UNITED STATES
SECURITY AND EXCHANGE COMMISSION
Washington D.C. 20549
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ____________________
COMMISSION FILE NUMBER: 333-08935
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1799019
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION)
INCORPORATION OR ORGANIZATION)
1320 OLD CHAIN BRIDGE ROAD
McLEAN, VA 22101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
703-883-1836
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filled all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of regitrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 31, 1998, there is not yet a market value for the Registrant's
common stock.
There were 1,389,314 shares of the registrant's Common Stock issued and
outstanding as of March 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's Proxy
Statement for its 1998 Annual Meeting of Stockholders which will be filed with
the Commission not later that 120 days after December 31, 1997.
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TABLE OF CONTENTS
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<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to Vote of Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationship and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
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PART I
Item 1. BUSINESS
General
Heartland Communications & Management, Inc. (the "Company") was
organized March 27, 1996. The Company's offices are located at 1320 Old Chain
Bridge Road -- Suite 220, McLean, Virginia 22101, and its telephone number is
(703) 883-1836. The Company intends to raise capital, perform support services
and pursue specific targeted business development opportunities as its basis for
growth and profitability. At the present time, the Company is offering up to
2,500,000 shares of its Common Stock at $5 per share for a maximum of
$12,500,000 (the "Initial Public Offering). 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 the Initial Public
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. 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
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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 the Initial
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 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.
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 1,394,500 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 1,236,000 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 the Initial Public Offering to develop
these rights and associated activities.
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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.
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. (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 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 its creators control)
will receive 3.75%; thereafter, the 5% royalty payment will be paid entirely to
its creators (or an entity they control.)
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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 the
Initial Public 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.
(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.
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
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that the success of talk radio -- which it believes strongly relies on
participation by angry or alienated listeners but is cheaper to develop and
sustain -- may have peaked.) Support for this theory can be found in the success
of ethnic-oriented programming and National Public Radio ("NPR") programming
such as "All Things Considered" and "Morning Edition." The NPR programs air in
morning and afternoon drive times; however, the economic potential of such
programs is largely untested because of their non-profit, non-commercial nature.
There are approximately 11,500 radio stations in America; about half of
these are AM stations, and most of them are co-owned and operated with FM
affiliates. Many AM radio stations lose money; about 1,200 of them have a
news/talk format, the only format to emerge in the past 20 years which has
consistently demonstrated the potential for profit on AM stations -- which do
not have the bandwidth required for the successful programming of music formats.
(Source: Broadcasting & Cable 1996 Yearbook.) Complicating this inequity has
been the inclination of packaged goods advertisers to concentrate their messages
on younger audience segments, as they have on television. Thus, the share of
advertising revenues flowing to AM stations has steadily declined since 1975,
and joint AM/FM licensees have concentrated their energies on FM programming.
Operators spend relatively little on AM program content. In fact, almost 1,000
AM operators merely "simulcast" on their AM outlets the programming that is
produced on their FM outlets, although the Federal Communications Commission
("FCC") frowns on the practice.
The limited local spending on local AM programming content has provided
a major opportunity for programmers who provide a national service distributed
inexpensively by satellite. As a result, AM radio, once thought of as the
prototypically local medium, is today heavily reliant on national programs.
Most syndicated programs are provided to the local affiliate on a
barter (free, in exchange for advertising time) basis. Typically, the national
program receives one-quarter to one-half of the total commercial time (up to 15
minutes total) available per hour in exchange for providing the program content
itself. Some programs are distributed on a cash basis only. Talk radio programs
can be broken down into several categories -- entertainment/humor,
advice/information, host opinion and listener driven.
Several networks have sprung up to provide additional syndicated
programming on a barter basis, including Talk America, Sun Network, Chancellor
Radio Network, Talk Radio Network and the Business Radio Network. These networks
typically sell production and transmission services to the program hosts, who
then sell national advertising time to cover their costs.
Syndicated talk shows air from one to six hours per day -- most often
two to three hours -- and most have 15 to 60 local affiliates. Most affiliates
are in medium to small markets or cover portions of larger markets (radio
coverage areas are substantially smaller than TV coverage areas). The Company
believes station operators and programmers face a paradox in designing talk
radio formats. According to listener surveys at the station level and in the
media which cover them, controversial programs draw the largest audiences and
are therefore the most desirable. However, most nationally syndicated
advertisers avoid controversial program formats for fear of having their
product(s) identified with a particular controversial
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political viewpoint. Thus, nationally syndicated talk shows may have great
difficulty selling their advertising time.
