, Fredericksburg, Virginia. During 1983
and 1984, Ms. Denora was a secretary and receptionist of Marinas International,
Ltd. Since 1984, she has been production manager of the DCM Group, a subsidiary
of ESD, responsible (among other activities) for print production, event
management and the training and supervision of new employees.
IT IS EXPECTED THAT ADDITIONAL PERSONNEL WILL BE EMPLOYED TO ASSIST IN
OPERATIONS AND FINANCIAL MANAGEMENT. THE COMPANY HAS ALSO IDENTIFIED SEVERAL
PEOPLE THAT ARE CANDIDATES FOR KEY POSITIONS WITHIN THE ORGANIZATION. THE
COMPANY HAS DISCUSSED OPPORTUNITIES WITH SOME OF THESE PEOPLE AND INTENDS TO
ACTIVELY RECRUIT THEM UPON FUNDING. MANAGEMENT RECOGNIZES THAT THEIR EXPERTISE
AND EXPERIENCE IS ESSENTIAL TO SUCCESS OF ITS BUSINESS PLAN. THE COMPANY INTENDS
TO ALSO CONTINUE TO EXPAND ITS ADVISORY GROUP IN THE AREAS OF BUSINESS AND
FINANCE.
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<PAGE>
(3) Directors
MICHAEL L. FOUDY. (See "Officers" above.)
RON ALEXENBURG, born 1942, has been President of National Record Company
since April 1997 and a music business consultant since 1990 for, among others,
The Beach Boys, Cabin Fever Entertainment (a division of U.S. Tobacco), American
Re-Insurance Company, Rawkus Entertainment (an affiliated company of James
Murdoch) and Joseph Antonini (past chairman of K-Mart). He also recently taught
at New York University as a Professor of Business Music, Music Promotion and
Advertising. From 1988 to 1990, Mr. Alexenburg was a partner with Cy Leslie at
Aegis Entertainment in 1988. In March 1980, he joined Peter and Trudy Meisel and
Ariola (GMB) to establish Handshake Records, leaving in 1988. In April 1978, Mr.
Alexenburg established Infinity Records, in association with MCA, until he left
in 1980. As CEO and President, he signed entertainers or groups that included
Orleans, Hot Chocolate, Spryo Gyra and Rupert Holmes (all of which had "gold"
recordings). Prior to that association, Mr. Alexenburg was named Senior Vice
President and General Manager of Epic Records, a division of the CBS Records
group, in July 1977; at that time, he also started the Portrait label, signing
the highly successful group Heart. Sales increased at Epic and the CBS
associated labels dramatically during the next seven years. For five consecutive
years, the organization signed, developed and successfully marketed more than 25
new artists, all of which achieved "gold" (sold over half a million units)
status, including two of the most successful album sellers of all time: the
artist Meatloaf and the group Boston. Mr. Alexenburg joined Columbia Records in
December 1965 and was promoted to Vice President of Epic Records in May 1971,
after holding increasingly responsible positions and receiving numerous industry
awards for his achievements.; a year later, in 1972, he was given full
responsibility for the label's growth at which time he brought Michael Jackson
(and "Thriller," the most successful album of all time) and The Jackson Family
to Epic Records. Mr. Alexenburg began his career with Garmisa Distribution, one
of Chicago's leading independent record distributors in 1962, were he held
positions in sales, marketing and promotion, while he represented companies such
as ABC Dunhill, Mercury, Phillips and United Artists.
THOMAS BURGUM, born in 1935, is a principal of Thicksten Grimm Burgum, a
Washington, D.C.-based law firm. Mr. Burgum is a 1958 graduate of Jamestown
college (North Dakota) and a recipient of a 1965 law degree from the University
of North Dakota. Since 1982, he has been a principal and Executive Vice
President of Thicksten Grimm Burgum, overseeing the implementation of lobbying
and consulting services to industrial financial and government clients. From
1980 -- 1982, Mr. Burgum was the principal of Burgum and Associates, serving as
a government relations consultant to a variety of agricultural and local
government clients. In 1979 -- 1980, he served as Deputy Under-Secretary of
Agriculture, directing operation of the FmHA (rural development) loan,
Alternative Energy and Rural Rail Acquisition programs; in such capacity, Mr.
Burgum was selected to act as chairman of the Secretary's Working Group of
Agriculture and Transportation; selected to represent the Department in issue
negotiations with the Office of Management and Budget as well as the Department
of the Treasury; and received a Presidential Commendation for coordinating
successful Carter Administration efforts to pass the rural Development Act of
1980. From 1971 -- 1979, he served as a member of the staff of the
appropriations committee for North Dakota Senator Quentin N. Burdick, directing
legislative research for that committee's Agriculture, Transportation and
Environmental Subcommittees and coordinated legislative efforts during the
period with representatives of the Executive Branch during the Nixon, Ford and
Carter Administrations. From 1972 -- 1974, Mr. Burgum served as Staff Director
of the Bankruptcy Reform committee for Senator Burdick' directed the legislative
drafting and lobbying effort for the Municipal Bankruptcy Amendments of 1975,
acted as Staff Advisor for the Judiciary Subcommittee Chairman during the floor
debate; and received a special Presidential commendation for staff work on the
Municipal Bankruptcy Amendments. From 1968 - 1972, he served as North Dakota
State's Attorney for Stutsman County; in such capacity, Mr. Burgum represented
the state in all criminal prosecutions and, as the senior attorney for this
governmental unit, managed all legal operations of the county.
KIRBY S. RALSTON, born 1953, is a 1976 graduate of Texas Christian
University with a B.A. in Journalism. While in college, Mr. Ralston worked in
the sports department at the Fort Worth Star-Telegram. He also was a staff
member of the TCU student newspaper and radio station. After graduation, Mr.
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Ralston joined the family-owned Ralston Advertising in Omaha, Nebraska where he
handled the sales and marketing of promotional advertising products. In 1978,
Mr. Ralston formed A Advertising & Supply, a direct mail marketing unit of
Ralston Advertising specializing in the promotion of political campaign items.
In 1990, Mr. Ralston was named President of Ralston Advertising/A Advertising &
Supply. He is a board member of the Mid-America Direct Marketing Association and
an active member of the Greater Omaha America Marketing Association and the
Omaha Federation of Advertising.
B. ERIC SIVERTSEN, born 1953, who graduated from the College of William &
Mary in 1975 and George Mason University School of Law in 1981, previously
served as an officer and director of various subsidiaries of DeRand Corporation
of America. Mr. Sivertsen, who currently serves as executive vice president of
Telecom Towers, L.L.C., is a member of the Virginia state bar and has extensive
experience creating marketing strategies products and has coordinated the
development of a national securities marketing organization and selling group.
He has performed acquisition due diligence, including financial and other risk
analysis of potential acquisitions, budget preparation and other pro forma
financial analysis. Mr. Sivertsen has negotiated various acquisition-related
agreements, including purchase and sale, senior and subordinated commercial
financing, seller refinancing, mortgages, leases, employment and credit
enhancement agreements. He also manages operations of a public
telecommunications fund, oversees preparation of budgets, contract negotiations,
development of operating strategies, as well as the review and hiring of
personnel. He served as senior deputy to the chairman of the board of DeRand
Corporation of America, serves as in-house counsel to DeRand and Chief Personnel
Manager and Administrator for several DeRand subsidiaries. During the last
several years, he has been selected to speak at various investment seminars and
conferences and on radio regarding telecommunications investments and investment
banking.
(b) Directors -- elect
Effective concurrent with registration of this offering, the following will
become Directors of the Company:
Bradley B. Niemcek. (See "Officers" above.)
GREGORY JACKSON, born 1942, an undergraduate of Columbia University and
Whitman college as well as a 1996 graduate of Columbia's Graduate School of
Journalism, was the principal New York correspondent for ABC news from 1970 to
1977. Mr. Jackson went on to produce and host a number of network series and
syndicated productions. These include: managing editor of "How'd They Do That?,"
a Telepictures/CBS 1994 - 1995 prime-time series; producer and host of "Up front
With . . .," a syndicated half-hour celebrity series; producer and host of
"Heart of the Mater," a WCBS (New York City) daily 15-minute "Nightline"-style
field piece and studio discussion; producer and host of "One on One," an ABC
nightly network half-hour high profile celebrity series (after "Nightline");
executive producer of non-dramatic programming at CBS Cable; producer and host
of "Signature" for CBS Cable; producer and host of "healthline," a weekly PBS
health series; producer and writer of "To Be An Astronaut," a one-hour ABC
videocassette; producer and writer of "Caring For Your Newborn," a two-hour
child care video with Dr. Benjamin Spock. Mr. Jackson is also author of the
textbook, "Getting Into Broadcast Journalism." Mr. Jackson also has often served
as a marketing advisor and board member on small, high-tech companies unrelated
to broadcasting. For example, he created a video sales campaign key for a
private company $450,000 in debt so successful that, due to a rise in sales
and/or projected sales, the Company was bought out by a major competitor for
$14,000,000. In 1989, he purchased, managed and (in 1996) sold a full service
country club in Boise, Idaho. Mr. Jackson began his journalism career in Boise.
He started with United Press International, became an assistant managing editor
at the daily paper, press secretary to the Idaho governor and, finally, local
television news director. In 1966, while in Columbia's master degree in
journalism program (where NBC had sent him) he was instrumental in setting up
the school's TV production program and subsequently taught.
SHARON M. MURPHY, born 1940, is Provost and Vice President for Academic
Affairs of Bradley University. Dr. Murphy received her Ph.D. from the University
of Iowa and has served in faculty and administrative positions at Marquette
University, Southern Illinois University, University of Wisconsin- Milwaukee
and, during 1977-78, as a Fulbright senior lecturer in mass communication at the
University
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of Nigeria. She is co-author of Great Women of the Press (1983), co-editor of
International Perspectives on News (1982), co-author of Let My People Know:
American Indian Journalism 1828-1978 (1981), co-editor of Screen Experience: An
Approach to Film (1968) and author of Other Voices: Black, Chicano and American
Indian Press (1974). Dr. Murphy has been a public relations director, magazine
editor and newspaper reporter. She was vice-president of the national
Accrediting Council on Education in Journalism and Mass Communication
(1983-1986), president of the Association for Education in Journalism and Mass
Communication ("AEJMC") (1986-1987) and member of various committees for AEJMC
and the Association of Schools of Journalism and Mass Communication. She has
been honored by Women in Communications, Inc., the Milwaukee Press Club, the
Catholic School Press Association, the Jaycees, the YWCA and the Gannett
Foundation. Dr. Murphy is a member of the North Central Association
Consultant-Evaluator Corps and serves on the Board of Directors of the Everett
McKinley Dirksen Congressional Leadership Research Center, the Women's Fund of
the Peoria Community Foundation, the Peoria Area Chamber of Commerce, the Peoria
Symphony Orchestra, a member of the Peoria Riverfront Development Commission and
the Peoria Race Relations Committee.
PROFESSIONAL ADVISOR(S)
In order to ensure that the Company takes all steps necessary for its
ultimate success, it has retained the services of certain professional advisors.
Despite the fact that the Company is still in the development stage, with the
help of its legal, accounting and financial advisors, management continues to
strive for a level of professionalism commensurate with the Company's strategic
plan and goals. (See "Conflicts Of Interest -- Professional Advisors" with
regard to compensation, time commitment and related conflict issues.) The
Company's professional advisors include:
(1) FRANK CALLAHAN, born 1928, who graduated from Baker University in 1950,
is a professor at the Thunderbird Graduate School of International Management in
Glendale, Arizona. Mr. Callahan is a former officer of the advertising agency
Young and Rubicam, owner of Winters, Francheski and Callahan Advertising and
partner in WFC Public Relations. He has had a long and successful career
introducing new products and services. Among his successful introductions are
Duncan Hines Cake Mixes, Purina Dog Chow, Gallo Wines, Pentel Pens, Scotchguard,
Club Med, Hyundai Personal Computers and various products for Armour Foods. Mr.
Callahan has an extensive history relating to new product introduction,
including careful consideration of positioning issues, marketing strategies,
obstacles to success, competitive forces, prospect definition, channels of
distribution, advertising, public relations and sales.
(2) MAX E. MILLER, ESQ., born 1949, has provided legal and financial advice
to the Company since early 1995. He is currently a senior partner at the
Washington, D.C. law firm of Reed Smith Shaw & McClay and, from June1987 through
September 30, 1996, a senior partner at the Washington, D.C. law firm of Bayh &
Connaughton, P.C. (founded and chaired by former U.S. Senator Birch Bayh). Mr.
Miller specializes in federal, state and international tax planning and business
consulting and commercial transactions on behalf of publicly-held and
closely-held corporations, partnerships, trusts, estates and individuals. He has
often assisted in the development of business plans and the financial structure
of start-up companies, and has worked closely with U.S. companies expanding
overseas. Also a certified public accountant, Mr. Miller combines a strong legal
background with a solid understanding of corporate finance and the financial
consequences of business transactions. Prior to joining the firm, Mr. Miller was
a senior tax manager with Coopers & Lybrand, an international accounting and
business consulting firm. He has been a frequent lecturer at tax seminars and
special business programs and has written extensively on tax matters. Mr. Miller
received his B.S. in accounting from Indiana University and his law degree from
Indiana University School of Law. Mr. Miller also attended the graduate tax law
program at Georgetown University Law Center. He is a member of the District of
Columbia, Virginia and Indiana Bars, and is admitted to practice before the
United States Tax Court and the Federal District Court for the Eastern District
of Virginia. He is also a member of the American Institute of Certified Public
Accountants, as well as the Indiana and Northern Virginia Societies of Certified
Public Accountants.
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(3) JOHN M. NOVACK, born 1951, currently works as a financial consultant.
Previously, he was employed by NHP, Incorporated, as Senior Vice President,
Finance and Accounting from 1993 -- 1995, a financial consultant from 1992 -
1993, Vice President-Controller of Woodward & Lothrop, Incorporated from 1981 --
1992 and an Audit Manager in the Washington, D.C. office of Arthur Andersen,
L.L.P. from 1973 -- 1981. He holds a B.B.A. degree in Accounting from the
College of William and Mary.
REMUNERATION
The Company was formed on March 27, 1996 and therefore paid no compensation
prior to that time. Under the current compensation agreement, dated as of May 1,
1996 with the Company, Michael L. Foudy and Bradley B. Niemcek earn compensation
at the annual rate of $120,000 and $60,000, respectively, plus certain
out-of-pocket expenses during this start-up period. In addition, Bradford W.
Baker and Gerald Garcia have employment agreements with the Company which do not
provide for direct compensation but do make each eligible for certain employee
benefits, including a bonus and/or stock options. (See "Employment Agreements"
following.)
If only the minimum funding is subscribed for in this offering and no other
funds are available, it is intended that the amount of salaries for Messrs.
Foundy and Niemcek will be reduced sufficiently until cash flow is available to
adequately pay these amounts. However, it is intended that the difference
between the full compensation level and what is paid will be accrued and
ultimately paid when funds are available. As the Company's operations develop,
it is anticipated that additional personnel and outside consultants may be
hired. It is currently anticipated that each of these individuals will devote up
to approximately 50% of their time to either HCC or ATB Productions, L.L.C. (for
which the Company will be reimbursed for that portion of the individual's base
salary). Determination of time allocation will be at the discretion of the Board
of Directors.
EMPLOYEE BENEFITS
It is anticipated that the Company will implement, in the near future, a
Restricted Employee Stock Option plan under which its Board of Directors may
grant employees, directors and certain advisors of the Company options to
purchase its Shares at exercise prices of not less than 85% of the then current
market price on the date of their grant. Income from any 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. Moreover, the Company has agreed with certain state securities
regulators that (i) the amount of outstanding options and warrants for its
Shares shall not exceed, during the period the offering is registered, more than
10% of the total Shares outstanding; and (ii) the term of any such warrants will
be ten years or less. Finally, see "Conflicts of Interest Certain Related Party
Transactions" with regard to employment agreements with four officers and
employees providing, among other terms, their ability annually to buy up to
100,000 Shares of common stock of the Company at $.10 per Share.
The Company anticipates that it will adopt in the future an employee cash
bonus program to provide incentive to the Company's employees. It is anticipated
that such a plan would pay bonuses to employees based upon the Company's pre-tax
or after-tax profit for a particular period. It is anticipated that the Company
will adopt a retirement plan such as a 401(k) retirement plan and that it will
implement an employee health plan comparable to the industry standard.
Establishment of such plans and their implementation will be at the discretion
of the Board of Directors; any such bonus plan will be based on annual
objective, goal-based criteria developed by the Board of Directors for eligible
participants and will be exercisable only at prices greater than or equal to the
market value of the underlying Shares on the date of their grant.
EMPLOYMENT AGREEMENTS
Messrs. Foudy, Baker and Niemcek (as of May 1, 1996) and Mr. Garcia (as of
November 1, 1997) each entered into a three-year employment agreement with the
Company (collectively, the "Employment Agreements") that provides for bonuses
and such other benefits (including base annual salaries as
40
<PAGE>
to Messrs. Foundy and Niemcek) as set forth in their agreements. See "Conflicts
of Interest -- Certain Related Party Transactions" with regard to eligibility of
these employees 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. As described in "Remuneration", it is anticipated that
Messrs. Foundy and Niemcek will devote approximately 50% of their time to HCC or
ATB and the determination of time allocation, and any and any associated salary
adjustment will be at the discretion of the independent members of the Board of
Directors. Messrs. Foudy, Garcia, Baker and Niemcek and the Boards of Directors
each have the right to terminate the Employment Agreements with or without cause
at any time; provided, however, that termination by the Board of Directors
without cause would obligate the Company to pay the compensation due under the
applicable Employment Agreement for the remainder of its term. Pursuant to the
terms of the Employment Agreements, Messrs. Foudy, Garcia, Baker and Niemcek
have agreed that they will not compete with the Company during the period of
their employment and for a one-year period after termination of the applicable
Employment Agreement.
EMPLOYEES
As of October 30, 1997, the Company had one full-time and two part-time
employees, all of whom are located in its Virginia offices. None of such
employees is represented by employee union(s). The Company believes its
relations with all of its employees are good.
PROPERTY
The Company rents its office facilities at market rates. (However, see
"Conflicts Of Interest" -- Certain Related Party Transactions.") Such leased
office space is adequate, the Company believes, to satisfy its needs for the
foreseeable future.
LITIGATION
There has not been any material civil, administrative or criminal
proceedings concluded, pending or on appeal against the Company or its
affiliates and principals.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table summarizes certain information with respect to the
beneficial ownership of the Company's Shares, immediately prior to and after
this offering (as well as the reverse stock split described in "Description of
Capital Stock - Reverse Stock Split").
41
<PAGE>
<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- -------------------------------------------------
MINIMUM(2) MAXIMUM(3)(4)
----------------------- -----------------------
NAME OF BENEFICIAL OWNER: NUMBER(1) % NUMBER % NUMBER %
- ----------------------------------------------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND OFFICERS
Michael L. Foudy ............................. 2,072,500 22.4 2,072,500 21.6 2,072,500 17.6
Bradford W. Baker ............................ -- -- -- -- -- --
Gerald Garcia ................................ 414,007 4.5 414,007 4.3 414,007 3.5
Bradley B. Niemcek (5) ....................... 112,500 1.2 112,500 1.2 112,500 1.0
Linda G. Moore ............................... -- -- -- -- -- --
Sherri Schwamb Denora ........................ -- -- -- -- -- --
Ron Alexenburg ............................... 12,500 .1 12,500 .1 12,500 .1
Thomas Burgum ................................ 12,500 .1 12,500 .1 12,500 .1
Kirby Ralston ................................ 12,500 .1 12,500 .1 12,500 .1
B. Eric Sivertsen ............................ 37,500 .4 37,500 .4 37,500 .4
Gregory Jackson (5) .......................... -- -- -- -- -- --
Sharon Murphy (5) ............................ -- -- -- -- -- --
--------- ---- --------- ---- --------- ----
ALL DIRECTORS AND OFFICERS AS A GROUP ......... 2,674,007 28.8% 2,674,007 27.8% 2,674,007 22.8%
========= ==== ========= ==== ========= ====
ALL 10% SHAREHOLDERS
Michael L. L. Foudy .......................... 2,072,500 22.4 2,072,500 21.5 2,072,500 17.6
Heartland Capital Corporation
(warrants only) ............................ 1,236,000 13.4 1,236,000 12.8 1,236,000 10.5
--------- ---- --------- ---- --------- ----
ALL 10% SHAREHOLDERS AS A GROUP ............... 3,308,500 35.8% 3,308,500 34.3% 3,308,500 28.1%
========= ==== ========= ==== ========= ====
ALL BENEFICIAL OWNERS AS A GROUP .............. 3,910,007 42.3% 3,910,007 40.6% 3,910,007 33.3%
========= ==== ========= ==== ========= ====
</TABLE>
- ----------
(1) Reflects total outstanding Shares of 1,326,811, escrowed shares of
4,801,589, the assumed issuance of 75,000 contingent shares and the assumed
exercise of warrants to purchase 3,033,600 shares, all as of September 30,
1997 Detailed ownership by director and/or officer are listed under the
heading, "Directors and Officers."
(2) Assumes issuance and sale of 400,000 of the Company's shares during this
Offering Period (the "minimum" offering), in addition to the 1,326,811
shares currently outstanding, the escrowed Shares of 4,801,589, the issuance
of 75,000 contingent shares and the assumed exercise of warrants to purchase
3,033,600 additional Shares, all as of September 30, 1997.
(3) Assumes issuance and sale of 2,500,000 of the Company's shares during this
Offering Period (the "maximum" offering), in addition to the 1,326,811
Shares currently outstanding, the escrowed Shares of 4,801,589, the issuance
of 75,000 contingent shares and the assumed exercise of warrants to purchase
3,033,600 additional Shares, all as of September 30, 1997.