As a recently formed, development stage company, the Company has only
recently begun to have business activities. Many of these activities are those
that were assigned from HCC, incorporating pre-existing business relations,
contractual rights and opportunities. In that context, ATB has been producing
and distributing a number of radio shows as described above or has a number
under development. To expand those activities and to create a focus, the talk
radio programs have been cross marketed to prospective radio stations and
newspapers under the trade style, the "Heartland Radio Network" ("HRN"). Under
those pre-existing agreements, ATB enters into the contracts and the Company
receives various percentages of the gross revenues generated. As described
above, those interrelated transactions constitute an affiliated relationship
among the Company, ATB and HCC. Because ATB is an integral part of the
communications business contemplated by the Company, it is possible that a
merger between the two will be affected at some time in the future. Because the
communications activities developed by HCC have already been spun-off and HCC
will continue to function as a merchant bank in other areas, it is unlikely that
a merger or other combination will occur between the Company and HCC.
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.
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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 distressed AM licensed stations and
converting them to block-time sales operations. Lundgren, a radio industry
veteran, is replicating a station conversion formula successfully employed in
the Houston market over the past three years. The Company will earn fees for
arranging the financing for station 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.
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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 in the Initial Public Offering, 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.
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 the Initial Public Offering 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 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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(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
the Initial Public Offering is completed).
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.
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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 the Initial Public
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.
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.
(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).
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
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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.
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.
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 Initial Public Offering 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.
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
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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.
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.")
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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.
Employees
As of December 31. 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.
Additional Business Risks
The Company's business is subject to the following risks in addition to
those discussed above and elsewhere in this report.
(1) Limited History Of Operation; Net Losses To Date. While activities (teen and
sports week weekly supplements) in preparation have been 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
December 31, 1997, have generated aggregate losses of $. 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). In
addition, the Company's future success will depend upon many factors, including
those which may be beyond its control or which cannot be predicted at this time,
such as increased levels of competition (including the emergence of additional
competitors, changes in economic conditions, emergence of new technologies and
changes in governmental regulations).
(2) Going Concern Report Of Independent Certified Public Accountants. The
factors described above in "Limited History Of Operations; Activities'
Historical Net Losses" raise substantial doubt about the Company's ability to
continue as a going concern. In this regard, See the Report of Independent
Certified Public Accountants accompanying the Company's audited financial
statements appearing elsewhere herein which cites substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance that
the Company will achieve profitability in the future, if at all. As a result of
these and other factors, there can be no assurance that the Company's proposed
activities and/or acquisitions will be successful or that the Company will be
able to achieve or maintain profitable operations. If the Company fails to
achieve profitability, its growth strategies could be materially adversely
affected. (See "Management's Discussion And Analysis Of Financial Condition And
Prospective Results Of Operations.")
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(3) Need For Additional Capital. The Company's capital resources are not
adequate to fully implement its business plan. While $12,500,000 from the
Initial Public Offering would be sufficient to pursue the specific opportunities
already targeted and described above, 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 in the Initial Public Offering, it is subject to a $2,000,000
minimum. If such minimum is not achieved during the up to nine (9) month Initial
Offering Period, any 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. If the minimum is achieved, the Company believes it
will have sufficient funds for 12 to 18 months of operation but at a reduced
level than would be the case, of course, for the maximum offering.
(5) Possible Adverse Impact Of Penny Stock Regulation. The Shares being offered
in the Initial Public Offering 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. 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
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contains non-compete provisions) with each of Michael L. Foudy, Gerald Garcia,
Bradford W. Baker and Bradley B. Niemcek; the loss of the services of any such
key personnel could have a material adverse effect upon the Company. The Company
maintains key man life insurance of $1,000,000 on Mr. Foudy. These employment
agreements contain non-compete provisions; however, there can be no assurance
that the Company will be able to retain such employees or prevent them from
competing with the Company in the event of their departure.
(7) Additional Investment Opportunities. As a result of the Initial Public
Offering, the Company is expected to experience significant expansion, including
expansion into certain activities which neither the Company nor its management
has previously operated. (See "The Company" generally.) In addition, the Company
is pursuing additional opportunities for expansion through the acquisition of
additional communications and/or management companies and, to that end, is
expected to be regularly involved in discussions with third parties regarding
potential acquisitions. Although no agreements have been reached regarding any
such potential acquisition, in light of the Company's pursuit of additional
acquisitions and funding in this and future offerings, it is likely that the
Company will experience significant expansion in the future. It is possible (as
a result of these recent preliminary activities -- and potential future
acquisitions) that the Company's management will be required to manage a larger
business operation than historically has been the case. There can be no
assurance that the Company will be able to effectively implement the
organizational and operational systems necessary for optimal management
integration of its expanded portfolio of activities.
(8) Unspecified Future Acquisitions. 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.
(9) Conflicts Of Interest. Certain inherent and potential conflicts of interest
exist with respect to operations of the Company's business. These include: (i)
the interest of certain current or former affiliates in the contemplated
activities of the Company; (ii) certain members of management are not required
to devote full time to the company's activities; and (iii) there are, as of
March 31, 1998, significant overlapping ownership interests between the Company,
HCC, ATB Productions, L.L.C. ("ATB") and Xpress Ventures, Inc. (See "The
Company".)
(10) Competition. The Company's business plan spans a variety of businesses,
many of which overlap and are highly competitive. The Company faces substantial
competition from a number of well-established, well-financed companies, many of
whom have greater resources and are more established than the Company. Increased
competition by existing and future competitors could materially and adversely
affect the Company's ability to achieve profitability. For example, to the
extent that ownership of radio stations is consolidated among only a few owners,
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
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ratings and share of the overall advertising revenue within its market.
Similarly, the broadcasting and newspaper publishing industry are highly
competitive businesses. The Company will compete for listeners and/or readers
and advertising revenue directly with other radio networks, print and other
media, within their respective markets. The Company's audience ratings and
market share are subject to change, and any adverse change in a particular
market could have a material and adverse effect on the revenue of the Company
and/or publishers located in that market. There can be no assurance that any one
of the Company's properties will be able to attain, maintain and/or increase its
current audience ratings, readership and advertising revenue market share. (See
"The Company" generally.)
(11) 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.
(12) Market Studies; Due Diligence Reviews. In formulating its business plan,
the Company has relied on the judgment of management. No formal, independent
market studies concerning the demand for the Company's proposed products and
services have been conducted; however, market studies are expected to be
employed in the future. Moreover, directly or indirectly, the Company will use
certain proceeds of its initial public offering to perform on-going due
diligence with regard to its proposed activities and/or contemplated future
acquisitions. While the Company's business plan is believed feasible, to the
extent that the Company determines any or part of its business plan is not
feasible, the Company will be unable to develop in accordance with its business
plan and investors may lose all or a portion of their investment in the Company.
(13) Dividends At Discretion Of Management; No Current Plans To Pay Dividends.
Dividends, if any, to Shareholders are in the discretion of management. To
conserve funds for its contemplated activities, management does not presently
intend to pay dividends. 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).
(14) Cyclicality. Advertising revenues of the Company, as well as those of the
media generally, are often cyclical and dependent upon general economic
conditions. Historically, advertising revenues have increased with the beginning
of an economic recovery, principally with increases in classified advertising
for employment, housing and automobiles. Decreases in advertising revenues have
historically corresponded with general economic downturns and regional
recessions and local conditions. Management believes, however, that the
Company's pricing strategies, distribution, production cost structure, marketing
strategy and management's experience mitigate, to some degree, the effects of an
economic downturn to the extent such downturn is regional. Moreover, the diverse
nature of its targeted businesses -- talk radio, a satellite distribution
system, targeted print products, management and marketing services, Internet and
related media components -- should reduce the cyclical risk often associated
with communications companies.
(15) Control By The Principal Stockholders. Prior to the Initial Public
Offering, individual officers, directors and more than 10% shareholders (the
"Principal Stockholders") owned in the aggregate approximately 42.3% of the
Shares. Upon completion of the Initial Public Offering, the Principal
Stockholders' and their
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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.
(16) 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.)
Item 2. PROPERTIES
The Company rents its office facilities at market rates. Such leased office
space is adequate, the Company believes, to satisfy its needs for the
foreseeable future.
Item 3. LEGAL PROCEEDINGS
There has not been any material civil, administrative or criminal
proceedings concluded, pending or on appeal against the Company or its
affiliates and principals.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997 fiscal year.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
In connection with the Initial Public Offering, the Company filed a
Registration Statement on Form S-1, SEC File No. 333-8935, which was declared
effective by the Commission on February 13, 1998.
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As of March 31, 1998, the Company's shares are being offered on a best
effort basis by Northridge Capital Corporation and other selected brokers. The
Company is in the preliminary stages of its Initial Public Offering and has not
yet begun to accept orders for its common shares. Consequently, the Company's
shares are not yet traded on any market and there is no established public
trading market for such common shares. Furthermore, the Company does not expect
such a market to exist for 6 to 18 months.
(b) Holders
As of March 31, 1998, there were One hundred forty-two (142) holders of
record of the Company's Common Stock.