(4) As described in "Description Of Capital Stock- Reverse Stock Split." a
reverse stock split was effected by the Company as of March 25, 1997 to
reduce the dilutive effect on new investors in the Company's planned initial
public offering. Because the Shares escrowed are issued contingent upon
required performance standards being met, they have no voting and dividend
rights and are, while in escrow, not deemed to be outstanding Shares. On the
assumption those performance standards will be met during each of the six
years of the escrow, the following directors and officers would have the
following escrowed Shares released to them (in annual increments of 16.67%):
Michael L. L. Foudy (934,329), Gerald Garcia (194,706) and Bradley C.
Niemcek (19,588).
(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.
42
<PAGE>
<TABLE>
<CAPTION>
SHARES UNDER SHARES UNDER
DIRECTOR AND/ OR OUTSTANDING ESCROWED NON-CONTINGENT CONTINGENT
OFFICER SHARES SHARES WARRANTS WARRANTS SHARE TOTAL
- ---------------------------- ------------- ------------ ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Michael L. Foudy ........... 270,671 934,329 867,500 -- 2,072,500
Gerald Garcia .............. 53,801 194,706 165,500 -- 414,007
Bradley B. Niemcek ......... 5,412 19,588 12,500 75,000 112,500
Eric B. Sivertsen .......... 12,500 -- 25,000 -- 37,500
Ron Alexenberg ............. 12,500 -- -- -- 12,500
Kirby Ralston .............. 12,500 -- -- -- 12,500
Thomas Burgum .............. 2,500 -- -- -- 12,500
------- ------- ------- ------ ---------
TOTAL ...................... 379,884 1,148,623 1,070,500 75,000 2,674,007
======= ========= ========= ====== =========
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial data for the Company. The
selected financial data should be read in conjunction with the Company's and
Heartland Capital Corporation's (HCC) "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and Notes thereto and the Financial Statements of HCC and Notes
thereto included elsewhere in the Prospectus. The selected financial data for
the periods ended December 31, 1994, 1995 and 1996, have been derived from the
Company's and HCC's financial statements, which have been audited by independent
certified public accountants and are included elsewhere in this Prospectus. The
selected financial data for the nine months ended September 30,1996 and 1997
have been derived from unaudited financial statements which are included
elsewhere in this Prospectus. In the opinion of management of the Company, the
unaudited financial statements of the Company and HCC have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for this
period. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. This data should be read in conjunction with the Company's
and HCC's "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations" and the financial statements, and related notes thereto,
included elsewhere in this Prospectus.
43
<PAGE>
<TABLE>
<CAPTION>
HCC (Predecessor Company) (1)(6)
--------------------------------
DATE OF DATE OF
FORMATION FORMATION
(6/23/94) YEAR YEAR 9 MONTHS 9 MONTHS (6/23/94)
THROUGH ENDED ENDED ENDED ENDED THROUGH
12/31/94 12/31/95 12/31/96 9/30/96 9/30/97 9/30/97
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE $-- $647 $2,847 $10,913 $-- $3,494
COSTS AND EXPENSES $211,372 $568,467 $361,354 $285,960 $140,500 $1,281,693
LOSS FROM OPERATIONS (7) ($211,372) ($567,820) ($358,507) ($275,047) ($140,500) ($1,278,199)
INTEREST EXPENSE (INCOME), NET $8,342 $25,690 $69,880 $3,973 $7,488 $111,400
NET LOSS (4) ($219,714) ($593,510) ($428,387) ($279,020) ($147,988) ($1,389,599)
NET LOSS PER SHARE ($0.03) ($0.07) $(0.05) ($0.03) ($0.02) ($0.17)
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING(2)(5) 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000 8,051,000
- ------------------------------------------------------------------------------------------------------------------------
HCC ( Predecessor Company) (1)(6)
---------------------------------
AS OF AS OF AS OF AS OF
12/31/94 12/31/95 12/31/96 12/31/97
----------------------------------------------------------------------------
BALANCE SHEET DATA:
WORKING CAPITAL (DEFICIENCY) ($245,214) ($333,529) ($32,014) ($301,226)
TOTAL ASSETS $36,274 $184,800 $605,375 $964,089
STOCKHOLDERS'EQUITY (DEFICIT) ($217,714) ($171,379) $340,592 $192,604
ACCUMULATED DEFICIT ($219,714) ($813,224) ($1,246,369) ($1,394,357)
</TABLE>
<TABLE>
<CAPTION>
HCMI (Successor Company)(1)(6)
---------------------------------
DATE OF DATE OF DATE OF
FORMATION FORMATION FORMATION
(3/27/96) (3/27/96) 9 MONTHS (3/27/96)
THROUGH THROUGH ENDED THROUGH
12/31/96 9/30/96 9/30/97 9/30/97
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE $3,507 $-- $4,757 $8,264
COSTS AND EXPENSES $321,421 $224,593 $849,558 $1,170,979
LOSS FROM OPERATIONS (7) ($317,914) ($224,593) ($844,801) ($1,162,715)
INTEREST EXPENSE (INCOME), NET ($2,899) ($739) ($17,025) ($19,924)
NET LOSS (4) ($315,015) ($223,854) ($827,776) ($1,142,791)
NET LOSS PER SHARE ($0.25) ($0.18) ($0.62) ($0.88)
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING(2)(5) 1,270,503 1,242,349 1,326,811 1,298,657
- ----------------------------------------------------------------------------------------------------------------
HCMI (Successor Company)(1)(6)
---------------------------------
AS OF AS OF MINIMUM
12/31/96 9/30/97 ADJUSTED (3)
-----------------------------------------------------
BALANCE SHEET DATA:
WORKING CAPITAL (DEFICIENCY) ($516,327) ($1,012,628) ($932,628)
TOTAL ASSETS $797,964 $508,572 $2,143,572
STOCKHOLDERS'EQUITY (DEFICIT) $275,143 ($552,633) $1,082,367
ACCUMULATED DEFICIT ($315,015) ($1,142,791) ($1,142,791)
</TABLE>
<PAGE>
(1)Effective May 17, 1996, the Company was assigned certain development rights
and obligations by HCC, its parent company at that time. Effective May 18, 1996,
the Company was spun off via a dividend to the HCC shareholders. Consequently,
the Company had yet to commence operations and is presented as the "Successor"
to HCC which, in turn, is deemed the "Predecessor" in the above table. (2) For
HCC, common and common equivalent shares outstanding are based on the weighted
average number of shares of common stock equivalents outstanding each period, as
adjusted for the effects of Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No.83. Pursuant to SAB No.83, "cheap" stock and warrants (that
is stock or warrants issued for consideration or with exercise prices below the
initial public offering("IPO") price within a year prior to the initial filing,
or in contemplation of the IPO) should be treated as outstanding for all
reported periods. Consequently, 8,051,000 shares are the common and common
equivalent shares outstanding for all reported periods for purposes of computing
net loss per share for HCC. (3) Assumes completion of the offering and
application of the net proceeds of $1,635,000 in the case of the minimum
offering. (4) There have been no, nor are there expected to be,cash dividends.
(5) For HCMI, based on the weighted average number of shares outstanding during
the period, adjusted retroactively for the reverse stock split approved March
25, 1997. (6) The financial statements from which the above information has been
derived have been prepared assuming the Company and HCC will continue as going
concerns. However, both the Company and HCC have incurred losses since
inception. Such factors, among others, raise substantial doubt about the
Company's and HCC's ability to continue as going concerns. In that regard, see
"Reports of Independent Certified Public Accountants" accompanying the Company's
and HCC's audited financial statements which cite substantial doubt about the
company's and HCC's ability to continue as going concerns. There can be no
assurance that the Company and HCC will achieve profitability and adequate
financing in the future. If the Company or HCC fail to achieve profitability
and/or adequate financing, their growth strategies could be materially adversely
affected.(See "Risk Factors-- Going Concern Report of Independent Certified
Public Accountants.")(7)Includes $618,690 in write-off of deferred offering
costs.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(1) HEARTLAND COMMUNICATIONS & MANAGEMENT, INC. (THE "COMPANY")
(A) LIQUIDITY AND CAPITAL RESOURCES
The Company was incorporated as a wholly-owned subsidiary of Heartland
Capital Corporation ("HCC") on March 27, 1996 for the purpose of raising capital
to develop several print and electronic media and investment concepts (the
"Media Concepts") and bring them to market. The development rights to these
Media Concepts had been owned by HCC and were assigned to the Company on May 17,
1996 simultaneously with payment by HCC of its $4,758 subscription for the stock
of the Company to which it subscribed on March 27, 1996.
The Company has not yet commenced generating substantial revenue. The
Company expects to fund development expenditures and incur losses until it is
able to generate sufficient income and cash flows to meet such expenditures and
other requirements. The Company does not currently have adequate cash reserves
to continue to cover such anticipated expenditures and cash requirements. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern. In this regard, see the Independent Certified
Public Accountants' Report appearing elsewhere herein which cites substantial
doubt about the Company's ability to continue as a going concern.
The Company and HCC have been evaluating financing and capitalization
alternatives as part of their long-term business plans. These alternatives
include HCC's sale of preferred stock and warrants and other alternatives,
including the formation of the Company and the associated transfer thereto of
many of HCC's development options, with the Company, in turn, undertaking an
initial public offering (the "IPO") of a portion of its common stock. To
preserve operating funds, HCC and the Company have also developed a strategic
plan which provides for reductions of expenditures and a prioritization of
development options, as discussed below.
The following table sets forth certain data from the Statements of Cash
Flow for the Company:
FOR THE PERIOD MARCH 27, 1996 (DATE OF FORMATION) THROUGH DECEMBER 31, 1996
AND FOR NINE MONTHS ENDED SEPTEMBER 30, 1997:
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------------
12/31/96 9/30/97
-------------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities ......... ($ 417,290) $ 16,408
Net cash provided by (used in) investing activities, princi-
pally loans to ATB ......................................... (172,780) 3,500
Net cash provided by financing activities, principally from
exercise of warrants ....................................... 590,158 --
--------- --------
Increase in cash ............................................ $ 88 $ 19,908
========= ========
</TABLE>
The development rights, which are discussed in more detail below under
"Anticipated Operations," had only a nominal intrinsic value as of the date they
were assigned to the Company because of the significant anticipated future
development costs and, therefore, such rights have no carrying value on the
Company's balance sheet. The Media Concepts cannot be developed without the
capital expected to be raised by the Company's IPO. The extent to which the
Company can realize any return on the development rights is directly related to
the amount of funding obtained 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 cur-
45
<PAGE>
rently held in HCC on a one-for-one basis. Holders of HCC preferred stock also
received warrants to buy the Company's common stock on the basis of one warrant
for each two HCC preferred shares held, resulting in 1,394,500 warrants for
2,789,000 outstanding shares of HCC preferred stock. Holders of non-contingent
warrants to purchase HCC shares were likewise provided the same number of
warrants to purchase shares of the Company, at exercise prices identical to
those contained in the HCC warrants.
During May 1996, the Company notified its warrant holders of its intent to
do an initial public offering ("IPO") stating that the warrant holders had until
July 6, 1996 to exercise their warrants at $.50 per share versus $4 per share
thereafter (80% of the expected IPO price of $5 per share). On July 19, 1996,
the Company extended this warrant exercise period until July 23, 1996. Through
that date, 1,170,400 of the warrants had been exercised resulting in net
proceeds to the Company of $585,200, virtually all of the cash provided by
financing activities.
To facilitate the IPO, the stockholders approved a reverse stock split as
of March 25, 1997 in which one new share of the Company's common stock was
issued for each 4.6190302 shares outstanding with shares for the remaining
3.6190302 shares being placed in escrow and being released only if the Company
meets a specified level of future performance. Likewise, the exercise of the
remaining outstanding warrants were tied to the attainment of this specified
level of future performance. The principal purpose of the reverse stock split
was to reduce the number of outstanding common shares prior to the IPO.
(B) RESULTS OF OPERATIONS
Since its inception (March 27, 1996) through September 30, 1997, the
Company's activities have been organizational and devoted to developing a
business plan and raising capital. Where such costs are indirect and
administrative in nature, they have been expensed in the accompanying statement
of operations and, together with the write-off of $618,690 of such costs as
discussed below, account for the majority of the $1,142,791 deficit accumulated
by the Company during the development stage. Where such costs relate to capital
raising and are both direct and incremental, such costs have been treated as
deferred offering costs in the accompanying balance sheets. During the nine
months ended September 30, 1997, the Company, in recognition of the length of
the IPO process, wrote off $618,690 of such deferred costs. Such deferred costs
amounted to $290,715 as of September 30, 1997. Together such costs account for
$1,433,506 of expenditures and, when netted against the non-cash increases in
liabilities of $1,033,000, approximate the $400,882 amount of net cash used in
operations.
Due to the importance of ATB to the Company's business plan, the Company
has joined HCC in co-funding the ATB Credit Agreement. HCC originally executed a
line of credit agreement with ATB in January 1995 to provide working capital for
its operations. In 1996, HCMI began co-funding this credit facility. HCMI had
advanced $172,780 as of December 31, 1996. During the nine months ended
September 30, 1997, ATB repaid $3,500 of this loan. The $169,280 outstanding
balance is due in December 1999.
The Company will structure its operations based on both the amount of
capital raised in the IPO and the timing of the receipt of the proceeds. The
Company has developed an action plan geared to varying amounts of capital being
raised. Assuming that only $2,000,000 of capital is raised, the Company's goals
will be to develop additional programming and broadcast capabilities for the
Heartland Radio Network (the "Network") and to make media acquisitions which
will help develop the Network. In addition, the Company also plans to develop a
weekly publication aimed at the youth (ages 11 to 18) market that would be
distributed free to students in schools. Based on preliminary discussions, it is
expected that several major national companies would be prominent advertisers in
the publication. Additionally, at the $5,000,000 level, the Company also would
expand its investment in the teen publication and would plan to invest in
additional media acquisitions. If a total of $12,500,000 is raised, the Company
also would expect to devote additional capital to investments in the teen
publication and more media acquisitions as well as to partially fund the
creation of a sports-based weekly newspaper insert which would be provided to
newspapers around the country. This publication also is expected to be supported
by advertising revenue from major national companies.
At the conclusion of this development effort, which for some of the Media
Concepts will require as much as nine months, the Company may still need to
obtain additional financing to begin operations.
46
<PAGE>
There can be no assurance that the Company will complete the necessary work on
the Media Concepts on schedule or that bank or additional equity financing will
be available to the Company as it seeks to develop the Media Concepts and begin
operations.
Because the Company has no history of operations, there is no assurance
that the Media Concepts can be successfully developed and put into operation
within the anticipated levels described above. Additionally, there is no
assurance that the Media Concepts would in fact be acceptable to the general
public and, as a result, there is no assurance that revenues would ever be
generated sufficient to recover the capital raised in the IPO, let alone provide
a return to shareholders on invested capital.
The Company also did not record an income tax provision or benefit in the
financial statements for the period December 31, 1996 because of the existence
of net operating losses. The Company expects to incur a net loss for the period
December 31, 1997. Consequently, there will be no income tax provision or
benefit in the financial statements for 1996 and 1997.
(C) RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements and their effect on the Company are
discussed below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," was issued. The Company
adopted SFAS No. 121 as of March 27, 1996, and its implementation did not have a
material effect on the Company's financial statements.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company intends to adopt the employee stock-based compensation provisions of
SFAS No. 123 by disclosing the pro forma net income and pro forma net income per
share amounts assuming the fair value method is adopted at the date it grants
stock options to officers, employees and directors. The adoption of this
standard will not impact the Company's financial position or cash flows.
On March 3, 1997 ,the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, basic earnings
per share would not be different from reported earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights), including dividend
and liquidation preferences, participants rights, call prices and dates,
conversion or exercise prices and redemption requirements. Adoption of SFAS 129
will have no effect on the Company as it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statements of Financial Accounting ("SFAS") 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
47
<PAGE>
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evacuated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evacuate the impact, if any, they may have
on future financial statement disclosures.
(2) HEARTLAND CAPITAL CORPORATION
(A) LIQUIDITY AND CAPITAL RESOURCES
Heartland Capital Corporation ("HCC"), the original shareholder of the
Company, was incorporated on June 23, 1994, and provides merchant banking,
marketing and consulting services. HCC incurred a net loss of $428,387 for the
year ended December 31, 1996 and $147,988 for the nine months ended September
30, 1997, and has incurred losses since formation resulting in an accumulated
deficit of $1,394,357 as of September 30, 1997. At September 30, 1997,HCC had
negative working capital, as indicated by current liabilities exceeding current
assets, of $301,226. Furthermore, HCC expects to incur additional losses until
it is able to generate sufficient income to cover operating expenses. HCC does
not currently have sufficient cash reserves to cover such anticipated losses. In
addition, HCC had significant receivables of $892,441, as of September 30, 1997,
from the Company and ATB which, in turn, are both development stage companies.
The most recent audit reports of the Company and ATB, dated April 25, 1997 and
September 19, 1997, respectively, expressed concern about the Company's and
ATB's ability to continue as going concern(s). In addition, the Company's most
recent audit report, dated April 25, 1997, expressed concern about the Company's
"ability to continue as a going concern." These factors raise substantial doubt
about HCC's ability to continue as a going concern. In this regard, see the
Independent Certified Public Accountants' Report appearing elsewhere herein
which cites substantial doubt about HCC's ability to continue as a going
concern.
HCC has been evaluating financing and capitalization alternatives in its
long-term business plan. These include HCC's sale of its 12% preferred stock and
warrants, and other alternatives, such as the formation of the Company,
including the transfer thereto of many of HCC's development options with the
Company, in turn, undergoing an IPO of common stock. To preserve operating
funds, HCC has furthermore developed a strategic plan which provides for the
reduction of expenditures and a prioritization of development options as
discussed below.
The following table sets forth certain data from the Statement of Cash
Flows for HCC.
FOR THE PERIOD
6/23/94 (DATE FOR THE
OF FORMATION) YEAR ENDED
THRU 12/31/94 12/ 31/95
---------------- ---------------
Net cash provided by (used in) oper-
ating activities ..................... $ (101,928) $ (260,015)
Net cash used in investing activities,
principally loans to ATB ............. -- (147,875)
Net cash provided by financing ac-
tivities, principally from loans
from investors and sales of pre-
ferred stock ......................... 102,000 427,505
----------- -----------
Increase (decrease) in cash ........... $ 72 $ 19,615
=========== ===========
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE PERIOD
FOR THE ENDED SEPTEMBER 30, 6/23/94 (DATE
YEAR ENDED ----------------------------- OF FORMATION)
12/31/96 1996 1997 THRU 9/30/97
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net cash provided by (used in) oper-
ating activities ..................... $ (471,823) $ (425,309) ($ 216,203) ($ 1,049,969)
Net cash used in investing activities,
principally loans to ATB ............. (194,255) (191,255) (151,606) (493,736)
Net cash provided by financing ac-
tivities, principally from loans
from investors and sales of pre-
ferred stock ......................... 647,642 632,400 369,360 1,546,507
---------- ---------- --------- -----------
Increase (decrease) in cash ........... $ (18,436) $ 15,836 $ 1,551 $ 2,802
========== ========== ========= ===========
</TABLE>
48
<PAGE>
In 1994, HCC's operations were funded primarily by $100,000 in loans from
investors. In 1995, HCC began raising capital through the sale of 12%
non-cumulative convertible preferred stock in a private placement. As of
December 31, 1995, $686,000 (before commissions and related costs) of preferred
stock had been sold and during the year ended December 31, 1996, an additional
$708,500 (before commissions and related costs) of preferred stock was sold.
Additional funds of $369,360 were provided in the nine months ended September
30, 1997 from the proceeds of a loan from an officer.
Even with the proceeds of preferred stock sales received through December
31, 1996, HCC did not have adequate resources to continue operating throughout
1997 at the same level as 1995 and 1996. However, certain changes are
anticipated in HCC's operations in 1997 which increase the likelihood of HCC
being able to fund its operations in 1997 without obtaining additional capital.
First, effective May 17, 1996, HCC transferred certain contract and development
rights to the Company which undertook plans for an initial public offering
("IPO") in 1996. Several employees previously on HCC's payroll have transferred
to the Company, reducing HCC's operating costs. Additionally, it is anticipated
that the Company will reimburse HCC for funding provided to the Company for the
IPO. Second, HCC has funded certain not-for-profit initiatives, the Institute
for American Liberty, the American Initiative Committee and the Philadelphia II
initiative, expecting to be repaid as these organizations begin operations and
raise working capital. As a matter of accounting policy, advances to these
organizations have been expensed when made and recoveries will be recorded to
the extent that any repayments are received. If necessary to preserve operating
funds, HCC could cease funding these organizations for the remainder of 1997.
Through September 30, 1997, HCC has advanced a total of $354,768 to these
organizations. However, in 1996, HCC has reduced these expenditures by over 50%
compared to the year ended December 31, 1995.
(B) RESULTS OF OPERATIONS
Since its inception, HCC has been engaged in merchant banking and related
activities, with its primary initial emphasis to develop certain media concepts
into viable stand-alone businesses. HCC has received an insignificant amount of
revenue ($647 for the year ended December 31, 1995 and $2,847 for the year ended
December 31, 1996 until the underlying contract was transferred to the Company
in May 1996) while incurring costs to develop the various media concepts. HCC's
net loss for the year ended December 31, 1995 was $593,510 compared to a net
loss of $219,714 for the period from inception (June 23, 1994) through December
31, 1994. Because 1994 was not a full year of operations, results for the 1994
partial year can not be meaningfully compared to results for 1995. Net loss was
$428,387 for the year ended December 31, 1996. The reduced loss of $170,000 for
1996, over 1995, was due principally to the reduction in funding of the
not-for-profit organizations in 1996 offset by an increased interest expense due
to higher borrowings and an increase in interest costs due to the use of below
market stock grants. During the nine months ended September 30, 1997, the net
loss was $147,988, or an annualized loss of approximately $200,000. The
annualized loss of $200,000 represents a continued reduction on expenses,
particularly salaries and funding of the not-for-profit organizations from the
1996 level.