(c) Dividends
The Company has never paid dividends on its common shares, intends to
retain future earning for use in its business and does not anticipate paying any
such dividends for the foreseeable future.
Item 6. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Form 10-K and the Financial Statements of
the Company and Notes thereto referred to in Item 8 and included in Item 14 of
this Form 10-K. The selected financial data for the periods ended December 31,
1996 and 1997 have been derived from the Company's financial statements, which
have been audited by independent certified public accountants and are included
elsewhere in this Prospectus.
HCMI (1)(4)
Date of Formation Year Ended
Income Statement Data: (3/27/96) Through 12/31/96 12/31/97
-------------------------- --------
Revenue $ 3,507 $ 9,908
Costs and Expenses $ 321,421 $ 1,130,596
Loss from Operation (1) $ (317,914) $ (1,120,688)
Interest Expense (Income), net $ (2,899) $ (13,724)
Net Loss (2) $ (315,015) $ (1,106,964)
Net Loss Per Share $ (0.25) $ (.81)
Common and common equivalent
shares outstanding (3) 1,270,503 1,360,373
Balance Sheet Data: As of 12/31/96 As of 12/31/97
-------------- --------------
Working Capital (Deficiency) $ (516,327) $ 1,216,029
Total Assets $ 797,964 $ 431,317
Stockholders' Equity (Deficit) $ 275,143 $ (800,571)
Accumulated Deficit $ (315,015) $(1,421,979)
(1) Includes $618,690 in write-off of deferred offering costs and $185,958 in
bad debt expense in 1997.
(2) There have been no, nor are there expected to be, cash dividends.
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(3) Based upon the weighted number of shares outstanding during the period,
adjusted retroactively for the reverse stock split approved March 25, 1997.
(4) The financial statements from which the above information has been derived
assume the Company will continue as a going concern. However, the Company
has incurred losses since inception. Such factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. In that regard, see "Report of Independent Certified Public
Accountants" accompanying the Company's financial statements 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 and adequate financing in the future. And, if the Company
fails to achieve these, their growth strategies would be materially
adversely affected.
(5)
Item 7. 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.
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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 the year ended December 31, 1997:
Periods Ended For the period 3/27/96
---------------------- (date of formation)
12/31/96 12/31/97 through 12/31/97
-------- -------- ----------------
Net cash provided by
(used in) operating activities ($417,290) $16,425 ($400,865)
Net cash provided by (used in)
investing activities,
principally loans to ATB (172,780) (5,594) (178,374)
Net cash provided by financing
activities, principally from
exercise of warrants 590,158 - 590,158
--------- --------- -------
Increase in cash $ 88 $10,831 $ 10,919
========= ========= =========
The development rights had only a nominal intrinsic value as of the date
they were assigned to the Company because of the significant anticipated future
development costs and, therefore, such rights have no carrying value on the
Company's balance sheet. The Media Concepts cannot be developed without the
capital expected to be raised by the Company's IPO. The extent to which the
Company can realize any return on the development rights is directly related to
the amount of funding obtained through the Company's offering of its shares to
the public, as well as its ability to successfully develop the Media Concepts.
Subsequent to the assignment, ownership of the Company was "spun off" to
the shareholders of HCC and HCC's stock ownership was retired. As part of the
spin-off, the Company issued shares of its common stock (the "Shares") to HCC's
common and preferred shareholders equal to shares they currently held in HCC on
a one-for-one basis. Holders of HCC preferred stock also received warrants to
buy the Company's common stock on the basis of one warrant for each two HCC
preferred shares held, resulting in 1,394,500 warrants for 2,789,000 outstanding
shares of HCC preferred stock. Holders of non-contingent warrants to purchase
HCC shares were likewise provided the same number of warrants to purchase shares
of the Company, at exercise prices identical to those contained in the HCC
warrants.
During May 1996, the Company notified its warrant holders of its intent to
do an initial public offering ("IPO") stating that the warrant holders had until
July 6, 1996 to exercise their warrants at $.50 per share versus $4 per share
thereafter (80% of the then 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.
22
<PAGE>
(b) Results of Operations
Since its inception (March 27, 1996) through December 31, 1997, the
Company's activities have been organizational with the Company expending funds
principally to develop a business plan and to raise capital. Where such
expenditures relate to capital raising and are both incremental and direct, they
have been treated as deferred offering costs in the accompanying balance sheets.
Where such expenditures are indirect and administrative in nature, they have
been expensed in the accompanying statements of operations. Such expensed costs,
together with the write off of $618,680 of such expenditures that had been
previously deferred and the provision of a $185,958 reserve for receivables, as
discussed below, account for the majority of the $1,421,979 deficit accumulated
by the Company during the development stage through December 31, 1997.