As of December 31, 1996, HCC also has approximately $680,000 of net
operating loss carryforwards ("NOLs") which expire year-end in 2009 through
2011. A valuation allowance equal to the tax benefit of the NOLs was established
reflecting the uncertainty of realizing these benefits in future years.
Furthermore, as a result of an ownership change due to the sale of preferred
stock, the use of the NOLs is restricted to an annual limitation of
approximately $65,000. HCC did not estimate an effective tax rate for the period
ended September 30, 1997 or 1996 due to the existence of net operating losses.
(C) RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements and their effect on HCC are discussed
below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," was issued. HCC adopted
SFAS No. 121 as of January 1, 1996, and its implementation did not have a
material effect on HCC's financial statements.
49
<PAGE>
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. HCC
intends to adopt the employee stock-based compensation provisions of SFAS No.
123 by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method was adopted January 1, 1995. The adoption
of this standard will not impact HCC's results of operations, financial position
or cash flows.
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)." SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
include no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, basic earnings
per share would not be different from reported primary earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights), including dividend
and liquidation preferences, participants rights, call prices and dates,
conversion or exercise prices and redemption requirements. Adoption of SFAS 129
will have no effect on the HCC as it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evacuated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evacuate the impact, if any, they may have
on future financial statement disclosures.
(3) ATB PRODUCTIONS, L.L.C. ( A Development Stage Company)
(A) LIQUIDITY AND CAPITAL RESOURCES
ATB Productions, L.L.C. ("ATB") was formed as a Virginia limited liability
company on April 17, 1995 as successor to a sole proprietorship of the same
name. Under its operating agreement, ARB restricts its activities to the
business of producing radio shows and publishing.
50
<PAGE>
ATB incurred net losses of $218,637 and $364,037 in 1995 and 1996,
respectively, and has incurred losses since formation, resulting in an
accumulated deficit of $855,971 as of September 30, 1997. At September 30, 1997,
ATB had negative working capital as indicated by current liabilities exceeding
current assets by $171,897 as well as $653,765 of noncurrent liabilities.
Furthermore, ATB expects to incur additional losses until it is able to generate
sufficient income to cover operating expenses. ATB does not currently have
sufficient cash reserves to cover such anticipated losses. Borrowings under
ATB's line of credit with HCC and HCMI amount to $600,425 at September 30, 1997.
And HCC and HCMI, in turn, have similar problems with significant doubt as to
their own ability to continue as going concerns as well as their ability to fund
more advances to ATB. These factors raise substantial doubt about ATB's ability
to continue as a going concern. In this regard, see Independent Certified Public
Accountants' Report appearing elsewhere herein which cites substantial doubts
about ATB's ability to continue as a going concern.
According to ATB's long-term business plan, ATB has been evaluating
financing and capitalization alternatives with HCC and the Company. These
alternatives include the sale of preferred stock and stock warrants by HCC and
other alternatives, such as the formation of the Company and the transfer
thereto of many of HCC's development options, including the ATB contract with
the Company and the transfer hereto of many of HCC's development options,
including the ATB contract, with the Company, in turn, undergoing an initial
public offing of its common stock. Additionally, ATB continues to expand the
radio shows it produces and broadcasts in an attempt to increase its own
revenues. To preserve operating funds, ATB has furthermore developed a strategic
plan which provides for the deduction of expenditures and a prioritization of
development options, as discussed below.
The following table sets forth certain data from the Statement of Cash
Flows for ATB.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1/95 (DATE
FOR THE YEAR FOR THE YEAR FOR NINE MONTHS OF FORMATION)
ENDED 12/3/95 ENDED 12/31/96 ENDED 9/30/97 THRU 9/30/97
--------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net cash used in operating activities ............ $ (182,523) $ (347,337) $ (93,405) $ (623,265)
Net cash used in investing activities ............ (4,824) (16,634) 1,798 (19,660)
Net cash provided by financing activities,
principally proceeds from HCC line of credit
and initial capital ............................ 188,907 365,068 88,950 642,925
----------- ----------- ---------- -----------
Increase (decrease) in cash ...................... $ 1,560 $ 1,097 $ (2,657) $ --
=========== =========== ========== ===========
</TABLE>
A total of $42,500 was contributed to equity in 1995 by ATB's founding
members at the time ATB was formed. There are at present no plans to raise
additional capital through subscriptions from members, although ATB's operating
agreement provides that its managing member may solicit additional contributions
from members; the members are, however, not legally compelled to invest
additional funds in ATB. Effective January 15, 1995, ATB entered into a line of
credit agreement with Heartland Capital Corporation ("HCC"), a related
organization having shareholders similar to those of ATB, whereby ATB was able
to borrow from HCC at a fixed interest rate of 8% per annum. HCMI began
co-funding this line of credit during 1996. Any borrowings under the agreement
must be repaid no later than December 31, 1999. As of December 31, 1995and 1996,
ATB had borrowed $144,850 against the line. The amount borrowed increased to
$600,425 as of September 30, 1997.
Cash used in operations was $182,523 and $347,337 for the years ended
December 31, 1995 and 1996, respectively. The comparison of the use of cash
between 1995 and 1996 is not meaningful because ATB only commenced its initial
operations in 1995 with a loss of $218,637. In 1996, the first year of full
operations, the loss increased to $364,037. Cash used in operations was $167,216
and $93,405 for the nine months ended September 30, 1996 and 1997, respectively.
The reduction in cash used for 1997 was due principally to the approximately
$150,000 increase in accounts payable at September 30, 1997 which did not
require the use of cash. Cash used in operations adjusted by the non-cash items,
such as the increase in accounts payable, determines the net loss for the
respective periods, as discussed below.
51
<PAGE>
(B) RESULTS OF OPERATIONS
The net loss for the nine months ended September 30, 1996 and 1997 was
$188,046 and $273,297, respectively. The primary reason for the increased loss
in 1997 was a $80,000 reduction in advertising and generational revenue form
1996 to 1997. This reduction was principally caused by the decline in political
advertising revenue which was more prevalent in 1996, a national election year,
and a decline in advertising revenue due to disbanding the production of the
radio show "America The Beautiful" hosted by Mike Foudy to allow Mr. Foudy a
chance to concentrate on multi-show production and network development.
(C) RECENT ACCOUNTING PRONOUNCEMENTS
A recent accounting pronouncement and its effect on ATB is discussed below.
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," was issued. ATB adopted
SFAS No. 121 as of January 1, 1996, and its implementation did not have a
material effect on the financial statements.
In October 1995, SFAS No 123, "Accounting for Stock-Based Compensation,"
was issued. SFAS No. 123 establishes a fair value method for accounting
stock-based compensation plans either through recognition or disclosure. HCC
intends to adopt the employee stock-based compensation provisions of SFAS No.
123 by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method was adopted January 1, 1995. The adoption
of this standard will not impact HCC's results of operations, financial position
or cash flows.
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)." SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
include no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, basic earnings
per share would not be different from reported primary earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights), including dividend
and liquidation preferences, participants rights, call prices and dates,
conversion or exercise prices and redemption requirements. Adoption of SFAS 129
will have no effect on the ATB as it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise" ,
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geo-
52
<PAGE>
graphic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evacuated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evacuate the impact, if any, they may have
on future financial statement disclosures.
ABSENCE OF PUBLIC MARKET AND DIVIDEND POLICY
There is no public trading market for the Shares nor is any expected to
develop for at least 6 -- 18 months after the offering commences. There is no
assurance that the Company can satisfy then current pertinent listing standards
or, if successful in getting listed, avoid later delisting. (See "Risk
Factors.")
The Company intends to retain future earnings for use in its business and
does not anticipate paying any dividends on Shares in the foreseeable future.
While not currently so restricted, the Company may be prohibited from paying
dividends on the Shares in the future under credit or other financing
agreement(s) unless certain amounts are available and certain other conditions
are satisfied. (See "Description of Capital Stock -- Common Stock --
Dividends.")
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 50,000,000 shares of
$.001 par value common stock, the only class of stock outstanding at this time
(the "Shares") and (ii) 10,000,000 shares of $.001 par value preferred stock,
none of which stock is outstanding at this time. No Shares held by 5% or greater
Shareholders may be sold from the date of the Prospectus until at least the
$2,000,000 minimum offering is achieved. Shareholders are entitled to one vote
per Share on all matters to be voted upon by Shareholders and, upon issuance in
consideration of full payment, are non-assessable. In the event of liquidation,
dissolution or winding up of the Company, the Shareholders are entitled to share
ratably in all assets remaining after payment of liabilities. Shares do not have
cumulative voting rights with respect to the election of directors and,
accordingly, the holders of more than 50% of the Shares could elect all the
directors of the Company. (See "Risk Factors -- Control By The Principal
Shareholders.") There are no redemption or sinking fund provisions or preemptive
rights with respect to the Shares, and Shareholders have no right to require the
Company to redeem or purchase Shares.
DIVIDEND RIGHTS
Each Share is entitled to dividends if, as and when dividends are declared
by the Company's Board of Directors. It is not the current expectation of the
Company to pay dividends.
REVERSE STOCK SPLIT
In conjunction with the planned public offering, the Board of Director
proposed a (1) reverse split of the Company's common stock on the basis of one
new share of common stock for each 4.619302 shares of then outstanding common
stock (1,326,811 new shares) and (2) limitations on the exercise of existing
warrants. The principal objective of the reverse split was to reduce the number
of outstanding common shares prior to the IPO. The Board of Directors believed
that the total number of shares then outstanding caused a disproportionately
large dilutive effect on new investors in the planned IPO and that the
anticipated offering price of $5.00 per share would be better supported with
fewer shares prior to the IPO. On March 25, 1997, the majority of the existing
Shareholders approved this proposal. The Shareholders have been reissued a
number of Shares equal to the Shares (4,801,589) being surrendered. Those Shares
have been placed in escrow with no voting or dividend rights while in escrow.
Because the Shares escrowed are issued contingent upon required performance
standards being met, they have no voting or dividend rights and are, while in
escrow, not deemed to be outstanding Shares.
53
<PAGE>
The release of these Shares from escrow and their distribution to the
Shareholders and the exercise of the existing warrants in six annual increments
of 16.67% is contingent on the Company achieving certain required performance
standards. (See Footnote 4, "Shareholder's Equity - Reverse Stock Split," to the
Company's financial statements (Appendix I) with regard to the definition of
"Required Performance Standards.") In summary, such "earn out" provisions
require a market capitalization of at least ten and provide a return of 40% for
the first two years and 15% thereafter. There is provision for Shares not
released in prior years to be released in subsequent years if the required
performance standards cumulatively are met or exceeded. At the end of six (6)
years, Shares not "earned out" will be canceled and Shareholders have no
continuing rights or interest in the Shares previously held in escrow. There is
no assurance such "earn out" and associated performance standards will be met;
if they are, substantial additional Shares will be issued to "old" Shareholders,
thereby diluting the investments of "new" Shareholders.
ANTI-TAKEOVER STATUTE
Section 203 of the Delaware General Corporation Law (the "DGCL") generally
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless: (i) prior to the date of the business combination, the
transaction is approved by the board of directors of the corporation; (ii) upon
consummation of the transaction which resulted in the Shareholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock; or (iii) on or after the date such Shareholder became
an interested stockholder, the business combination is approved by the board and
by the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder. A "business combination"
includes mergers, certain asset sales and certain other transactions resulting
in a financial benefit to the Shareholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. Section 203 of
the DGCL applies to the Company since it has not elected to opt out of coverage
under Section 203 of the DGCL.
DIRECTORS' LIABILITY
As authorized by Section 145 of the DGCL, each director or officer of the
Company will be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the defense or settlement of any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative in which he is involved by reason of
the fact that he is or was a director or officer of the Company; such
indemnification, of course, is conditioned upon such officer or director having
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, if he had no reasonable cause to believe that his conduct
was unlawful. If, however, any threatened, pending or completed action, suit or
proceeding is by or in the right of the Company, the director or officer shall
not be indemnified in respect to any claim, issue or matter as to which he is
adjudged to be liable to the Company unless a court determines otherwise.
The Certificate of Incorporation of the Company provides that no director
of the Company shall be personally liable to the Company or any of its
Shareholders for monetary damages for any breach of fiduciary duty as a
director, except with respect to: (i) any breach of the director's duty of
loyalty to the Company or its Shareholders; (ii) for acts or omissions that are
not in good faith or involve intentional misconduct or a knowing violation of
the law; (iii) violation of the DGCL; or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, such Certificate of
Incorporation authorizes the Company to indemnify any person to the fullest
extent permitted by Sections 102(b)(7) and 145 of the DGCL.
54
<PAGE>
PREFERRED STOCK
The Company's articles of incorporation also authorize 10,000,000 shares of
preferred stock. The rights of any preferred stock issue will be determined by
the Board of Directors at the time a preferred series is authorized.
The Company issued 1,394,500 warrants of the Company to holders of HCC
preferred stock on the basis of one warrant for each two HCC preferred shares,
exercisable at $.50 per Shares. The issuance of the Company's common stock and
warrants does not affect the rights of holders of HCC preferred stock and
warrants previously issued. The Company has agreed that any future warrants for
Shares will be exercisable only at prices greater than or equal to the market
value of the Shares on the date such warrants are issued.
TRANSFER AGENT
The Company initially will act as its own transfer agent and registrar.
However, no later than the closing for the Initial Offering Period, the Company
will engage an independent transfer agent/registrar for the Shares.
PLAN OF DISTRIBUTION
The Shares are offered on a best efforts basis by Northridge Capital
Corporation, an SEC registered broker-dealer and a member firm of the NASD (the
"Managing Placement Agent"). The Managing Placement Agent will be paid (out of
Shares sold) at any closing 8% of the subscription amount. During this Offering
Period, whether the Initial or Continuous Offering Periods, Shares will be sold
at $5.00 (the "Selling Price"). If any Additional Placement Agents (other
SEC-registered, NASD member broker-dealer firms) are engaged to offer Shares,
they will be paid a negotiated portion of the 8% selling commission. (In
addition, the Managing Placement Agent will be reimbursed for expenses the
greater of actual expenses or 2% of the proceeds of the offering; a $50,000 due
diligence fee; and stock purchase warrants entitling the Managing Placement
Agent and/or Additional Placement Agents and/or their affiliates (otherwise
non-transferrable) to purchase at $8.25 per share, one share for each ten shares
sold in the offering.) In such capacity in connection with this offering, the
Managing and Additional Placement Agent(s) are underwriters as defined by the
Securities Act of 1933, as amended, and the rules promulgated thereunder.
The Initial Offering Period will be up two (2) to nine (9) months from the
date of this Prospectus unless earlier terminated. Shares having as an aggregate
selling price of $12,500,000 are being offered pursuant to this Registration
Statement. Unless earlier terminated, the Initial Offering Period will be up to
two (2) months from the date hereof unless extended for periods up to a total of
seven (7) additional months. The Company is offering a minimum of $2,000,000 up
to a maximum of $12,500,000 of Shares. The date that (1) subscriptions for a
minimum of $2,000,000 in Shares have been received and (2) the Company has
closed the initial escrow on the offering will mark the end of the Initial
Offering Period. If a minimum of $2,000,000 in Shares is not sold during the
Initial Offering Period (as it may be extended), investor funds will be promptly
returned with all interest earned thereon. Unless the minimum offering is not
achieved, all interest earned on subscriptions pending their month-end
acceptance will be paid to the Company, not the individual subscribers.
Similarly, if the subscription is rejected, in whole or in part (which is in the
sole discretion of the Company), the subscription funds or the rejected portion
thereof will be returned within 20 days to the subscriber without interest. The
up to $12,500,000 offering being made pursuant to this Registration Statement
may be extended for additional periods, once the Initial Offering Period is
concluded, which in the aggregate will not exceed 18 months from the date of
this Prospectus (defined herein as the "Continuous Offering Period").
The minimum purchase during Initial and Continuous Offering Periods is
$5,000 (except that the Company in its discretion may accept lesser amounts);
additional purchases by existing Shareholders may be made in the amount of
$1,000 or more. Subscriptions for Shares sold during the Continuous Offering
Period will continue to be escrowed (see"Escrow Account" below) until accepted
at the respective month-end or $250,000 in subscriptions are received, whichever
first occurs. Subject to pertinent
55
<PAGE>
securities requirements, the Company expects to update periodically the
Prospectus after its initial nine (9) month Offering Period -- but no more than
18 months in the aggregate from the date of this Prospectus -- and continue the
offering if, as expected, the $12,500,0000 maximum offering is not achieved
during that period; in no case will this offering extend for more than two years
from the date of this Prospectus nor will more than $12,500,000 be raised by the
Company under this current Registration Statement.
SUBSCRIPTION PROCEDURE
In order to purchase Shares:
(1) An investor must complete and execute a copy of the Subscription
Agreement and Power of Attorney (hereafter the "Subscription Agreement")
(Exhibit A).
(2) CHECKS (WHICH SHOULD BE AT LEAST $5,000 FOR INITIAL PURCHASES UNLESS
THE COMPANY CHOOSES TO ACCEPT IRA ACCOUNTS FOR LESS AND ADDITIONAL PURCHASES
BY EXISTING SHAREHOLDERS MAY BE IN THE AMOUNT OF $1,000 OR MORE) SHOULD BE
MADE PAYABLE AS FOLLOWS: HEARTLAND COMMUNICATIONS & MANAGEMENT, INC. --
ESCROW ACCOUNT.
(3) The check and the Subscription Agreement should be mailed or
delivered to the Managing Placement Agent or Additional Placement Agent
through whom your subscription was solicited.
Each individual subscriber must represent and warrant in the Subscription
Agreement that he has either a net worth (exclusive of home, furnishings and
automobile) of at least $100,000 or a net worth (similarly calculated) of at
least $50,000 and an annual adjusted gross income of at least $25,000. (See
"Investment Requirements.") Under the securities laws of certain states,
residents of those states may be subject to higher standards as stated in the
Annex to the Subscription Agreement. In addition, the subscriber must represent,
among other things, that: (a) the subscriber has received this Prospectus; and
(b) the subscriber is (or is not) a citizen or permanent resident of the United
States.
The management and any Placement Agent(s) must have reasonable grounds to
believe on the basis of information obtained from the Shareholder concerning his
investments, financial situation and needs, and any other information known by
the undersigned, that: (i) the purchaser is or will be in a financial position
appropriate to enable him to realize to a significant extent the benefits
described in the Prospectus; (ii) the purchaser has a net worth sufficient to
sustain the risks inherent to the Company, including losses of investment and
lack of liquidity; and (iii) the Company is otherwise a suitable investment for
the purchaser.
ESCROW ACCOUNT
All monies remitted by subscribers during the Initial Offering Period will
be deposited in an escrow account maintained by the Company at George Mason
Bank, McLean, Virginia, until the $2,000,000 minimum offering is achieved. The
bank is not guaranteeing that any interest will accrue on the subscription funds
deposited with it. To the extent practicable, the funds held in the account
during the Initial Offering Period will be invested at the direction of the
management in short-term U.S. Treasury securities and other high quality
interest-earning obligations. Unless the minimum is not achieved, all interest
earned during the Initial Offering Period on the proceeds of the subscriptions
held in such account maintained by the Company with the escrow bank will be
retained by the Company. (See "Application of Proceeds" and "The Company --
Management.") Subscriptions for Shares sold during the Continuous Offering
Period will continue to be escrowed (with all interest earned thereon retained
by the Company) until accepted at the respective month-end or $250,000 in
subscriptions are received, whichever first occurs.
ERISA CONSIDERATIONS
Persons who contemplate purchasing Shares on behalf of Qualified Plans are
urged to consult with tax and ERISA counsel regarding the effect of such
purchase and, further, to determine that such a purchase will not result in a
prohibited transaction under ERISA, the Code or a violation of some other
56
<PAGE>
provision of ERISA, the Code or other applicable law. The management and the
Company necessarily will rely on such determination made by such persons,
although no Shares will be sold to any Qualified Plans if management believes
that such sale will result in a prohibited transaction under ERISA or the Code.
LEGAL MATTERS
The validity of Shares being offered by this Prospectus will be passed upon
for the Company by Duncan, Blum & Associates, Washington, D.C. Certain legal
matters will be passed upon for the Company by Reed Smith Shaw & McClay,
Washington, D.C. Certain legal matter will be passed upon for the Managing
Placement Agent by John W. Ringo, Esq., Roswell, Georgia.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports, which contain an explanatory paragraph regarding the companies'
abilities to continue as going concerns, appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in such Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. Reference is made to such
Registration Statement, including the amendment(s) and exhibits thereto, for
further information with respect to the Company and such securities. The
Registration Statement can be inspected and copied at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the SEC's following regional offices: at Seven World Trade Center, 13th
Floor, New York, New York 10048; and 500 West Madison, Suite 1400, Chicago,
Illinois 60601. Copies of the Registration Statement can be obtained from the
Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not necessarily
complete, and in each instance are qualified in all respects by reference to the
copy of such document filed as an exhibit to the Registration Statement.
For further information with respect to the Company and the shares of
common stock offered hereby, reference is made to the Registration Statement and
the exhibits and the financial statements, notes and schedules filed as a part
thereof or incorporated by reference therein, which may be inspected at the
public reference facilities of the SEC, at the addresses set forth above.
Moreover, the Company has filed such materials electronically with the SEC;
accordingly, such materials can be accessed through the SEC's web site that
contains reports, proxy and information statements and other information
regarding registrants (http// www.sec.gov).
The Company is not currently subject to the informational and periodic
reporting requirements of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"). However, as a result of the offering (assuming that the
$2,000,000 minimum offering is achieved), the Company will become subject to
such requirements.
57
<PAGE>
APPENDIX I
FINANCIAL STATEMENTS
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
Independent Certified Public Accountants' Report ........................................ F-2
Balance sheets as of December 31, 1996 and September 30, 1997 (unaudited) ............... F-3
Statements of operations for the period March 27, 1996 (date of formation) through
December 31, 1996, the period from March 27, 1996 (date of formation) through September
30, 1996 (unaudited), the nine months ended September 30, 1997 (unaudited) and the period
March 27, 1996 (date of formation) through September 30, 1997 (unaudited) ............... F-4
Statements of changes in shareholders' equity for the period March 27, 1996 (date of
formation) through December 31, 1996 and the nine months ended September 30, 1997
(unaudited) ........................................................................... F-5
Statements of cash flows for the period March 27, 1996 (date of formation) through
December 31, 1996, the period from March 27, 1996 (date of formation) through
September 30, 1996 (unaudited), the nine months ended September 30, 1997
(unaudited) and the period March 27, 1996 (date of formation) through September 30,
1997 (unaudited) ...................................................................... F-6
Summary of accounting policies .......................................................... F-7
Notes to financial statements ........................................................... F-10
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
Independent Certified Public Accountants' Report ........................................ F-16
Balance sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) ...... F-17
Statements of operations for the period September 23, 1994 (date of formation) through
December 31, 1994, the years ended December 31, 1995 and 1996, the nine
months ended September 30, 1996 and 1997 (unaudited) and the period June 23, 1994
(date of formation) through September 30, 1997 (unaudited) ......................... F-18
Statements of changes in shareholders' equity (deficit) for the period June 23, 1994
(date of formation) through December 31, 1994, the years ended December 31, 1995
and 1996, and the nine months ended September 30, 1997 (unaudited) .................. F-19
Statements of cash flows for the period June 23, 1994 (date of formation) through
December 31, 1994, the years ended December 31, 1995 and 1996, the nine months ended
September 30, 1996 and 1997 (unaudited) and the period June 23, 1994 (date
of formation) through September 30, 1997 (unaudited) ............................... F-20
Summary of accounting policies .......................................................... F-21
Notes to financial statements ........................................................... F-25
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
Independent Certified Public Accountants' Report ........................................ F-33
Balance sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) ...... F-34
Statements of operations for the years ended December 31, 1995 and 1996, the nine months
ended September 30, 1996 and 1997 (unaudited) and the period January 1, 1995 (date
of formation) through September 30, 1997 (unaudited) ................................... F-35
Statements of changes in Members' Capital (deficit) for the years ended December 31,
1995 and 1996 and for the nine months ended September 30, 1997 (unaudited) ............. F-36
Statements of cash flows for the years ended December 31, 1995 and 1996, the nine months
ended September 30, 1996 and 1997 (unaudited) and the period January 1, 1995 (date
of formation) through September 30, 1997 (unaudited) .................................. F-37
Summary of accounting policies ......................................................... F-38
Notes to financial statements .......................................................... F-41
</TABLE>
F-1
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
We have audited the accompanying balance sheet of HEARTLAND COMMUNICATIONS
& MANAGEMENT, INC. (A Development Stage Company and Successor Company) as of
December 31, 1996, and the related statements of operations, changes in
shareholders' equity (deficit) and cash flows for the period March 27, 1996
(date of formation) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC. (A Development Stage Company and Successor Company) as of
December 31, 1996 and the results of its operations and its cash flows for the
period March 27, 1996 (date of formation) through December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has had no substantial
operations and has incurred significant operating losses and working capital
deficits since formation. In addition, the Company expects to fund development
expenditures and incur additional losses until its operations are able to
generate sufficient revenue and cash flows to meet anticipated expenditures and
other cash requirements. The Company does not currently have sufficient cash
reserves to cover such anticipated expenditures and cash requirements,
necessitating additional capital or financing. These factors, in addition to
other factors discussed in Note 2 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding these matters are also discussed in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman, LLP
---------------------
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-2
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash ................................................................. $ 88 $ 19,996
Accounts receivable from related parties ............................. 6,406 28,581
---------- ------------
Total current assets ................................................. 6,494 48,577
---------- ------------
Note receivable from related party (Note 3) .......................... 172,780 169,280
Deferred offering costs (Notes 7 and 8) .............................. 618,690 290,715
---------- ------------
Total assets ......................................................... $ 797,964 $ 508,572
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable ..................................................... $ 293,235 $ 533,006
Accrued payroll ...................................................... 8,970 130,849
Accounts payable to related parties (Note 8) ......................... 220,616 397,350
---------- ------------
Total current liabilities ............................................ 522,821 1,061,205
---------- ------------
Commitments (Notes 5 and 8) ..........................................
Shareholders' equity (deficit) (Notes 1, 4, 5 and 8) .................
Preferred stock, $.001 par value, 10,000,000 shares authorized; none
issued ..............................................................
Common stock, $.001 par value, 50,000,000 shares authorized; 6,128,400
shares issued at December 31, 1996 and September 30, 1997 and 1,326,811
shares outstanding at December 31, 1996 and September 30, 1997 ...... 1,327 1,327
Additional paid-in capital ........................................... 588,831 588,831
Deficit accumulated during the development stage ..................... (315,015) (1,142,791)
---------- ------------
Total shareholders' equity (deficit) ................................. 275,143 (552,633)
---------- ------------
Total liabilities and shareholders' equity (deficit) ................. $ 797,964 $ 508,572
========== ============
</TABLE>
See accounting summary of accounting policies and notes to financial statements.
F-3
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
MARCH 27, 1996 MARCH 27, 1996 MARCH 27, 1996
(DATE OF FORMATION) (DATE OF FORMATION) FOR THE NINE (DATE OF FORMATION)
THROUGH THROUGH MONTHS ENDED THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
--------------------- --------------------- --------------- --------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Marketing commissions received from
related party (Note 3) ............... $ 3,507 $ -- $ 4,757 $ 8,264
---------- ---------- ---------- ------------
OPERATING EXPENSES
Salaries .............................. 165,084 66,976 113,777 278,861
General and administrative ............ 156,337 157,617 117,091 273,428
Write-off of offering costs (Note 8) .. -- -- 618,690 618,690
---------- ---------- ---------- ------------
Total operating expenses .............. 321,421 224,593 849,558 1,170,979
---------- ---------- ---------- ------------
Operating loss ........................ (317,914) (224,593) (844,801) (1,162,715)
Interest income (Note 3) .............. 2,899 739 17,025 19,924
---------- ---------- ---------- ------------
Net loss .............................. $ (315,015) $ (223,854) $ (827,776) $ (1,142,791)
========== ========== ========== ============
Weighted average common shares out-
standing ............................. 1,270,503 1,242,349 1,326,811 1,298,657
========== ========== ========== ============
Net loss per share .................... $ (.25) $ (.18) $ (.62) $ (.88)
========== ========== ========== ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Period March 27, 1996 (date of formation) through December 31, 1996
and the nine months ended September 30, 1997
<TABLE>
<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 Corpora-
tion .............................. 1,030,086 -- $ 1,030 $ 3,728 -- $ 4,758
Payment of subscription ............ (1,030,086) 1,030,086 -- -- -- --
Cancellation of shares ............. -- (1,030,086) (1,030) (3,728) -- (4,758)
Spin-off ........................... -- 1,030,086 1,030 3,728 4,758
Other issuance ..................... -- 43,338 43 157 200
Exercise of warrants ............... -- 253,387 254 584,946 -- 585,200
Net loss ........................... -- (315,015) (315,015)
---------- ---------- -------- -------- -------- ----------
Balance, December 31, 1996 ......... -- 1,326,811 1,327 588,831 (315,015) 275,143
Net loss (unaudited) ............... -- -- -- -- (827,776) (827,776)
---------- ---------- -------- -------- -------- ----------
Balance, September 30, 1997
(unaudited) ....................... -- 1,326,811 $ 1,327 $588,831 $ (1,142,791) $ (552,633)
========== ========== ======== ======== ============ ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 27, 1996
(DATE OF FORMATIN)
THROUGH
DECEMBER 31,
1996
--------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................... $ (315,015)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATIONS
Increase in accounts receivable from related
parties .......................................... (6,406)
Increase in accounts payable ...................... 293,235
Increase in accrued payroll ....................... 8,970
(Increase) reduction in deferred offering costs (618,690)
Increase in accounts payable to related par-
ties ............................................. 220,616
----------
Net cash provided by (used in) operating ac-
tivities ......................................... (417,290)
----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
(Increase) decrease in Loans to related party. (172,780)
----------
Net cash (used in) provided by investing ac-
tivities ......................................... (172,780)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in subscription receivable and other
issuance ......................................... 4,958
Proceeds from exercise of warrants ................ 585,200
----------
Net cash provided by financing activities ......... 590,158
----------
Increase (decrease) in cash ....................... 88
Cash and cash equivalents, beginning of pe-
riod ............................................. --
----------
Cash and cash equivalents, end of period .......... $ 88
==========
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
ARCH 27, 1996 MARCH 27, 1996
(DATE OF FORMATION) FOR THE NINE (DATE OF FORMATION)
THROUGH MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
--------------------- --------------- --------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................... $ (223,854) $ (827,776) $ (1,142,791)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATIONS
Increase in accounts receivable from related
parties .......................................... (248) (22,175) (28,581)
Increase in accounts payable ...................... 90,926 239,771 533,006
Increase in accrued payroll ....................... 2,323 121,879 130,849
(Increase) reduction in deferred offering costs (122,807) 327,975 (290,715)
Increase in accounts payable to related par-
ties ............................................. -- 176,734 397,350
---------- ---------- ------------
Net cash provided by (used in) operating ac-
tivities ......................................... (253,660) 16,408 (400,882)
---------- ---------- ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
(Increase) decrease in Loans to related party. (65,500) 3,500 (169,280)
---------- ---------- ------------
Net cash (used in) provided by investing ac-
tivities ......................................... (65,500) 3,500 (169,280)
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in subscription receivable and other
issuance ......................................... 4,958 -- 4,958
Proceeds from exercise of warrants ................ 585,000 -- 585,200
---------- ---------- ------------
Net cash provided by financing activities ......... 589,958 -- 590,158
---------- ---------- ------------
Increase (decrease) in cash ....................... 270,798 19,908 19,996
Cash and cash equivalents, beginning of pe-
riod ............................................. -- 88 --
---------- ---------- ------------
Cash and cash equivalents, end of period .......... $ 270,798 $ 19,996 $ 19,996
========== ========== ============
</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)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996)
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 the period
March 27, 1996 (date of formation) through September 30, 1996 (unaudited) and as
of September 30, 1997, and for the nine months then ended. Since HCMI's
activities to this point have been organizational and devoted to financial
planning and raising capital, HCMI's activities have been accounted for as those
of a "development stage enterprise" as set forth in Statement of Financial
Accounting Standards (SFAS) No. 7.
On May 17, 1996, Heartland Capital Corporation (HCC) paid its $4,758 stock
subscription and HCMI ("Successor Company") was simultaneously assigned certain
development and contract rights and obligations by HCC ("Predecessor Company")
(see Note 1). Also, HCMI is an affiliate of ATB Productions, L.L.C. ("ATB"),
with which it shares common, but not identical, ownership, and to which it
provides marketing services.
RISKS AND 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.
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 or the offering terms are substantially revised, the
deferred offering costs
F-7
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
will be expensed. Indirect costs relating to the offering are expensed when
incurred. If either direct, incremental costs or indirect costs relating to the
offering are incurred by HCC, such costs are deferred or expensed, respectively,
by HCMI with the net unpaid amount reflected as part of the Accounts Payable to
related parties (see Note 8).
INCOME 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.
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 September 30, 1997 and
for the nine months then ended and for the period March 27, 1996 (date of
formation) through September 30, 1996 are unaudited but, in the opinion of
management, reflect all adjustments (consisting primarily of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
the period presented. The results for the nine months ended September 30, 1997
are not necessarily indicative of the results to be obtained for the full fiscal
year.
FAIR VALUE OF 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, 1996 and September 30, 1997. In the opinion of management, the
fair values of HCMI's financial instruments as of December 31, 1996 and
September 30, 1997 are not materially different from the carrying amounts shown
in the accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
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. HCMI
intends to adopt the employee stock-based compensation provisions of
F-8
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
SFAS No. 123 by disclosing the pro forma net income and pro forma net income per
share amounts, assuming the fair value method is adopted at the date it grants
stock options to officers, employees and directors. The adoption of this
standard will not impact HCMI's results of operations, financial position or
cash flows.
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earning per Share (SFAS 128)." SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
include no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, basic earnings
per share would not be different from reported primary earnings per share.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participants rights, call prices and dates, conversions
or exercise prices and redemptions requirements. Adoption of SFAS 129 will have
no effect on HCMI as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, it components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
F-9
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996)
1. REORGANIZATION AND TRANSFER OF CERTAIN RIGHTS
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. Several
opportunities were identified in 1994, 1995 and 1996, including talk radio, a
youth oriented newspaper, a newspaper insert aimed at sports enthusiasts and an
investment fund management company. The talk radio venture was furthest along in
the development process, with HCC having provided a line of credit as well as
marketing expertise to ATB. The other ventures identified are only development
options and are intended to be pursued only if funding is achieved and
appropriate due diligence, supporting the feasibility of the acquisitions, has
been completed.
HCC determined that these ventures could not be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned its
option and, in the case of ATB, its contract rights to HCMI, its wholly-owned
subsidiary on that date. On May 18, 1996, HCC spun off HCMI via a dividend to
HCC shareholders, with HCMI effectively replicating the HCC capital structure by
issuing a share of its common stock for each share of HCC common and preferred
stock outstanding as of May 18, 1996. Warrants to purchase HCMI stock were
granted to holders of non-contingent HCC stock purchase warrants, and warrants
were issued to the HCC preferred shareholders, as of May 18, 1996. The contracts
and option rights transferred to HCMI have no carrying value because the cost of
developing, or servicing, the rights are expected to require a substantial
infusion of capital. It is HCMI's intention to obtain the necessary capital
through an initial public offering (IPO) of its common stock (See Note 8).
2. GOING CONCERN
As shown in the accompanying financial statements, HCMI incurred a net loss
of $315,015 and $1,142,791 during the period March 27, 1966 (date of formation)
through December 31, 1996 and for the nine months ended September 30, 1997,
respectively. At December 31, 1996 and September 30, 1997, HCMI had a working
capital deficit of $516,327 and $1,012,628, respectively. As of December 31,
1996 and September 30, 1997, HCMI had also expended $618,690 and $290,715 for
direct incremental offering costs which have been deferred in the accompanying
balance sheets and whose recovery is dependent on the success of its IPO. HCMI
also has a significant receivable of $172,780 as of December 31, 1996 and
$169,280 as of September 30, 1997, from ATB which, in turn, is also a
development stage company and whose most recent audit report, dated September
19, 1997, expressed concern about it's "ability to continue as a going concern".
Furthermore, HCMI expects to fund development expenditures and incur losses
until it is able to generate sufficient income and cash flows to meet such
expenditures and other requirements. HCMI does not currently have sufficient
cash reserves to cover such anticipated expenditures and cash requirements.
These factors raise substantial doubt about HCMI's ability to continue as a
going concern.
HCMI and HCC have been evaluating financing alternatives as part of their
long-term business plans. These alternatives include loan arrangements for
working capital needs, HCMI's exercise of warrants, HCC's sale of preferred
stock and warrants and other alternatives, such as the formation of HCMI,
including the transfer thereto of many of HCC's development options, with HCMI,
in turn, undertaking an IPO of a portion of its common stock. To preserve
operating funds, HCC and HCMI have developed a strategic plan which provides for
reductions of, and deferrals of payments for, expenditures and a prioritization
of development options.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary should HCMI be unable to
complete its proposed public offering and continue as a going concern.
F-10
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
3. HCC MARKETING AND LINE OF CREDIT AGREEMENTS
Effective January 1, 1995, HCC entered into a marketing agreement with ATB
("the HCC Agreement") whereby HCC provides marketing services on behalf of ATB.
Such services include presenting programs to sponsors on a worldwide basis,
negotiating sponsorship agreements, etc. In return for receiving the marketing
services, ATB is obligated to pay HCC 40% of its gross advertising cash receipts
and 5% of its non-advertising gross receipts. The agreement was transferred from
HCC to HCMI on May 17, 1996. Revenues recorded by HCMI from the date of transfer
through December 31, 1996 and for the nine months ended September 30, 1997
amount to $3,507 and $4,757, respectively. The HCC Agreement automatically
terminates on January 1, 1999, unless extended by mutual agreement, and it is
terminable at earlier dates under certain specified conditions. In the event of
termination for whatever reason, the amounts due under the HCC Agreement for
sponsorship existing at the time of termination shall remain due and payable,
notwithstanding the termination (if certain other conditions are met), for a
period ending the later of the automatic termination of the HCC Agreement or two
years after the date of other termination. Revenues recognized by HCC under the
HCC Agreement aggregated $647 and $2,847 during 1995 and until transfer in the
year ended December 31, 1996, respectively.
On January 15, 1995, HCC executed an unsecured line of credit agreement
with ATB (the "Credit Agreement") which provides ATB with a standby line of
credit in the amount of $360,000. Borrowings under the Credit Agreement bear
interest at 8% per annum, with payment of interest being deferred until January
15, 1997, whereupon monthly interest payments will be required. Through
September 30, 1997, interest payments of $12,950 and $185 have been made to HCMI
and HCC, respectively. Any principal and interest outstanding must be repaid on
December 31, 1999. During 1996, HCMI began co-funding this Credit Agreement with
HCC. As of December 31, 1996 and September 30, 1997, HCMI had advanced $172,780
and $169,280, respectively, while HCC had advanced $338,695 and $431,145 as of
December 31, 1996 and September 30, 1997, respectively. Although the total
advances ($511,475 and $600,425 as of December 31, 1996 and September 30, 1997,
respectively), are in excess of the Credit Agreement's standby line of credit
amount ($360,000), the total advances are governed by the Credit Agreement
including interest rates, due dates, etc. Interest income earned by HCMI on its
share of the outstanding loan amounted to $2,899 and $10,310 during the period
March 27, 1996 (date of formation) through December 31, 1996 and the nine months
ended September 30, 1997, respectively. Interest income earned by HCC on its
share of the outstanding loans amounted to $3,364, $22,970 and $24,387 for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997, respectively.
4. SHAREHOLDERS' EQUITY
PREFERRED STOCK
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
F-11
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
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.
Warrants to purchase 1,573,500 shares of HCMI common stock were also
granted on May 18, 1996 to the holders of non-contingent HCC stock purchase
warrants. Additionally, on April 17, 1996, HCMI granted HCC warrants to purchase
1,236,000 shares of its common stock for $.50 per common share.
OUTSTANDING WARRANTS
A summary of the outstanding warrants as of December 31, 1996 and September
30, 1997 to purchase HCMI Common Stock is as follows:
<TABLE>
<CAPTION>
ORIGINAL EXERCISE
WARRANT DATE DATE OF PRICE
HOLDER ISSUED EXPIRATION* SHARES PER SHARE
- ------------------------------------- ---------------- ------------------- -------------- ----------
<S> <C> <C> <C> <C>
HCC non-contingent warrant holders .. May 18, 1996 May 17, 2001 190,000 $ .001
900,000 $ .10
483,500 $ .50
-------
1,573,500
Issued to HCC Preferred Shareholders May 18, 1996 December 31, 1996 224,100 $ .50
HCC ................................. April 17, 1996 April 16, 2001 1,236,000 $ .50
---------
3.033,600
==========
</TABLE>
- ----------
* The terms of these warrants, and the contingent warrants discussed below, have
been modified in the reverse stock split which was approved in March 1997.
CONTINGENT WARRANTS
HCMI Common Stock which is contingently issuable as of December 31, 1996
and September 30, 1997 upon the occurrence of a specified event is as follows:
EVENT REQUIRING SHARES OF
STOCK ISSUANCE COMMON STOCK
- ---------------------------------------------------- -------------
Employment Performance (See Note 5) ......... 75,000
------
Total ....................................... 75,000
======
STOCK OPTION PLAN
On March 27, 1996, HCMI's incorporators reserved 600,000 shares of Common
Stock for a Stock Option Plan. Conditions of grants, terms, exercise prices,
etc. are yet to be determined by the Board of Directors. The shareholders would
be required to approve the plan prior to granting options.
F-12
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
REVERSE STOCK SPLIT
In conjunction with the planned IPO ("IPO"), the Board of Directors of HCMI
proposed a (1) reverse split of HCMI's Common Stock on the basis of one new
share of common stock to shareholders for each 4.6190302 shares of presently
outstanding Common Stock (1,326,811 new shares) and (2) a limitation on the
exercise of existing warrants. The principal objective of the reverse split was
to reduce the number of outstanding Common Shares prior to the IPO. The Board of
Directors believed that the total number of shares then outstanding caused a
disproportionately large dilutive effect on new investors in the planned IPO and
that the anticipated offering price of $5 per share would be better supported
with fewer shareholders prior to the IPO.
On March 26, 1997, the majority of the Common Shareholders approved this
proposal.
The shareholders will also be reissued a number of shares equal to the
shares being surrendered (4,801,589 shares). Those shares will be placed in
escrow with no voting or dividend rights while in escrow. The release of these
shares from escrow and their distribution to the shareholders and the exercise
of the existing warrants, both in normal annual increments of 16.67%, is
contingent on HCMI achieving the following:
HCMI generates an amount of income before extraordinary items but after
the deduction for minority interests (the "Recurring Results of
Operations") that, when multiplied by a market capitalization factor of
ten (10), would result in a product sufficient in size (the "Required
Value") to (1) hypothetically return capital of $5 per share (the
"Capital") and (2) hypothetically provide a return of 40% per year
(compounded monthly) on the Capital for the first two years, and then
15% per year (compounded monthly) thereafter, on the sum of (a) all
common shares then outstanding and (b) the (i) increase in common shares
caused by the assumed release from escrow of the 16.67% of the escrowed
stock that is then eligible for release, (ii) any carryforward shares
and (iii) other warrants or options probable of being exercised,
including the 16.67% of existing warrants that is then eligible for
exercise.
Issuance of shares from escrow in the future may result in the recognition of
compensation expense.
5. EMPLOYMENT AGREEMENTS
HCMI has employment agreements (the "Agreements") with three officers and
employees. The Agreements provide for base annual salaries aggregating $180,000
and permit participation in an annual bonus pool, the amount and conditions of
which shall be determined by HCMI's Board of Directors. In addition, the
Agreements provide that these employees are eligible to annually receive options
to buy up to 100,000 shares of Common Stock at $.10 per share with terms, other
than price, to be determined by the Board of Directors. No options have been
granted yet. One of the Agreements also provides for the issuance of 75,000
shares of common stock to the employee if he is employed by HCMI for three years
from May 1, 1996. Any options awarded under such plans will be charged to
compensation expense to the extent fair value of the underlying stock exceeds
the related exercise prices. The Agreements are effective as of May 1, 1996,
have a term of three years and provide for termination for cause with a
cessation in compensation payments. If terminated by HCMI without cause, or by
the employees with cause, prior to the end of their term, the Agreements require
payments of base salary to be continued from the date of termination through the
end of the original term of the Agreements.
In addition, the Board of Directors has agreed to annually provide certain
directors with options to buy up to 12,500 shares of Common Stock per director.
Terms, including price, are yet to be determined by the Board of Directors.
F-13
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
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.
A reconciliation of the income tax benefit at the statutory rate to the
amount actually recorded is as follows:
PERIOD ENDED
DECEMBER 31, 1996
------------------
Income tax benefit at statutory rate ..................... $ (99,755)
Valuation allowance related to deferred tax asset ........ 99,755
---------
Income tax benefit ....................................... $ --
=========
Deferred income taxes result from temporary differences which are the
result of provisions of the tax laws that either require or permit certain items
of income or expense to be reported in different periods for financial statement
and income tax reporting purposes. The following is a summary of the deferred
income taxes for 1996.
PERIOD ENDED
DECEMBER 31, 1996
------------------
DEFERRED TAX ASSETS
Net operating loss carryforward .................... $ 40,000
Cash basis accounting for income tax purposes ...... 60,000
----------
100,000
Valuation allowance ................................ (100,000)
----------
Net deferred tax asset ............................. $ --
==========
Generally accepted accounting principles require that a valuation allowance
be recorded against deferred tax assets which are not likely to be realized.
Specifically, HCMI established the valuation allowance due to the uncertain
nature of the ultimate realization.
HCMI did not record an income tax provision or benefit in the accompanying
financial statements for the nine months ended September 30, 1997 because of the
existence of net operating losses. HCMI does not expect to provide any income
tax provision or benefit for the year ending December 31, 1997 because HCMI
expects a net loss for the year ending December 31, 1997.
7. OTHER RELATED PARTY TRANSACTIONS
One of HCMI's shareholders was/is a partner in laws firms which provide
services to HCMI. Amounts recorded for legal services provided by these firms in
conjunction with the public offering amounted to $106,834 and $167,655 as of
December 31, 1996 and September 30, 1997, respectively. Another HCMI shareholder
is the principal stockholder of a company that provides professional services to
HCMI. Amounts recorded for professional services provided by this company to
HCMI in conjunction with the public offering amounted to $54,286 and $74,063 as
of December 31, 1996 and September 30, 1997, respectively. These amounts are
contained in deferred offering costs in the accompanying balance sheets.
F-14
<PAGE>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company and Successor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
8. PROPOSED INITIAL PUBLIC OFFERING
HCMI intends to offer 2,500,000 shares of Common Stock in a public offering
at $5 per share, or an aggregate of $12,500,000 before deducting a selling
commission of 8% of the gross proceeds raised, and other offering costs
including a $50,000 due diligence fee and a nonaccountable expense reimbursement
of 2% of the gross proceeds of the offering. If shares providing a minimum of
$2,000,000 of gross proceeds are not sold during the initial offering period, as
defined, investors' funds will be returned. The arrangement with the underwriter
is on a best efforts basis.
HCMI also expects to sell, at the termination of the Offering, to the
underwriter for an aggregate purchase price of $100, warrants entitling the
underwriter to purchase one share of HCMI stock for each ten shares of Common
Stock which have been sold in the IPO (for the minimum offering of 400,000
shares, 40,000 warrants will be issued and for the maximum offering of 2,500,000
shares, 250,000 warrants will be issued). The warrants will be exercisable for a
period of 4 years commencing 12 months after the date of the Prospectus. The
exercise price of the warrants shall be 165% of the per share offering price.
In accordance with Securities and Exchange Commission (SEC) Staff
Accounting bulletin (SAB) Topic No. (1)(B), the financial statements of
subsidiaries are required to include expenses incurred by the subsidiary's
parent on the subsidiary's behalf. In conjunction with the HCMI public offering,
HCC has incurred direct and indirect costs, such as salaries, rent, etc. all of
which have been assigned and/or allocated to HCMI in the accompanying financial
statements with the net unpaid amount reflected by HCMI as accounts payable to
related parties. At December 31, 1996 and September 30, 1997, the net unpaid
amount aggregated $220,616 and $397,350, respectively. HCC's and HCMI's
financial statements reflect approximately $300,000 and $150,000 of such costs
from March 27, 1996 (date of information) through December 31, 1996 and during
the nine months ended September 30, 1997. such costs have either been either
specifically identified or, where specific identification was not possible, have
been allocated using proportional cost allocation. Management is of the opinion
that such methods result in a reasonable presentation of such costs.
Furthermore, management believes that such costs approximate the amounts that
would have been incurred by HCMI on a stand alone basis.
By the completion of the public offering, it is expected that such costs
could aggregate $600,000. It is the intent of HCMI to reimburse HCC for these
costs, or at least a portion thereof, on a sliding scale basis. Any amount not
reimbursed will be reflected as an investment in HCMI by HCC.
In January 1997, the Company substantially revised the terms of its
proposed sale of common stock. Accordingly, the Company wrote off the deferred
offering costs of $618,690 related to the prior offering in the period ended
September 30, 1997.
F-15
<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 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
operating losses and working capital deficits since formation. In addition, the
Company expects to fund development expenditures and incur additional losses
until its operations are able to generate sufficient revenues to cover such
expenditures and losses. The Company does not currently have sufficient cash
reserves to cover 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 the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
----------------------------------------
BDO Seidman, LLP
Washington, D.C.
April 25, 1997
F-16
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1995 1996 1997
------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .......................................... $ 19,687 $ 1,251 $ 2,802
Accounts and notes receivable from related parties (Note 1 and
10) ............................................................... 2,963 224,110 400,844
Notes receivable -- other (Note 11) ................................ -- -- 59,156
Receivables from employees ......................................... -- 7,408 7,457
---------- ------------ ------------
Total current assets ............................................... 22,650 232,769 470,259
---------- ------------ ------------
Property and equipment, net of accumulated depreciation of
$687 and $1,203 as of December 31, 1996 and September 30,
1997 .............................................................. 3,025 2,748 2,233
Note receivable from related party (Note 3) ........................ 144,850 338,695 431,145
Accrued interest receivable principally from related party ......... 5,878 31,163 60,452
Other assets ....................................................... 8,397 --- --
---------- ------------ ------------
Total assets ....................................................... $ 184,800 $ 605,375 $ 964,089
========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable ................................................... $ 105,800 $ 42,391 $ 142,770
Accrued salaries ................................................... 140,152 75,560 75,560
Accrued expenses ................................................... 2,357 27,024 27,024
Notes payable to related parties (Note 6) .......................... 100,000 109,284 478,644
Accrued interest payable to related parties (Note 6) ............... 7,870 10,524 47,487
---------- ------------ ------------
Total current liabilities .......................................... 356,179 264,783 771,485
---------- ------------ ------------
Commitments (Note 8)
Shareholders' equity (deficit) (Notes 1, 5, and 10) ................
Preferred stock, $.001 par value, 10,000,000 shares authorized:
Series A 12% Noncumulative convertible preferred stock,
3,600,000 shares authorized, at December 31, 1996 and 1995;
1,372,000 shares and 2,789,000 shares issued and outstanding
at December 31, 1995 and 1996. .................................... 1,372 2,789 --
Common stock, $.001 par value, 50,000,000 shares authorized:
1,565,000, 2,169,000 shares and 4,958,000 shares outstanding at
December 31, 1995, and 1996 and June 30, 1997, respec-
tively ............................................................ 1,565 2,169 4,958
Additional paid-in capital ......................................... 638,908 1,582,003 1,582,003
Deficit accumulated during the development stage ................... (813,224) (1,246,369) (1,394,357)
---------- ------------ ------------
Total shareholders' equity (deficit) ............................... (171,379) 340,592 192,604
---------- ------------ ------------
Total liabilities and shareholders' equity (deficit) ............... $ 184,800 $ 605,375 $ 964,089
========== ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-17
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 23, 1994
(DATE OF FORMATION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
--------------------- --------------
<S> <C> <C>
REVENUES
Marketing commission received from related
party (Note 3) ............................... $ -- $ 647
Operating expenses Salaries (Note 5) .......... 112,374 209,885
General and administrative (Notes 8 and 9). 56,826 127,727
Write-off of working capital advances (Note
4) ........................................... 42,172 180,955
Program costs (Note 5) ........................ -- 49,900
Depreciation .................................. -- --
---------- ----------
Total operating expenses ...................... 211,372 568,467
---------- ----------
Operating loss ................................ (211,372) (567,820)
---------- ----------
Interest expense, net of interest income
of $ -- in 1994, $4,775 in 1995, $23,492
in 1996, $18,115 and $29,474 in the nine
months ended September 30, 1996 and 1997,
respectively and $57,741 from June 23, 1994
(date of formation) through September 30,
1997 (Notes 3, 5 and 6) ..................... (8,342) (25,690)
---------- ----------
Net loss ...................................... $ (219,714) $ (593,510)
========== ==========
Weighted average common shares outstand-
ing .......................................... 8,051,000 8,051,000
========== ==========
Net loss per share ............................ $ (.03) $ (.07)
========== ==========
<CAPTION>
FOR THE PERIOD
JUNE 23, 1994
FOR THE (DATE OF
FOR THE NINE MONTHS ENDED FORMATION)
YEAR ENDED SEPTEMBER 30, THROUGH
DECEMBER 31, --------------------------- SEPTEMBER 30,
1996 1996 1997 1997
-------------- ------------- ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Marketing commission received from related
party (Note 3) ............................... $ 2,847 $ 10,913 $ -- $ 3,494
Operating expenses Salaries (Note 5) .......... 156,279 3,487 -- 478538
General and administrative (Notes 8 and 9). 121,936 221,710 90,795 397,284
Write-off of working capital advances (Note
4) ........................................... 82,451 60,309 49,190 354,768
Program costs (Note 5) ........................ -- -- -- 49,900
Depreciation .................................. 688 454 515 1,203
---------- ---------- ---------- ------------
Total operating expenses ...................... 361,354 285,960 140,500 1,281,693
---------- ---------- ---------- ------------
Operating loss ................................ (358,507) (275,047) (140,500) (1,278,199)
---------- ---------- ---------- ------------
Interest expense, net of interest income
of $ -- in 1994, $4,775 in 1995, $23,492
in 1996, $18,115 and $29,474 in the nine
months ended September 30, 1996 and 1997,
respectively and $57,741 from June 23, 1994
(date of formation) through September 30,
1997 (Notes 3, 5 and 6)................. ..... (69,880) (3,973) (7,488) (111,400)
---------- ---------- ---------- ------------
Net loss ...................................... $ (428,387) $ (279,020) $ (147,988) $ (1,389,599)
========== ========== ========== ============
Weighted average common shares outstand-
ing .......................................... 8,051,000 8,051,000 8,051,000 8,051,000
========== ========== ========== ============
Net loss per share ............................ $ (.05) $ (.03) $ (.02) $ (.17)
========== ========== ========== ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-18
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
SERIES A 12%
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------- -------------------------
ISSUED AND ISSUED AND
OUTSTANDING $.001 OUTSTANDING $.001
SHARES PAR VALUE SHARES PAR VALUE
--------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ............ -- $ -- 2,000,000 $ 2,000
Repurchase of common stock ............ -- -- -- --
Retirement of common stock ............ -- -- (700,000) (700)
Sale of common stock .................. -- -- 180,000 180
Issuance of common stock for ser-
vices ................................ -- -- 85,000 85
Issuance of warrants for services...... -- -- -- --
Sale of preferred stock, net of of-
fering costs of $257,795 1,372,000
1,372 ................................ -- -- 426,833 --
Net loss .............................. -- -- -- --
-- --------- --------- -------
Balance, December 31, 1995 ............ 1,372,000 1,372 1,565,000 1,565
Issuance of common stock for ser-
vices ................................ -- -- 404,000 404
Issuance of dividend .................. -- -- -- --
Sale of preferred stock, net of of-
fering costs of $65,384............... 1,417,000 1,417 -- --
Issuance of common stock for re-
duction of liability - ............... --- 200,000 200 99,800
Net loss .............................. -- --- -- --
--------- --------- --------- -------
Balance, December 31, 1996 ............ 2,789,000 2,789 2,169,000 2,169
Conversion of preferred stock ......... (2,789,000) (2,789) 2,789,000 2,789
Net loss (unaudited) .................. -- -- -- --
---------- --------- --------- -------
Balance, September 30, 1997 (un-
audited) ............................. -- $ -- 4,958,000 $ 4,958
========== ========= ========= =======
<CAPTION>
DEFICIT
ACCUMULATED
DEVELOPMENT
ADDITIONAL DURING THE
PAID-IN TREASURY DEVELOPMENT
CAPITAL STOCK STAGE TOTAL
------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ............ $ -- $ -- $ (219,714) $ (217,714)
Repurchase of common stock ............ -- (700) -- (700)
Retirement of common stock ............ -- 700 -- --
Sale of common stock .................. 89,820 -- -- 90,000
Issuance of common stock for ser-
vices ................................ 27,445 -- -- 27,530
Issuance of warrants for services...... 94,810 -- -- 94,810
Sale of preferred stock, net of of-
fering costs of $257,795
1,372,000 1,372 ...................... -- 428,205
Net loss .............................. -- -- (593,510) (593,510)
---------- --------- ------------ ----------
Balance, December 31, 1995 ............ 638,908 -- (813,224) (171,379)
Issuance of common stock for ser-
vices ................................ 201,596 -- -- 202,000
Issuance of dividend .................. -- -- (4,758) (4,758)
Sale of preferred stock, net of of-
fering costs of $65,384............... 641,699 -- -- 643,116
Issuance of common stock for re-
duction of liability - ............... -- --- 100,000
Net loss .............................. -- -- (428,387) (428,387)
---------- --------- ------------ ----------
Balance, December 31, 1996 ............ 1,582,003 -- (1,246,369) 340,592
Conversion of preferred stock ......... -- -- -- --
Net loss (unaudited) .................. -- -- (147,988) (147,988)
---------- --------- ------------ ----------
Balance, September 30, 1997 (un-
audited) ............................. $1,582,003 $ -- $ (1,394,357) $ 192,604
========== ========= ============ ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-19
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 23, 1994
(DATE OF FORMATION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
--------------------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss .................................... $ (219,714) $ (593,510)
Adjustments to reconcile net loss to net
cash provided by operations ................
Depreciation ................................ -- --
Stock and warrants issued for compensa-
tion ....................................... -- 212,340
Increase in receivables ..................... (1,800) (7,041)
(Increase) decrease in prepaid expense....... (6,902) 6,902
Increase in accrued interest ................ -- --
(Increase) decrease in other assets ......... (27,500) 19,103
Increase (decrease) in accounts payable...... 44,502 61,298
Increase (decrease) in accrued salaries ..... 105,000 35,152
Increase in accrued expenses ................ -- 2,357
Increase in accrued interest payable to
related parties ............................ 4,486 3,384
---------- ----------
Net cash used in operating activities ....... (101,928) (260,015)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ....................... -- (3,025)
Loan to related party ....................... -- (144,850)
Loans to others ............................. -- --
---------- ----------
Net cash used in investing activities ....... -- (147,875)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale (retirement) of common stock, net
of issuance costs .......................... 2,000 (700)
Sale of preferred stock, net of issuance
costs ...................................... -- 428,205
Proceeds from related party loans ........... 100,000 29,600
Principal repayments to related parties...... -- (29,600)
Dividends ................................... -- --
---------- ----------
Net cash provided by financing activities. 102,000 427,505
---------- ----------
Increase (decrease) in cash and cash
equivalents ................................ 72 19,615
Cash and cash equivalents, beginning of
period ..................................... - 72
---------- ----------
Cash and cash equivalents, end of period .... $ 72 $ 19,687
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid ............................... $ 3,856 $ 12,111
========== ==========
Noncash investing and financing activities
consisted of the following:
Issuance of common stock for services ....... $ -- $ 85
Issuance of stock for reduction of liabil-
ity ........................................ $ -- $ --
Conversion of accrued salaries to notes
payable .................................... $ -- $ ---
<CAPTION>
FOR THE PERIOD
JUNE 23, 1994
FOR THE (DATE OF
FOR THE NINE MONTHS ENDED FORMATION)
YEAR ENDED SEPTEMBER 30, THROUGH
DECEMBER 31, --------------------------- SEPTEMBER 30,
1996 1996 1997 1997
-------------- ------------- ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss .................................... $ (428,387) $ (279,020) $ (147,988) $ (1,389,599)
Adjustments to reconcile net loss to net
cash provided by operations ................
Depreciation ................................ 688 454 515 1,203
Stock and warrants issued for compensa-
tion ....................................... 302,000 404 -- 514,340
Increase in receivables ..................... (228,555) (67,611) (176,783) (414,179)
(Increase) decrease in prepaid expense....... -- (25,000) -- --
Increase in accrued interest ................ (25,285) -- (29,289) (54,574)
(Increase) decrease in other assets ......... 8,397 3,639 -- --
Increase (decrease) in accounts payable...... (63,409) 6,011 100,379 142,770
Increase (decrease) in accrued salaries ..... (64,592) (65,152) -- 75,560
Increase in accrued expenses ................ 24,667 (2,357) -- 27,024
Increase in accrued interest payable to
related parties ............................ 2,653 3,323 36,963 47,486
---------- ---------- ---------- ------------
Net cash used in operating activities ....... (471,823) (425,309) (216,203) (1,049,969)
---------- ---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ....................... (410) (410) -- (3,435)
Loan to related party ....................... (193,845) (190,845) (92,450) (431,145)
Loans to others ............................. -- -- (59,156) (59,156)
---------- ---------- ---------- ------------
Net cash used in investing activities ....... (194,255) (191,255) (151,606) (493,736)
---------- ---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale (retirement) of common stock, net
of issuance costs .......................... -- -- -- 1,300
Sale of preferred stock, net of issuance
costs ...................................... 643,116 643,116 -- 1,071,321
Proceeds from related party loans ........... 9,284 -- 369,360 508,244
Principal repayments to related parties...... -- (10,716) -- (29,600)
Dividends ................................... (4,758) -- -- (4,758)
---------- ---------- ---------- ------------
Net cash provided by financing activities. 647,642 632,400 369,360 1,546,507
---------- ---------- ---------- ------------
Increase (decrease) in cash and cash
equivalents ................................ (18,436) 15,836 1,551 $ 2,802
Cash and cash equivalents, beginning of
period ..................................... 19,687 19,687 1,251 --
---------- ---------- ---------- ------------
Cash and cash equivalents, end of period $ 1,251 $ 35,523 $ 2,802 2,802
========== ========== ========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid ............................... $ -- $ 18,774 $ - $ 15,967
========== ========== ========== ============
Noncash investing and financing activities
consisted of the following:
Issuance of common stock for services ....... $ --- $ -- $ -- $ 85
Issuance of stock for reduction of liabil-
ity ........................................ $ -- $ 100,000 $ -- $ 100,000
Conversion of accrued salaries to notes
payable .................................... $ -- $ 60,000 $ -- $ 60,000
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-20
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1996 and 1997)
THE COMPANY AND NATURE OF BUSINESS
Heartland Capital Corporation ("HCC") was incorporated on June 23, 1994 as
a Delaware corporation. HCC provides merchant banking, marketing and consulting
services to companies primarily engaged in the electronic and print media
industries. HCC also provides consulting and support services to not-for-profit
organizations, assisting certain organizations by planning start-up operations,
and advancing temporary working capital. To date, HCC has not generated
significant revenues from its operations, and a majority of its activities have
been devoted to developing its own programs and starting up operations.
Accordingly, HCC's activities have been accounted for as those of a "development
stage enterprise" as set forth in Statement of Financial Accounting Standards
("SFAS") No. 7.
Heartland Communications and Management, Inc. ("HCMI") was formed on March
27, 1996 as a wholly owned subsidiary of HCC with HCC subscribing to HCMI's
common stock. On May 17, 1996, HCC ("Predecessor Company") paid its $4,758 stock
subscription and simultaneously assigned certain of its development and contract
rights and obligations to HCMI ("Successor Company") (see Note 1). HCC is also
related to another entity, ATB Productions, L.L.C. ("ATB"), with which it shares
common, but not identical, ownership and to which it provides marketing services
and a line of credit.
RISKS AND UNCERTAINTIES
While HCC has had limited operations, it is still in the development 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 the environment in which it
operates and implemented strategies to effectively reduce the financial impact
of these risks on HCC.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires HCC to make certain estimates and
assumptions particularly as it relates to the valuation of receivable and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
PROPERTY AND EQUIPMENT
Additions to property and equipment are recorded at cost and include all
major renewals and betterments. Maintenance, repairs and minor replacements are
expensed as incurred. Depreciation expense is provided on the straight line
basis over the five year estimated life of the related assets.
REVENUES
Marketing commissions are recognized as commercials are broadcast and the
related advertising revenues are received.
F-21
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
ADVANCES OF TEMPORARY WORKING CAPITAL
As part of its services to not-for-profit organizations, HCC makes working
capital advances which call for repayment. Due to the start-up nature of these
not-for-profit entities and the uncertainty regarding the ultimate
collectibility of the working capital advances, HCC expenses these advances as
funded. Repayment, if received, will be recorded as income when received. Also,
interest income related to the working capital advances is recorded as received.
INCOME TAXES
HCC uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement and
income tax bases. The recognition of net deferred tax assets is reduced, if
necessary, by a valuation allowance for the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
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>
<S> <C>
"CHEAP" STOCK
Common shares ...................................................... 2,169,000
---------
Convertible Preferred Stock ........................................ 2,789,000*
---------
"CHEAP" WARRANTS
Outstanding as of December 31, 1996 (including 125,000 shares
subject to contingent warrants) ................................. 1,698,500
Available upon conversion of convertible preferred stock ......... 1,394,500*
---------
3,093,000
---------
Total weighted average shares considered to be outstanding for
all periods ...................................................... 8,051,000
=========
</TABLE>
- ----------
* As of September 30, 1997, the convertible preferred stock outstanding has been
reflected as converted into common stock on a one-for-one basis and the
1,394,500 warrants issuable, upon conversion, on a two-for-one basis, are
deemed as outstanding warrants versus contingent warrants. There is no effect
on the total equivalent shares since both such preferred shares and warrants
were deemed equivalent shares even before conversion.
Furthermore, both contingent and outstanding warrants are included in the
determinations of equivalent shares. Accordingly, the number of equivalent
shares is the same in total at December 31, 1996 and September 30, 1997.
CASH EQUIVALENTS
HCC considers all highly liquid investments purchased with initial
maturities of 90 days or less to be cash equivalents.
F-22
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
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 FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments," HCC must disclose the fair value of its
financial instruments. In the opinion of management, the fair values of the
HCC's financial instruments as of December 31, 1995 and 1996 and September 30,
1997 are not materially different from the carrying amounts shown in the
accompanying financial statements.
INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements for the nine months ended
September 30, 1996 and 1997 are unaudited but, in the opinion of management,
reflect all adjustments (consisting primarily of normal recurring adjustments)
necessary for a fair presentation of the results of operations for the periods
presented. The results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be obtained for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
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, SFAS No. 128, "Earnings per Share (SFAS 128)". SFAS 128
provides a different method of calculating earnings per share than is currently
used in accordance with APB Opinion 15. SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. Using the principles set forth in SFAS 128, basic earnings per share
would not be different from reported earnings per share.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participants rights, call prices and dates, conversions
or exercise prices and redemptions requirements. Adoption of SFAS 129 will have
no effect on HCC as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosures standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
F-23
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", established standards for reporting and display of
comprehensive income, it components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segment in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
F-24
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997)
1. REORGANIZATION AND TRANSFER OF CERTAIN RIGHTS
As part of its merchant banking operations, HCC identifies investment
opportunities which can be developed into viable operations. In 1994, 1995 and
1996, HCC identified several opportunities, including talk radio, a youth
oriented newspaper, a newspaper insert aimed at sports enthusiasts and an
investment fund management company. The talk radio venture was furthest along in
the development process, with HCC having provided a line of credit as well as
marketing expertise to ATB (see Note 3). The other ventures identified to date
are only development options and are intended to be pursued only if funding is
obtained (see below) and appropriate due diligence, supporting the feasibility
of the acquisitions, has been completed.
HCC has determined that these ventures can not be adequately developed
without additional capital and, to that end, on May 17, 1996, HCC assigned its
option (and in the case of ATB, its contract) rights to HCMI, formerly a wholly
owned subsidiary. The contract and option rights transferred to HCMI have no
carrying value because developing or servicing the rights is expected to require
a substantial infusion of capital. It is HCMI's intention to obtain the
necessary capital through an initial public offering of its common stock. On May
18, 1996, HCC spun off HCMI via a dividend to the HCC stockholders with HCMI
cancelling the shares that had been issued to HCC and effectively replicating
the HCC capital structure by issuing a share of HCMI common stock to each HCC
common and preferred shareholder for each share of HCC common and preferred
stock outstanding. Warrants to purchase HCMI stock at $.50 per share were
granted to holders of non-contingent HCC stock purchase warrants, and warrants
were issued to the HCC preferred shareholders, on May 18, 1996. Additionally, on
April 17, 1996, HCMI granted HCC warrants to purchase 1,236,000 shares of its
common stock for $.50 per share.
During March 1997 the HCMI stockholders, in conjunction with the
contemplated HCMI public offering, approved a reverse stock split of HCMI's
common stock on the basis of one new share of HCMI common stock for each
4.6190302 shares of presently outstanding HCMI shares. The balance of 3.6190302
shares will be surrendered to HCMI and replaced by an equal number of shares
placed in escrow with no voting or dividend rights while in escrow. The release
of these shares from escrow and the exercise of the outstanding warrants will be
dependent on HCMI achieving a specified level of profitability. The principal
purpose of the reverse split was to reduce the number of outstanding HCMI Common
Shares prior to the public stock offering.
2. GOING CONCERN
As shown in the accompanying financial statements, HCC incurred a net loss
of $428,387 in 1996 and $147,988 for the nine months ended September 30, 1997
and has incurred losses since formation resulting in an accumulated deficit of
$1,246,369 and $1,394,357 at December 31, 1996 and September 30, 1997,
respectively. At December 31, 1996 and September 30, 1997. HCC had working
capital deficits of $32,014 and $301,226, respectively. Furthermore, HCC expects
to incur additional losses and fund other expenditures until it is able to
generate sufficient income to cover operating expenses and other expenditures.
HCC does not currently have sufficient cash reserves to cover such anticipated
losses and other expenditures. HCC also has significant receivables of $593,968
and $892,441 as of December 31, 1996 and September 30, 1997, respectively from
HCMI and ATB which, in turn, are both development stage companies. In addition,
HCMI's and ATB's most recent audit reports, dated April 25, 1997 and September
19, 1997, respectively, expressed concern about their "ability to continue as a
going concerns". These factors raise substantial doubt about HCC's ability to
continue as a going concern.
HCC has been evaluating financing and capitalization alternatives in its
long-term business plan. These alternatives included the sale of the 12%
Preferred Stock and warrants, and other alternatives,
F-25
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
such as the formation of HCMI, including the transfer thereto of many of HCC's
development options with HCMI, in turn, undergoing an IPO of common stock. To
preserve operating funds, HCC has developed a strategic plan which provides for
the reduction of expenditures and a prioritization of development options.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary should HCC be unable to
continue as a going concern.
3. HCC MARKETING AND LINE OF CREDIT AGREEMENTS
Effective January 1, 1995, HCC entered into a marketing agreement with ATB
("the HCC Agreement") whereby HCC will provide marketing services on behalf of
ATB. In return for receiving the marketing services, ATB is obligated to pay HCC
40% of its gross advertising cash receipts and 5% of its non-advertising gross
receipts. This agreement was assigned to HCMI by HCC on May 17, 1996. The HCC
Agreement automatically terminates on January 1, 1999 unless extended by mutual
agreement, and it is terminable at earlier dates under certain specified
conditions. In the event of termination for whatever reason, the amounts due
under the HCC Agreement for sponsorship existing at the time of termination
shall remain due and payable, notwithstanding the termination (if certain other
conditions are met), for a period ending the later of the automatic termination
date of the HCC Agreement or two years after the date of other termination.
Revenues recognized by HCC under the HCC Agreement aggregated $647, and $2,847
during 1995 and 1996, respectively. After the assignment of the contract, HCMI
recognized $3,507 and $4,757 of revenues under this agreement during the period
March 27, 1996 (date of formation) through December 31, 1996 and the nine months
ended September 30, 1997, respectively.
On January 15, 1995, HCC executed an unsecured line of credit agreement
with ATB (the "Credit Agreement") which provides ATB with a standby line of
credit in the amount of $360,000. Borrowings under the Credit Agreement bear
interest at 8% per annum, with payment of interest deferred until January 15,
1997, whereupon monthly interest payments will be required. Through September
30, 1997, interest payments of $12,950 and $185 have been made to HCMI and HCC,
respectively. Any principal and interest outstanding on the line of credit must
be repaid on December 31, 1999. During 1996, HCMI began co-funding this Credit
Agreement with HCC. As of December 31, 1996 and September 30, 1997, HCC had
advanced $338,695 and $431,145, respectively, while HCMI had advanced $172,780
and $169,280, respectively. Although the total advances $511,475 and $600,425 as
of December 31, 1996 and September 30, 1997, respectively are in excess of the
standby line of credit amount ($360,000), the total advances are governed by the
Credit Agreement including interest rates, due dates, etc. Interest income on
the line of credit for HCC amounted to $3,364, $22,970 and $24,387 for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. Interest income earned by HCMI on its share of the outstanding
loan amounted to $2,899 and $10,310 during the period March 27, 1996 (date of
formation) through December 31, 1996 and the nine months ended September 30,
1977, respectively.
4. FUNDING AND SERVICES PROVIDED TO NOT-FOR-PROFIT ORGANIZATIONS
In 1994, 1995, 1996 and during the nine months ended September 30, 1997.
HCC provided management assistance and funding to not-for-profit organizations.
These organizations are separate entities and their operations are not reflected
in the accompanying financial statements. In 1994, 1995 and 1996, HCC advanced a
total of $42,172, $180,955 and $82,451, respectively, to these organizations.
For the nine months ended September 30, 1997, such advances amounted to $49,190.
These amounts are re-
F-26
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
flected as "Write-off of working capital advances" in the accompanying
Statements of Operations. Included in these amounts was $50,000 in 1995 that was
paid to ATB on behalf of one of these nonprofit organizations for advertising on
a radio program produced by ATB.
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The total number of shares of stock that HCC has the authority to issue is
60,000,000, consisting of 10,000,000 shares of preferred stock, par value $.001
per share, and 50,000,000 shares of common stock, par value $.001 per share. The
preferred stock may be issued from time to time in one or more series. The Board
of Directors of HCC is empowered to provide for the issuance of shares of
preferred stock in series, to establish the number of shares to be included in
each series and to fix the designations, powers, preferences and rights of the
shares in each such series.
On January 6, 1995, the Board of Directors created a series of
Noncumulative Convertible 12% Preferred Stock, par value, $.001 per share to
consist of 1,800,000 shares. On September 18, 1995, the number of authorized
shares of the Convertible 12% Preferred Stock was increased to 3,600,000. The
series was designated the "Series A 12% Noncumulative Convertible Preferred
Stock" (the "12% Preferred Stock").
The 12% Preferred Stock was senior in right to all shares of HCC's common
stock. With the written consent of a least a majority of the shareholders of the
12% Preferred Stock, HCC could have issued one or more series of preferred stock
with right, rank and priority senior to the 12% Preferred Stock.
Beginning April 1, 1996, the 12% Preferred Stock was entitled to receive,
when and as declared by HCC's Board of Directors, noncumulative cash dividends
at the rate of $.06 per share per annum. Accrued dividends on the 12% Preferred
Stock shall be paid before any dividends shall be paid upon the Common Stock and
before any repurchase, retirement or other acquisition of any shares of Common
Stock. No such dividends have been declared.
In the event of the voluntary or involuntary liquidation, dissolution or
winding up of HCC, the holders of the 12% Preferred Stock were entitled, before
any payment with respect to Common Stock, to receive in cash for their shares
from the assets of HCC then available for distribution a proportional amount, as
defined, up to $.50 for each share of 12% Preferred Stock plus any unpaid and
accrued dividends.
On March 31, 1997, each share of 12% Preferred Stock automatically
converted into one share of common stock. At any time prior to March 31, 1997,
the Holder could have converted the 12% Preferred Shares into common stock. In
addition to the one-for-one conversion, the Holder shall, upon conversion,
receive a purchase warrant for one share of common stock for each two shares of
the 12% Preferred Stock converted. Each warrant shall entitle the holder to
purchase an additional share of common stock for (i) $.50 up to and including 20
days after the Company notifies the Holder that it has signed a letter of intent
with an underwriter to do an initial public offering of HCC's common stock or
(ii) 80% of the initial public offering price for a period of one year
subsequent to the effective date of a registration statement filed for the sale
of HCC's common stock. Between the two dates (20 days after notification and the
effective day of the Registration Statement), the 12% Preferred Stock could not
be converted into common stock. The 12% Preferred Stock would have been
automatically converted into common stock immediately prior to the completion of
any public sale of stock.
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.
F-27
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
Effective March 31, 1997, the 2,789,000 shares of outstanding 12% Preferred
Stock has been reflected as converted into common stock on a one-for-one basis
and the 1,394,500 purchase warrants issuable upon conversion, on a one-for-two
basis, are deemed as outstanding warrants whereas they formerly had been deemed
contingent warrants.
COMMON STOCK/WARRANTS
On June 23, 1994, HCC's three founding investors purchased 2,000,000 shares
of HCC common stock (the "Common Stock") at a price of $.001 per share, for a
total of $2,000. The founding investors also received warrants (expiring June
23, 1999) to purchase 900,000 shares of the Company's Common Stock at $.10 per
share. Two of the founding investors were employed by the Company in senior
management positions.
In 1995, one of the two employees (the "Selling Employee") left the Company
and the remaining employee (the "Purchasing Employee") agreed to purchase the
Selling Employee's common stock (700,000 shares) and warrants (to purchase
350,000 shares) for $75,000. As part of this sale, the Selling Employee also
waived his rights to approximately $100,000 of unpaid compensation. The
Purchasing Employee then entered into an agreement with HCC to sell HCC the
700,000 shares of common stock purchased from the Selling Employee for $75,000.
The Purchasing Employee retained ownership of the warrants to purchase 350,000
shares of the Company's common stock. Because the $75,000 cost of acquiring the
700,000 shares was in excess of the par value of the shares (the amount at which
originally issued), the excess cost ($74,300) has been reflected as compensation
expense (to the Selling Employee) in the accompanying Statement of Operations in
1995.
On May 3, 1995, HCC issued warrants to purchase 100,000 shares of common
stock to a radio talk show host (otherwise unaffiliated with HCC) as partial
consideration for his doing the show. These warrants are exercisable for a five
year period and have an exercise price of $.001 per share. These warrants were
recorded as programs costs based on a comparable value of $.50 per share
resulting in $49,900 of program costs in 1995.
On July 24, 1995, 180,000 shares of common stock were sold to a company
assisting with the private placement of the Preferred Stock. The amount paid was
$.001 per share, for a total of $180. The shares were recorded based on a
comparable value of $.50 per share, resulting in additional offerings costs of
$89,820. Also, on July 24, 1995, HCC issued warrants to purchase 90,000 shares
of Common Stock in conjunction with the sale of 180,000 shares of the Company's
common stock. The warrants allow the holder to purchase the HCC's common stock
for $.001 per share for five years. The warrants were recorded based on a
comparable value of $.50 per share resulting in $44,910 of additional offering
costs.
COMMON STOCK/WARRANTS ISSUED FOR SERVICES RENDERED
Certain employees, officers, lenders, board members and contractors (the
"Suppliers") were issued common stock in partial consideration for services
rendered or for loans made to the Company. In 1995, a total of 85,000 shares
were issued. During 1996, a total of 404,000 shares were similarly issued.
Related expense (interest, compensation, etc., based on a comparable value of
$.50 per share, of $27,445 and $201,596 has been recognized in the accompanying
Statements of Operations for the year ended December 31, 1995 and 1996,
respectively.
Along with the 404,000 shares of common stock issued during 1996, warrants
to purchase 333,500 shares of common stock were also issued. HCC also issued
warrants to purchase 60,000 shares of common stock to two employees who had
loaned money to HCC. These warrants were issued on January 29, 1996, are
exercisable for a five year period and have an exercise price of $.50 per share.
F-28
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
Additionally, on January 29, 1996, HCC issued to an underwriter warrants to
purchase 90,000 share of common stock at $.50 per share, contingent on the
underwriter raising at least $1,350,000 in the private placement of HCC's
preferred stock. As of April 19, 1996, the goal was met and the warrants were
issued and are exercisable for a five year period. The underwriter also will
receive, in addition to normal sales commissions, an additional 2% of all
capital raised in excess of $1,350,000.
In 1995, HCC entered into an agreement with the placement agent of its 12%
Preferred Stock allowing HCC to convert $100,000 of outstanding fees due to the
placement agent into common stock at a price of $.50 per share. On March 31,
1996, HCC issued 200,000 shares of common stock in lieu of paying $100,000 to
the placement agent and recorded such shares based on the amount of the
liability relieved ($100,000).
OUTSTANDING WARRANTS
A summary of the outstanding warrants as of September 30, 1997 described
above is as follows:
<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
Underwriter ...................... January 29, 1996 January 28, 2001 90,000 $ .50
Suppliers (with stock) ........... January 29, 1996 January 28, 2001 333,500 $ .50
Suppliers (without stock) ........ January 29, 1996 January 28, 2001 60,000 $ .50
-------
1,573,500 --
Conversion of Preferred Stock .... 1,394,500 $ .50
---------
Total ............................ 2,968,000 --
=========
</TABLE>
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.
CONTINGENT WARRANTS
A summary of warrants as of September 30, 1997 described above under which
shares are contingently issuable upon the occurrence of specified events is as
follows:
<TABLE>
<CAPTION>
SHARES EXERCISE
UNDER PRICE
EVENT REQUIRING WARRANTS ISSUANCE WARRANTS PER SHARE
- ----------------------------------- ---------- ----------
<S> <C> <C>
Employment Performance ............ 75,000 $ .40
Employment Performance ............ 50,000 $ .001
------ ------
Total ............................. 125,000 --
======= ======
</TABLE>
F-29
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
6. NOTES PAYABLE
On June 1, 1994, HCC entered into a promissory note agreement with an
officer who is also a director. Under the terms of the note agreement, HCC
borrowed $100,000, at a rate of 14.875% per annum. The note is now payable on
demand. The balance of the note as of December 31, 1996 and September 30, 1997
was $49,284 and $418,644, respectively.
On February 1, 1995, HCC executed a promissory note with an officer who is
also a director. Under the terms of the note, HCC borrowed $14,600, at a stated
interest rate of 13.75% per annum, and repaid the amount borrowed during 1995.
As additional consideration for making the note, HCC also agreed to issue 30,000
shares of common stock and provide warrants to purchase an additional 15,000
shares of common stock at $.50 per share. Such share have been valued based on a
comparable value of $.50 per share resulting in increased interest expense of
$14,970, or an overall effective interest rate of 106% per year.
On May 8, 1995, HCC executed a promissory note agreement with another
director. Under the terms of the note agreement, HCC borrowed $15,000, at a rate
of 14.875% per annum, and repaid the amount borrowed during 1995. In
consideration for making the note, HCC also agreed to issue the director 30,000
shares of common stock and provide warrants to purchase an additional 15,000
shares of common stock at $.50 per share. Such shares have been valued based on
a comparable value of $.50 per share resulting in increased interest expense of
$14,970, or an overall effective interest rate of $105% per year.
On January 20, 1996, HCC executed a promissory note agreement with another
officer who is also a director. Under the terms of the Note agreement, HCC
converted $60,000 of accrued compensation into a $60,000 note payable, with an
interest rate of 14.875% per annum. The note is payable on the earlier of July
20, 1996 or the date that the Company, through its equity capital development on
behalf of HCMI, raises in excess of $1,000,000. In consideration for making the
note, HCC also agreed to issue the employee 120,000 shares of common stock and
provide warrants to purchase an additional 120,000 shares of common stock at
$.50 per share. Such shares have been valued based on a comparable value of $.50
per share resulting in increased interest expense of $59,880 or an overall
effective interest rate of 105% per year.
All of these notes are unsecured. Interest expense on these notes
aggregated $7,750, $15,495 and $93,372 and $5,656 and $36,962 during the period
June 23, 1994 through December 31, 1994, 1995, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
7. INCOME TAXES
HCC has no provision for income taxes in 1994, 1995 or 1996 due to net
operating losses generated in those periods. At December 31, 1996, the Company
has net operating loss carryforwards of approximately $680,000 on a tax basis,
which expire through 2011. Due to the recent sale of preferred stock, the
utilization of these net operating losses is limited to approximately $65,000
annually.
A reconciliation of the income tax benefit at the statutory rate to the
amount actually recorded is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR 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>
F-30
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
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>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR 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>
Generally accepted accounting principles require that a valuation allowance
be recorded against deferred tax assets which are not likely to be realized.
Specifically, the Company established the valuation allowance due to the
uncertain nature of the ultimate realization.
HCC did not record an income tax provision or benefit in the accompanying
financial statements for the nine months ended September 30, 1997 because of the
existence of net operating losses. HCC does not expect to provide any income tax
provision or benefit for the year ending December 31, 1997 because HCC expects a
net loss for the year ending December 31, 1997.
8. LEASES
HCC leased office space and furniture from a company controlled by a Board
member under operating leases cancelable on sixty days notice. Net rent expense
under operating leases was $4,400, $10,200 and $8,375 in 1994, 1995 and 1996,
respectively, and $4,200 for the nine months ended September 30, 1996.
9. OTHER RELATED PARTY TRANSACTIONS
One of HCC's shareholders is a current and former partner in law firms
which provides legal services to HCC. Amounts recorded for legal services
provided by these firms were $ -, $3,959, $11,754, $14,878 and $71,972 for 1994,
1995, 1996 and the nine months ended September 30, 1996 and 1997, respectively.
Another of HCC's shareholders who is also a director of HCC is the
principal stockholder of a company that provides professional services to HCC.
Amounts recorded for professional services provided by this Company were $2,250,
$5,766, $50,668, $20,390 and $12,178 for 1994, 1995, 1996 and the nine months
ended September 30, 1996 and 1997, respectively.
10. HCMI INITIAL PUBLIC OFFERING
HCMI intends to offer 2,500,000 shares of Common Stock in a public offering
at $5 per share, or an aggregate maximum of $12,500,000, including a selling
commission of 8% on all shares sold, a $50,000 due diligence fee and a
nonaccountable expense allowance of 2% the gross proceeds. Sales of HCMI shares
are to be made on a best efforts basis. If shares providing a minimum of
$2,000,000 of proceeds are not sold during the initial offering period, as
defined, investors' funds are expected to be returned.
F-31
<PAGE>
HEARTLAND CAPITAL CORPORATION
(A Development Stage Company and Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1996 and 1997) - (CONTINUED)
In accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) Topic No. (1)(B), the financial statements of
subsidiaries are required to include expenses incurred by the subsidiary's
parent on the subsidiary's behalf. In conjunction with the HCMI public offering,
HCC has incurred direct and indirect costs, such as salaries, rent, etc. all of
which have been assigned and/or allocated to HCMI in the accompanying financial
statements with the net unpaid amount reflected by HCC as accounts receivable
from related parties. At December 31, 1996 and September 30, 1997, the net
unpaid amount aggregated $220,616 and $397,350, respectively. HCC's and HCMI's
financial statements reflect approximately $300,000 and $150,000 of such costs
from March 27, 1996 (date of information) through December 31, 1996 and during
the nine months ended September 30, 1997. Such costs have either been either
specifically identified or, where specific identification was not possible, have
been allocated using proportional cost allocation. Management is of the opinion
that such methods result in a reasonable presentation of such costs.
Furthermore, management believes that such costs approximate the amounts that
would have been incurred by HCMI on a stand alone basis.
By the completion of the public offering, it is expected that such costs
could aggregate $600,000. It is the intent of HCMI to reimburse HCC for these
costs, or a least a portion thereof, on a sliding scale basis. Any amount not
reimbursed will be reflected as an investment in HCMI by HCC.
11. OTHER LOANS
On March 25, 1997, HCC advanced funds under loan agreements. The balances
of such loans as of September 30, 1997 are as follows:
ATB Media, Inc. ........... $44,356
Supershield ............... 14,800
-------
$59,156
=======
These loans bear interest at the rate of 15% per annum and are payable the
earlier of (1) one year from the date of disbursement or (2) upon the breaking
of escrow for capital raising activities of each entity. Interest income earned
on these loans during the nine months ended September 30, 1997 aggregated $3,355
for ATB Media, Inc. and $1,432 for Supershield.
ATB Media, Inc. a wholly owned subsidiary of ATB, is presently in the
process of acquiring four licenses for AM radio stations in the states of
Washington and California. Supershield intends to sell to homeowners and install
a product to significantly reduce harmful ultraviolet rays received through
windows. HCC will earn fees for arranging the financing for the station
acquisitions and will receive a share of station revenue through its contractual
relationship with ATB (see Note 3).
F-32
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Members
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
We have audited the accompanying balance sheets of ATB PRODUCTIONS, L.L.C.
(A Development Stage Company) as of December 31, 1995 and December 31, 1996, and
the related statements of operations, changes in members' capital (deficit), and
cash flows for the years ended December 31, 1995 and December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATB PRODUCTIONS, L.L.C. (A
Development Stage Company) as of December 31, 1995 and December 31, 1996, and
the results of its operations and its cash flows for the years ended December
31, 1995 and December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred net losses in
1995 and 1996 and has an accumulated deficit from formation through December 31,
1996, In addition, the Company expects to incur additional losses until its
operations are able to generate sufficient revenues to cover operating expenses.
The Company does not currently have sufficient cash reserves to cover such
expenses, necessitating additional capital or financing. At December 31, 1996,
the Company had negative working capital, as well as significant noncurrent
liabilities. These factors, in addition to other factors discussed in Note 1 to
the financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding these matters are
discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
-------------------------------------
BDO Seidman, LLP
Washington, D.C.
September 19, 1997
F-33
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 1,560 $ 2,657 $ --
Accounts receivable ......................................... 3,200 5,414 7,664
Prepaid expenses ............................................ -- 4,600 --
Other current assets ........................................ -- 3,000 3,000
---------- ---------- ----------
Total current assets ......................................... 4,760 15,671 10,664
---------- ---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated deprecation of
$40, $2,140 and $4,177 as of December 31, 1995 December 31,
1996 and September 30, 1997, respectively ................... 4,784 16,318 12,191
---------- ---------- ----------
TOTAL ASSETS ................................................. $ 9,544 $ 31,989 $ 22,855
========== ========== ==========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES
Accounts payable -- trade ................................... $ 31,349 $ 28,264 $ 181,914
Accounts payable to related parties ......................... 647 647 647
Note payable to Member -- Manager (related party)
(Note 2) .................................................. 1,557 -- --
Deferred revenue ............................................ 1,400 -- --
---------- ---------- ----------
TOTAL CURRENT LIABILITIES .................................... 34,953 28,911 182,561
Accrued interest payable to related parties (Note 3) ......... 5,878 31,777 53,340
Long-term note payable to HCC and HCMI (Note 3) . 144,850 511,475 600,425
---------- ---------- ----------
TOTAL LIABILITIES ............................................ 185,681 572,163 836,326
---------- ---------- ----------
COMMITMENTS (Notes 2, 3 and 4)
MEMBERS' DEFICIT (Notes 2 and 3)
Members' capital contribution (100 member units
authorized, issued and outstanding) ....................... 42,500 42,500 42,500
Deficit accumulated during the development stage ............ (218,637) (582,674) (855,971)
---------- ---------- ----------
TOTAL MEMBERS' deficit ...................................... (176,137) (540,174) (813,471)
---------- ---------- ----------
TOTAL LIABILITIES AND MEMBERS' deficit ...................... $ 9,544 $ 31,989 $ 22,855
========== ========== ==========
</TABLE>
See accompanying summary of accounting polices and notes to
financial statements.
F-34
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1996
------------- -------------
<S> <C> <C>
ADVERTISING AND OPERATIONAL REVENUES, includ-
ing revenues from a related party of $50,000
and $19,744 in 1995 and 1996 (Note 3)................ $ 62,940 $ 130,695
---------- ----------
OPERATING EXPENSES
Broadcast costs ..................................... 152,056 236,938
Salaries to Members (related parties) ............... 71,572 106,107
General and administrative expenses (Notes 3
and 4) ............................................ 52,331 123,629
Depreciation ........................................ 40 2,100
---------- ----------
TOTAL OPERATING EXPENSES ............................. 275,999 468,774
---------- ----------
OPERATING LOSS ....................................... (213,059) (338,079)
---------- ----------
OTHER INCOME
Gain on sale of property and equipment .............. -- --
INTEREST EXPENSE, net of $400 and $ 0 interest in-
come in 1995 and 1996 and the nine months
ended September 30, 1997, to related parties
(Note 3) ............................................ 5,578 25,958
---------- ----------
NET LOSS ............................................. (218,637) (364,037)
MEMBERS' DEFICIT, beginning of period ................ -- (218,637)
---------- ----------
MEMBERS' DEFICIT, end of period ...................... $ (218,637) $ (582,674)
========== ==========
WEIGHTED AVERAGE MEMBERSHIP UNITS OUTSTANDING ........ 100 100
========== ==========
NET LOSS PER MEMBERSHIP UNIT ......................... $ (2,186) $ (3,641)
========== ==========
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1995
FOR THE (DATE OF FORMATION)
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------
1996 1997 1997
------------- ------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ADVERTISING AND OPERATIONAL REVENUES, includ-
ing revenues from a related party of $50,000
and $19,744 in 1995 and 1996 (Note 3)................ $ 144,155 $ 63,629 $ 257,264
---------- ---------- ----------
OPERATING EXPENSES
Broadcast costs ..................................... 153,713 140,762 529,756
Salaries to Members (related parties) ............... 81,067 76,061 253,740
General and administrative expenses (Notes 3
and 4) ............................................ 79,225 83,076 259,036
Depreciation ........................................ 1,500 2,455 4,595
---------- ---------- ----------
TOTAL OPERATING EXPENSES ............................. 315,505 302,354 1,047,127
---------- ---------- ----------
OPERATING LOSS ....................................... (171,350) (238,725) 789,863
---------- ---------- ----------
OTHER INCOME
Gain on sale of property and equipment .............. -- (126) (126)
INTEREST EXPENSE, net of $400 and $ 0 interest in-
come in 1995 and 1996 and the nine months
ended September 30, 1997, to related parties
(Note 3) ............................................ 16,696 34,698 66,234
---------- ---------- ----------
NET LOSS ............................................. (188,046) (273,297) (855,971)
MEMBERS' DEFICIT, beginning of period ................ (218,637) (582,674) --
---------- ---------- ----------
MEMBERS' DEFICIT, end of period ...................... $ (406,683) $ (855,971) $ (855,971)
========== ========== ==========
WEIGHTED AVERAGE MEMBERSHIP UNITS OUTSTANDING ........ 100 100 100
========== ========== ==========
NET LOSS PER MEMBERSHIP UNIT ......................... $ (1,880) $ (2,733) $ (8,560)
========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-35
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL (DEFICIT)
For the period
January 1, 1995 (date of formation) through September 30, 1997
<TABLE>
<S> <C>
INITIAL CASH CONTRIBUTIONS (Note 2) ...................................... $ 42,500
Net loss for year ended December 31, 1995 ............................... (218,637)
----------
BALANCE, December 31, 1995 ............................................... (176,137)
Net loss for year ended December 31, 1996 ............................... (364,037)
----------
BALANCE, December 31, 1996 ............................................... (540,174)
Net loss for the nine months ended September 30, 1997 (unaudited) ....... (273,297)
----------
BALANCE, September 30, 1997 (unaudited) .................................. $ (813,471)
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-36
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
------------------------------
1995 1996
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................ $ (218,637) $ (364,037)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATIONS
Depreciation ........................................ 40 2,100
Gain on sale of property and equipment .............. -- --
(Increase) decrease in accounts receivable .......... (3,200) (2,214)
(Increase) decrease in prepaids ..................... -- (4,600)
Increase (decrease) in accounts payable ............. 31,996 (3,085)
Increase in accrued interest payable ................ 5,878 25,899
Increase in deferred revenue ........................ 1,400 (1,400)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES ............... (182,523) (347,337)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (Purchase) of property and equipment ........... (4,824) (13,634)
Advances to related parties ......................... -- (3,000)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................ (4,824) (16,634)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of members units ........................... 42,500 --
Proceeds from notes payable to related par-
ties .............................................. 171,407 366,625
Principal repayments to related parties ............. (25,000) (1,557)
---------- -----------
Net cash provided by financing activities ........... 188,907 365,068
---------- -----------
Increase (decrease) in cash and cash equivalents. 1,560 1,097
Cash and Cash equivalents, beginning of period. -- 1,560
---------- -----------
Cash and Cash equivalents end of period .............. $ 1,560 $ 2,657
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash interest paid .................................. $ 100 $ --
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1995
FOR THE (DATE OF FORMATION)
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------
1996 1997 1997
-------------- -------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................ $ (188,046) $ (273,297) $ (855,971)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATIONS
Depreciation ........................................ 1,500 2,455 4,595
Gain on sale of property and equipment .............. -- (126) (126)
(Increase) decrease in accounts receivable .......... (50,419) (2,250) (7,664)
(Increase) decrease in prepaids ..................... (6,727) 4,600 --
Increase (decrease) in accounts payable ............. 71,124 153,650 182,561
Increase in accrued interest payable ................ (5,878) 21,563 53,340
Increase in deferred revenue ........................ 11,230 -- --
---------- ---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ............... (167,216) (93,405) (623,265)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (Purchase) of property and equipment ........... (5,345) 1,798 (16,660)
Advances to related parties ......................... -- -- (3,000)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ................ (5,345) 1,798 (19,660)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of members units ........................... -- -- 42,500
Proceeds from notes payable to related par-
ties .............................................. 190,845 88,950 626,982
Principal repayments to related parties ............. (1,557) -- (26,557)
---------- ---------- ----------
Net cash provided by financing activities ........... 189,288 88,950 642,925
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents. 16,727 (2,657) --
Cash and Cash equivalents, beginning of period. 1,560 2,657 --
---------- ---------- ----------
Cash and Cash equivalents end of period .............. $ 18,287 $ -- $ --
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash interest paid .................................. $ -- $ 13,135 $ 13,235
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-37
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996)
THE COMPANY AND NATURE OF BUSINESS
ATB Productions, L.L.C. ("ATB") was formed on April 19, 1995 as a Virginia
Limited Liability Company, as successor to a sole proprietorship of the same
name that was formed January 1, 1995. The accompanying financial statements
include the financial position, the results of operations and the cash flows of
both ATB and its predecessor sole proprietorship. Under its operating agreement,
ATB restricts its activities principally to the businesses of producing radio
shows. To this point, ATB has not generated significant revenue from its
operations, and a majority of its activities have been devoted to developing
programs and starting up production. Accordingly, ATB's activities have been
accounted for as those of a "development stage enterprise" as set forth in
Statement of Financial Accounting Standards ("SFAS") No. 7.
ATB is related to two separate companies, Heartland Capital Corporation
("HCC") and Heartland Communications & Management, Inc. ("HCMI") through common,
although not identical, ownership and through marketing and borrowing agreements
(See Notes 2 and 3).
RISK AND UNCERTAINTIES
While ATB has had limited operations, it is still in the development stage.
Consequently, ATB's activities will be subject to the risks inherent in a new
business enterprise including, among others, limited capital, uncertain market
acceptance and the inability to obtain additional financing. Additionally, ATB
faces substantial competition from a number of well-established, well financed
companies. ATB's principal source of revenues, advertising, is often cyclical
and dependent upon general economic conditions, rising in good economic times
and declining in economic downturns. In addition, ATB is highly dependent upon
its affiliates, which are likewise in the development stage, for services and
financing. ATB believes it has properly identified the risks in the environment
in which it operates and has implemented strategies to effectively reduce the
financial impact of these risks.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires ATB to make certain estimates and
assumptions, particularly as it relates to the valuation of accounts receivable
and disclosures of contingent assets and liabilities. Actual results could
differ from these estimates.
REVENUES AND EXPENSES
ATB recognizes advertising and operational revenues as commercials or
programs are broadcast and related services are rendered. Prepayments received
on service contracts are deferred and recognized as revenue when the related
advertising/program is broadcast.
Amounts payable to HCC and HCMI under ATB's marketing agreement are
recognized as expense at the time the related revenues are recorded as earned.
ACCOUNTS RECEIVABLE
ATB provides a reserve for doubtful accounts based on a specific review of
the expected collectibility of individual outstanding accounts.
INCOME TAXES
As a Limited Liability Corporation, ATB is treated as a partnership for
federal and state income tax purposes. Consequently, ATB's earnings and losses
are recognized in the individual income tax returns of ATB's Members (investors)
in accordance with the operating agreement. Therefore, no provision for income
taxes has been reflected in the accompanying financial statements.
F-38
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
NET LOSS PER UNIT
Net loss per membership unit has been computed based on the weighted
average of 100 investment units outstanding during the years ended December 31,
1995 and 1996, the nine months ended September 30, 1996 and 1997 and the period
January 1, 1995 (date of formation) through September 30, 1997.
CASH EQUIVALENTS
ATB considers all highly liquid investments purchased with initial
maturities of 90 days or less to be cash equivalents.
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.
INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements for the nine months ended
September 30, 1996 and 1997 are unaudited but, in the opinion of management,
reflect all adjustments (consisting primarily of normal recurring adjustments)
necessary for a fair presentation of the results of the period presented. The
results of the nine months ended September 30, 1997 are not necessarily
indicative of the results to be obtained for the full fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments," the Company must disclose the fair value of its
financial instruments as of December 31, 1996, and September 30, 1997. In the
opinion of management, the fair values of ATB's financial instruments are not
materially different from the carrying amounts shown in the accompanying
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
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. ATB
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 ATB'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
F-39
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
dilution of securities that could share in the earnings of an entity, similar to
existing fully diluted earnings per share. Using the principles set forth in
SFAS 128, basic earnings per share would not be different from reported primary
earnings per share.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participants rights, call prices and dates, conversions
or exercise prices and redemptions requirements. Adoption of SFAS 129 will have
no effect on ATB as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosures standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statements of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", established standards for reporting and display of
comprehensive income, it components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segment in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
F-40
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996)
1. GOING CONCERN
As shown in the accompanying financial statements, ATB incurred a net loss
of $218,637 and $364,037 in 1995 and 1996, respectively and has incurred losses
since formation, resulting in an accumulated deficit of $855,971 as of September
30, 1997. At September 30, 1997, ATB had negative working capital, as indicated
by current liabilities exceeding current assets by $171,917 as well as $653,765
of noncurrent liabilities. Furthermore, ATB expects to incur additional losses
until it is able to generate sufficient income to cover operating expenses. ATB
does not currently have sufficient cash reserves to cover such anticipated
losses. Borrowings under ATB's line of credit with HCC and HCMI (see Note 3)
amount to $600,425 at September 30, 1997 leaving $ 0 available for future use.
And HCC and HCMI, in turn, have similar problems with significant operating
deficits and working capital deficiencies, raising substantial doubt as to their
own ability to continue as a going concern as well as their ability to further
fund the line of credit and provide marketing services to ATB. These factors
raise substantial doubt about ATB's ability to continue as a going concern.
According to ATB's long-term business plan, ATB has been evaluating
financing and capitalization alternatives with HCC and HCMI. These alternatives
include the sale of preferred stock and warrants by HCC and other alternatives,
such as the formation of HCMI and the transfer thereto of many of HCC's
development options, including the ATB contract, with HCMI, in turn, undergoing
an initial public offering of its common stock. Additionally, ATB continues to
expand the radio shows it produces and broadcasts in an attempt to increase its
own revenues. Further, to preserve operating funds, ATB has developed a
strategic plan which provides for the reduction of expenditures and a
prioritization of development options.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary should ATB be unable to
continue as a going concern.
2. OPERATING AGREEMENT
ATB's operations are governed by the Operating Agreement (the "Agreement")
which sets forth the rights and responsibilities of the investors and others,
defined as "Members", entering into the Agreement. As part of the Agreement,
members contributed $42,500 in cash to the capital of ATB. Members have sharing
ratios in proportion to units owned which do not necessarily relate to the
capital contributed. Key provisions of the Agreement are as follows:
o One member was named the "Member-Manager", with rights, up to certain
limits, to contractually bind ATB, without consent of ATB's remaining
Members.
o The Member Manager is entitled to compensation in the amount of $5,000 per
month for management of ATB.
o Net profits and losses are to be apportioned among the Members in
proportion to their sharing ratios. Member are responsible for any income
taxes relating to apportioned profits and losses.
o No distributions to Members may be made unless, after the distribution,
ATB's assets will be in excess of liabilities.
o A Member dissociating from ATB will be paid the product of (i) the Member's
sharing ratio and (ii) the greater of ATB's (a) net book value or (b)
appraised fair market value.
o ATB's term of operations will end on December 31, 2050, unless the term is
either extended or ended sooner via amendment to the Agreement.
F-41
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
3. HCC MARKETING AND LINE OF CREDIT AGREEMENTS
Effective January 1, 1995, ATB entered into a marketing agreement with HCC
("HCC Agreement") whereby HCC will provide marketing services on behalf of ATB.
Services under the HCC agreement include presenting programs to prospective
sponsors on a worldwide basis, negotiating sponsorship agreements, etc. In
return for providing the marketing services, ATB is obligated to pay HCC 40% of
its gross advertising cash receipts and 5% of its non-advertising gross
receipts. On May 18, 1996, HCC assigned the HCC agreement to HCMI. The HCC
Agreement automatically terminates on January 1, 1999, unless extended by mutual
agreement, and is terminable at earlier dates under certain specified
conditions. In the event of termination for whatever reason, the amount due
under the HCC agreement for sponsorship existing at the time of termination
shall remain due and payable, notwithstanding the termination, (if certain other
conditions are met), for a period ending the later of the automatic termination
of the HCC Agreement or two years after the date of other termination. Revenues
recorded by HCMI from the date of transfer through December 31, 1996 and for the
nine months ended September 30, 1997 amounted to $3,507 and $4,757,
respectively. Revenues recorded by HCC under the HCC agreement aggregated $647
and $ 2,847 during 1995 and until transfer in the year ended December 31, 1996.
Additionally, ATB received $50,000 and $19,744 in advertising revenue from
HCC in 1995, and 1996, respectively, which was not subject to the HCC agreement.
On January 15, 1995, ATB executed an unsecured line of credit agreement
with HCC (the "Credit Agreement") which provides ATB with a standby line of
credit in the amount of $360,000. Borrowings under the Credit Agreement bear
interest at a fixed rate of 8% per annum, with payment of interest on any
borrowings being deferred until January 15, 1997, whereupon monthly interest
payments will be required. As of September 30, 1997, ATB has made $12,950 and
$185 of interest payments to HCMI and HCC, respectively. Any principal and
interest outstanding on the line of credit must be repaid on December 31, 1999.
During 1996, HCMI began co-funding this Credit Agreement with HCC. As of
December 31, 1996 and September 30, 1997, HCMI had advanced $172,780 and
$169,280, respectively, while HCC had advanced $338,695 and $431,145 as of
December 31, 1996 and September 30, 1997, respectively. Although the total
advances ($511,475 and $600,425 as of December 31, 1996 and September 30, 1997,
respectively), are in excess of the Credit Agreement's standby line of credit
amount ($360,000), the total advances are governed by the Credit Agreement
including interest rates, due dates, etc. During the year ended December 31,
1995, the average amounts borrowed under the Credit Agreement were $42,000 and
the maximum amount of month-end borrowing during the period was $144,850. During
the year ended December 31, 1996, the average amount borrowed under the credit
agreement was $259,950 and the maximum amount of month-end borrowing during the
period was $511,475. During the nine months ended September 30, 1997, an
additional $88,950 was borrowed under this Credit Agreement.
Interest expense under the Credit Agreement aggregated $3,364, $25,958 and
$34,698 during 1995, 1996 and the nine months ended September 30, 1996,
respectively.
On March 30, 1995, ATB executed a promissory note agreement with a Member
who is also an officer of HCC and HCMI. Under the terms of the note agreement,
ATB borrowed $20,000 from the Member on March 30, 1995, repaying it 15 days
later, at an interest rate of 8% per annum. As additional consideration, the
Member received eight investment units in ATB.
On May 29, 1995, ATB borrowed $5,000 from another Member, who is also a
director of HCC, repaying the balance on June 12, 1995 plus $100 in interest and
fees.
On December 15, 1995, ATB executed a note agreement with its Member-Manager
(who is also an officer of HCC and HCMI) whereby ATB borrowed $1,557 at an
interest rate of 8% per annum, payable on a monthly basis. The balance was
repaid during 1996.
F-42
<PAGE>
ATB PRODUCTIONS, L.L.C.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to September 30, 1997 and 1996) - (CONTINUED)
Interest expense on these notes payable to members aggregated $167, $0 and
$0 for 1995, 1996 and the nine months ended September 30, 1997, respectively.
Long-term notes payable as of December 31, 1995, December 31, 1996 and
September 30, 1997 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
-------------- -------------- -------------
<S> <C> <C> <C>
$
Borrowing under Credit Agreement ...... $144,850 $511,475 600,425
Note payable to Managing Member ....... 1,557 -- --
-------- -------- -----------
146,407 511,475 600,425
Less current portion .................. 1,557 -- --
-------- -------- -----------
$144,850 $511,475 $600,425
======== ======== ===========
</TABLE>
4. LEASE COMMITMENTS
ATB leases office space and furniture from a Member (who is also a director
of HCC) under an operating lease cancelable on sixty days notice. Net rent
expense under this lease was $12,425 for 1995, $29,500 for 1996 and $21,750 for
the nine months ended September 30, 1997.
5. TAX LOSSES
For income tax purposes, ATB reports on the cash basis whereby (1) certain
revenue and the related assets are recorded when received rather than when
earned and (2) certain costs are deducted when paid rather than when incurred. A
reconciliation of the financial statement net loss to the income tax loss
follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------------------
1995 1996 1996 1997
-------------- -------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Financial statement net loss ......... $ (218,637) $ (364,037) $ (188,046) $ (273,297)
ADJUSTMENTS
Accrual to cash conversion .......... 30,196 (19,001) 55,404 174,897
Other temporary differences ......... 7,572 6,750 -- --
---------- ---------- ---------- ----------
Income tax loss ..................... $ (180,869) $ (376,288) $ (132,642) $ 98,400
========== ========== ========== ==========
</TABLE>
F-43
<PAGE>
APPENDIX II
SCHEDULE 15G
IMPORTANT INFORMATION ON PENNY STOCKS
THIS STATEMENT IS REQUIRED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION
THE ("SEC") AND CONTAINS IMPORTANT INFORMATION ON PENNY STOCKS. YOUR
BROKER-DEALER IS REQUIRED TO OBTAIN YOUR SIGNATURE TO SHOW THAT YOU HAVE
RECEIVED THIS STATEMENT BEFORE YOUR FIRST TRADE IN A PENNY STOCK. YOU ARE URGED
TO READ THIS STATEMENT BEFORE SIGNING THE SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY AND BEFORE MAKING A PURCHASE OR SALE OF A PENNY STOCK.
PENNY STOCKS CAN BE VERY RISKY.
o 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.
o 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.
o 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.
o 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").
o The difference between the bid and the offer price is the dealer's
"spread." A spread that is large compared with the purchase price can make
a resale of a stock very costly. To be profitable when you sell, the bid
price of your stock must rise above the amount of this spread and the
compensation charged by both your selling and purchasing dealers. If the
dealer has no bid price, you may not be able to sell the stock after you
buy it, and may lose your whole investment.
BROKERS' DUTIES AND CUSTOMER'S RIGHTS AND REMEDIES.
o 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
II-1
<PAGE>
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.
o Generally, penny stock is a security that:
o is priced under five dollars;
o is not traded on a national stock exchange or on NASDAQ (the NASD's
automated quotation system for actively traded stocks);
o may be listed in the "pink sheets" or the NASD OTC Bulletin Board; and/or
o is issued by a company that has less than $5 million in net tangible assets
and has been in business less than three years, or by a company that has
under $2 million in net tangible assets and has been in business for at
least three years, or by a company that has revenues of $6 million for 3
years.
Use caution when investing in penny stocks:
(1) Do not make a hurried investment decision. High-pressure sales
techniques can be a warning sign of fraud. The salesperson is not an impartial
advisor, but is paid for selling stock to you. The salesperson also does not
have to watch your investment for you. Thus, you should think over the offer and
seek outside advice. Check to see if the information given by the salesperson
differs from other information you may have. Also, it is illegal for
salespersons to promise that a stock will increase in value or is risk-free, or
to guarantee against loss. If you think there is a problem, ask to speak with a
compliance official at the firm and, if necessary, any of the regulators
referred to in this statement.
(2) Study the company issuing the stock. Be wary of companies that have no
operating history, few assets, or no defined business purpose. These may be sham
or "shell" corporations. Read the prospectus for the company carefully before
you invest. Some dealers fraudulently solicit investors' money to buy stock in
sham companies, artificially inflate the stock prices, then cash in their
profits before public investors can sell their stock.
(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:
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<PAGE>
o 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.
o 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.
o 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:
o 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.
o A Written Statement of Your Financial Situation and Investment Goals. In
general, unless you have had an account with your brokerage firm for more
than one year, or you have previously bought three different penny stocks
from that firm, your brokerage firm must send you a written statement for
you to sign that accurately describes your financial situation, your
investment experience and your investment goals, and that contains a
statement of why your firm decided that penny stocks are a suitable
investment for you. The firm also must get your written consent to buy the
penny stock.
Legal remedies. If penny stocks are sold to you in violation of your rights
listed above, or other federal or state securities laws, you may be able to
cancel your purchase and get your money back. If the stocks are sold in a
fraudulent manner, you may be able to sue the persons and firms that caused the
fraud or damages. If you have signed an arbitration agreement, however, you may
have to pursue your claim through arbitration. You may wish to contact an
attorney. The SEC is not authorized to represent individuals in private
litigation.
However, to protect yourself and other investors, you should report any
violations of your brokerage firm's duties listed above and other securities
laws to the SEC, the NASD, or your state securities administrator at the
telephone numbers on the first page of this document. These bodies have the
power to stop fraudulent and abusive activity of salespersons and firms engaged
in the securities business. Or you can write to the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549; the NASD at 1735 K Street, N.W., Washington, D.C.
20006; or NASAA at 555 New Jersey Avenue, N.W., Suite 750, Washington, D.C.
20001. NASAA will give you the telephone number of your state's securities
agency. If there is any disciplinary record of a person or a firm, the NASD,
NASAA or your state securities regulator will send you this information if you
ask for it.
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.
II-3
<PAGE>
Market domination. In some cases, only one or two dealers, acting as
"market makers," may be buying or selling a given stock. You should first ask if
a firm is acting as a broker (your agent) or as a dealer. A dealer buys stock
itself to fill your order or already owns the stock. A market maker is a dealer
who holds itself out as ready to buy and sell stock on a regular basis. If the
firm is a market maker, ask how many other market makers are dealing in the
stock to see if the firm (or group of firms) dominates the market. When there
are only one or two market makers, there is a risk that the dealer or group of
dealers may control the market in that stock and set prices that are not based
on competitive forces. In recent years, some market makers have created
fraudulent markets in certain penny stock, so that stock prices rose suddenly,
but collapsed just as quickly, at a loss to investors.
Mark-ups and mark-downs. The actual price that the customer pays usually
includes the mark-up or mark-down. Markups and markdowns are direct profits for
the firm and its salespeople, so you should be aware of such amounts to assess
the overall value of the trade.
The "spread." The difference between the bid and offer price is the spread.
Like a mark-up or mark-down, the spread is another source of profit for the
brokerage firm and compensates the firm for the risk of owning the stock. A
large spread can make a trade very expensive to an investor. For some penny
stock, the spread between the bid and offer may be a large part of the purchase
price of the stock. Where the bid price is much lower than the offer price, the
market value of the stock must rise substantially before the stock can be sold
at a profit. Moreover, an investor may experience substantial losses if the
stock must be sold immediately.
Example: If the bid is $0.04 per share and the offer is $0.10 per share,
the spread (difference) is $0.06, which appears to be a small amount. But
you would lose $0.06 on every share that you bought for $0.10 if you had to
sell that stock immediately to the same firm. If you had invested $5,000 at
the $0.10 offer price, the market maker's repurchase price, at $0.04 bid,
would be only $2,000; thus you would lose $3,000, or more than half of your
investment, if you decided to sell the stock. In addition, you would have to
pay compensation (a "mark-up," "mark-down" or commission) to buy and sell the
stock.
In addition to the amount of the spread, the price of your stock must rise
enough to make up for the compensation that the dealer charged you when it first
sold you the stock. Then, when you want to resell the stock, a dealer again will
charge compensation, in the form of a markdown. The dealer subtracts the
markdown from the price of the stock when it buys the stock from you. Thus, to
make a profit, the bid price of your stock must rise above the amount of the
original spread, the markup 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-4
<PAGE>
APPENDIX III
HOULIHAN VALUATION ADVISORS
FAIRNESS OPINION
<PAGE>
April 18, 1997
To the Board of Directors
of the 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 Bartlett Fund Management Co. ("ABFM"), and other
unidentified communications company acquisitions, as well as fund anticipated
integrated communications management and marketing services. Only HRN, which in
turn has certain contractual arrangements with ATB Productions, L.L.C. ("ATB"),
has any current operations. All other potential 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 Offering 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 McLean, 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;
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;
III-2
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Page 2
To the Board of Directors of
Heartland Communications & Management, Inc.
April 18, 1997
9) reviewed certain publicly available financial data in relation to comparable
companies and the industries in which HCMI has existing and proposed
operations; and
10) conducted other such studies, analyses and inquiries as we have deemed
appropriate.
HCMI is in the early stage of development and has no history of operations.
HCMI's operations to date have been primarily organizational and devoted to
financial planning and raising capital. To the extent that the Company
implements its business plan, the Company will be subject to risks inherent in a
new business enterprise, including, among others, limited capital, uncertain
market acceptance, and the potential inability to obtain financing. In addition,
the Company's future success will depend upon many factors, including those
which may be beyond its control and not predictable at this time. The Opinion
expressed herein should not be construed by any party as investment advice nor
does the Opinion address the Company's underlying business decision to effect
the contemplated investments and transactions. An investment in HCMI is highly
speculative and involves substantial risk and no assurances can be made that any
of the proposed ventures will ever generate positive cash flow.
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. Projection 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 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
Offering Price to the public shareholders is fair from a financial point of
view.
This Opinion is furnished solely for the benefit of the addresses 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
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<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. The following states impose greater net worth or net income
requirements, as set forth in the attached Annex to this Subscription Agreement:
Arizona, California, Idaho, Iowa, Michigan, Nebraska, New Mexico, North Dakota,
Ohio, Oregon, South Dakota and Virginia. Purchaser represents that he meets
these financial requirements and that he is of legal age. Purchaser is urged to
review carefully the responses, representations and warranties he is making
herein. Purchaser agrees that this subscription may be accepted or rejected in
whole or in part by the Company in its sole and absolute discretion.
READ THIS PROSPECTUS CAREFULLY BEFORE YOU SUBSCRIBE. CONTAINED HEREIN ARE
DISCLOSURES CONCERNING VARIOUS RISKS, CONFLICTS, FEES AND EXPENSES RELATING TO
OR TO BE PAID BY THE COMPANY. YOU SHOULD BE AWARE THAT THE DISCLOSURES MADE MAY
BE USED AS A DEFENSE IF PROCEEDINGS ARE BROUGHT BY SHAREHOLDERS RELATING TO THE
COMPANY.
REPRESENTATIONS AND WARRANTIES
Purchaser makes the following representations and warranties in order to
permit the Company to determine his suitability as a purchaser of Shares:
(1) The undersigned has received the Company's Prospectus and the
exhibits thereto.
(2) The undersigned acknowledges that he has received and read the
attached Appendix II, Schedule 15G, "Important Information On Penny Stocks."
(3) The undersigned understands that the Company has made all documents
pertaining to the transactions described in the Company's Prospectus
available to the undersigned in making the decision to purchase the Shares
subscribed for herein.
(4) The undersigned is reminded that:
(a) The Shares are speculative investments, the purchase of which
involves a high degree of risk of loss of the entire investment of the
undersigned in the Company.
(b) S/he is encouraged to discuss the proposed purchase with her/his
attorney, accountant or a Purchaser Representative (as defined under the
Securities Act of 1933, as amended) or take the opportunity to do so, and
is satisfied that s/he has had an adequate opportunity to ask questions
concerning the Company, the Shares and the offering described in the
Prospectus.
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<PAGE>
(c) No federal or state agency has passed upon the adequacy or
accuracy of the information set forth in the Prospectus or made any
finding or determination as to the fairness of the investment, or any
recommendation or endorsement of the Shares as an investment.
(d) S/he must not be dependent upon a current cash return with respect
to her/his investment in the Shares. S/he understands that distributions
are not required (and are not expected) to be made.
(e) The Company is not a "tax shelter" and the specific tax
consequences to her/him relative to as an investment in the Company will
depend on her/his individual circumstances.
(5) If the Shares are being subscribed for by a pension or profit-sharing
plan, the undersigned independent trustee represents that s/he has reviewed
the plan's portfolio and finds (considering such factors as diversification,
liquidity and current return and projected return of the portfolio) this
purchase to be a prudent investment under applicable rules and regulations,
and acknowledges that no representation is made on behalf of the Company that
an investment in the Company by such plan is suitable for any particular plan
or constitutes a prudent investment thereby. Moreover, the undersigned
independent trustee represents that s/he understands that income generated by
the Company may be subject to tax, that s/he is authorized to execute such
subscription on behalf of the plan or trust and that such investment is not
prohibited by law or the plan's or trust's governing documents.
The undersigned understands and agrees that this subscription may be
accepted or rejected by the Company in whole or in part, in its sole and
absolute discretion. The undersigned hereby acknowledges and agrees that this
Subscription Agreement shall survive (i) non-material changes in the
transactions, documents and instruments described in the Prospectus, (ii) death
or disability of the undersigned and (iii) the acceptance of this subscription
by the Company. By executing this Subscription Agreement below, the undersigned
(i) acknowledge the accuracy of all statements and (ii) appoints the management
of the Company to act as his true and lawful attorney to file any documents or
take any action required by the Company to carry out its business activities.
The foregoing information which the undersigned has provided to the Company
is true and accurate as of the date hereof and shall be true and accurate as of
the date of the undersigned's admission as a Shareholder. If in any respect such
representations, warranties or information shall not be true and accurate at any
time prior to the undersigned's admission as a Shareholder, s/he will give
written notice of such fact to the Company, specifying which representation,
warranty or information is not true and accurate and the reason therefor.
By executing this Subscription Agreement, the undersigned certifies, under
penalty of perjury:
(1) That the Social Security Number or Taxpayer Identification Number
provided below is correct; and
(2) That the IRS has never notified him that s/he is subject to 20%
backup withholding, or has notified her/him that s/he is no longer subject to
such backup withholding. (NOTE: IF THIS PART (2) IS NOT TRUE IN YOUR CASE,
PLEASE STRIKE OUT THIS PART BEFORE SIGNING.)
(3) The undersigned is a U.S. citizen or resident, or is a domestic
corporation, partnership or trust, as defined in the Internal Revenue Code of
1986, as amended. (NOTE: IF THIS PART (3) IS NOT TRUE IN YOUR CASE, PLEASE
STRIKE OUT THIS PART BEFORE SIGNING.)
(4) That the undersigned acknowledges and agrees that this information
may be disclosed to the Internal Revenue Service by the Company and that any
false statement contained herein is punishable by fine, imprisonment or both.
The undersigned will notify the Company within sixty (60) days of the date
upon which any of the information contained herein becomes false or otherwise
changes in a material manner, or the undersigned becomes a foreign person.
The undersigned agrees to update this information whenever requested by the
Company. Under penalties of perjury,
A-2
<PAGE>
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.
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)
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<PAGE>
ANNEX TO
SUBSCRIPTION AGREEMENT
AND
POWER OF ATTORNEY
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
SUPPLEMENTAL SUBSCRIPTION REQUIREMENTS
The purchase of Shares in Heartland Communications & Management, Inc. may
be made only by persons who have (i) a net worth of at least $100,000 (exclusive
of home, furnishings and automobiles) or (ii) net worth (similarly calculated)
of at least $50,000 and an annual gross income of at least $25,000. Subscribers
in the following states, in which Shares may be qualified for sale, are subject
to greater net worth (similarly calculated), annual income and other financial
requirements as shown below:
I understand that the investment requirements, as to net worth ("NW")
(exclusive of home, furnishings and automobiles) and past and anticipated annual
income ("AI") set forth below opposite the state in which I purchase, apply to
my subscription:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona $150,000 NW or $ 50,000 NW* and $50,000 AI
----
California $500,000 NW* or $250,000 NW* and $65,000 AI
----
Idaho $500,000 NW* or $250,000 NW* and $65,000 AI
----
Iowa $500,000 NW or $250,000 NW and $65,000 AI
----
Michigan $100,000 NW* or $ 50,000 NW* and $25,000 AI
Nebraska** Accredited investors (as defined below) only
New Mexico $500,000 NW* or $250,000 NW* and $65,000 AI
----
North Dakota*** $100,000 NW* or $ 56,000 NW and $25,000 AI
----
Oregon $500,000 NW* or $250,000 NW* and $65,000 AI
----
Ohio $500,000 NW* or $250,000 NW* and $65,000 AI
----
South Dakota $150,000 NW or $ 65,000 NW and $65,000 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.
** For purposed of satisfying Nebraska requirements, only "accredited investors"
as defined are permitted. Accredited investors, if individuals, must either
(i) have (along with his/her spouse) a net worth which exceeds $1,000,000 at
the time of the purchase or (ii) have had an individual income in excess of
$200,000 in the previous two tax years (or joint income which exceeds
$300,000) and has a reasonable expectation of reaching the same income level
(or joint income level) in 1998. Accredited investors also include: (i) any
bank or savings and loan associated acting in its individual or fiduciary
capacity, any broker-dealer, any insurance company, investment company,
business development company, small business investment company or employee
benefit plan; if the latter, investment decisions are made for the plan by a
fiduciary which is a bank, savings and loan association, insurance company or
registered investment advisor; (b) the plan has total assets in excess of
$5,000,000; and (c) if a self-directed plan, the investment decisions are
made solely by persons that are accredited investors; (i) any private
business development company; (ii) any organization (corporation,
Massachusetts or similar business trust or partnership) under Section
501(c)(3) of the Internal Revenue Code not formed for the specific purpose of
acquiring the securities offered with and which has total assets in excess of
$5,000,000 and whose purchase is directed by a "sophisticated" investor;
(iii) any director or executive officer of the Company; and/or (iv) any
entity in which all equity owners are accredited investors.
***The Securities Commissioner of North Dakota has prohibited the offer and
sale of Shares to any IRA accounts beneficially owned by residents of North
Dakota.
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<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 $12,500,000 OF SHARES OF
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 COMMON STOCK
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 HEARTLAND
- ----------------- ---- COMMUNICATIONS
& MANAGEMENT, INC.
Investment Requirements ........... 2
Prospectus Summary ................ 5
Summary Financial Data ............ 7
Pro Forma Financial Information ... 9
Introductory Statement:
Who Should Invest ............... 9
Risk Factors ...................... 9
Conflicts Of Interest ............. 15
Fiduciary Responsibility Of
The Company's Management ........ 19
Application Of Proceeds ........... 20
Capitalization .................... 22 -------------------------------------
Dilution .......................... 22 PROSPECTUS
The Company ....................... 24
Selected Financial Data ........... 43 -------------------------------------
Management's Discussion And
Analysis Of Financial Condition
And Results Of Operations........ 45
Absence Of Public Market And
Dividend Policy ................. 53
Description Of Capital Stock ...... 53
Plan Of Distribution .............. 55
ERISA Considerations .............. 56
Legal Matters ..................... 57
Experts ........................... 57
Available Information ............. 57
Appendix I (Financial Statements).. I-1 February 13, 1998
Appendix II (Schedule 15G,
"Important Information On Penny
Stocks")........................ II-1
Appendix III (Fairness Opinion) ..III-1
Exhibit A-Subscription Agreement
And Power Of Attorney........... A-1
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