During the year ended December 31, 1997, the Company, in recognition of the
length of the IPO process, wrote off $618,690 of deferred offering costs, the
balance accumulated as of December 31, 1996. New deferred offering costs
amounted to $407,454 during the year ended December 31, 1997.
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 year ended December 31,
1997, ATB repaid $3,410 of this loan. The $169,370 outstanding balance is due in
December 1999. At December 31, 1997, the Company concluded that the recorded
assets and known business of ATB did not, at the present time, support the
assured collectibility of the receivables from ATB, including the $169,370
advanced under the Credit Agreement and $16,588 from accrued interest under the
Credit Agreement and unpaid fees under the HCC Agreement. Although an affiliate
of ATB received consideration subsequent to December 31, 1997 for the sale of
certain radio properties it had sold, management of the Company again concluded
there was not yet sufficient assured asset value and business within ATB to
ensure the collectibility of these receivables. Consequently, the Company, as of
December 31, 1997, provided a reserve for these receivables in the amount of
$185,958. The Company, however, intends to vigorously pursue, and expects to
fully collect, these receivables. Any repayments of these receivables will be
recorded as income when received.
When the deficit (i.e. cumulative net losses) accumulated during the
development stage at December 31, 1997 ($1,421,979) is (1) increased by the
total offering costs that were deferred through December 31, 1997 of $1,026,144
($618,690 in 1996 and $407,454 in 1997) and (2) reduced by the 1996 and 1997
non-cash items described below, aggregating $2,047,258, the net cash used in
operations of $400,865 for the period from inception through December 31, 1997
is determined.
Non-cash Items
--------------
Write-off offering costs $ 618,690
Bad debt expense 185,958
Increase in liabilities 1,231,888
Compensation expense funded
by stock issuance 31,250
Other (20,528)
-----------
Total $2,047,258
===========
23
<PAGE>
The primary differences between the 1996 and 1997 periods for the net cash
provided by (used in operations) was, first, the 1997 loss of $1,106,964
contained the large non-cash write-off and reserve provision of $618,690 and
$185,958, respectively. Without these, the net loss for both 1996 and 1997 would
have approximated $300,000. The second major difference between 1996 and 1997
was that more cash was available in 1996 and consequently more of the 1996
expenditures were funded with cash resulting in $417,920 of cash being used in
operations in 1996. In 1997, the expenditures were principally funded by an
increase in liabilities resulting, together with the large non-cash 1997
expenses described above, in $16,425 of cash actually being provided by
operations in 1997. The source of cash in 1996 was principally the exercise of
warrants ($565,200) which did not occur in 1997 since most had been exercised in
1996. This 1996 cash was also used to fund ATB Credit Agreement in 1996
($172,780) while there was no new fundings in 1997 and, in fact, there was a
small repayment.
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. 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 periods ended December 31, 1996 and 1997 because of
the existence of net operating losses.
(c) Recent Accounting Pronouncements
Recent accounting pronouncements and their effect on the Company are
discussed below.
24
<PAGE>
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.
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
25
<PAGE>
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. Management believes the impact, if any, would
not be material to the financial statement disclosures. Results of operations
and financial position will be unaffected by implementation of these standards.
(d) Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. While uncertainty exists
concerning the potential effect of such compliance, the Company does not
currently believe that year 2000 compliance will result in a material adverse
effect on business, financial condition or results of operation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, together with related notes and report
of BDO Seidman, LLP, independent auditors, are listed in Item 14(a).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
Information required by this item will be contained under the captions
"Election of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's definitive proxy statement with respect
to the Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement"),
and is hereby incorporated by reference thereto. The Proxy Statement will be
filed with the Commission not later than April 30, 1998.
(b) Management
The following table reflects the names, ages and positions of the Company's
executive officers. See the pertinent individual's specific biographical
information which follows:
Name Age Position
---- --- --------
Michael L. Foudy 47 President, Chief Executive Officer and
Chairman of the Board of Directors
26
<PAGE>
Gerald Garcia 55 Vice President
Bradley B. Niemcek 58 Vice President-Operations and Director
Bradford W. Baker 43 Secretary-Treasurer
Linda G. Moore 51 Assistant Treasurer and Chief Financial
Officer
(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, 1977 and now co-hosts "Newsmaker" which is broadcast on 119 radio
stations by the United Broadcasting Network. He has diverse experience in public
affairs, integrated marketing communications, strategic planning, management,
entrepreneurship, finance, writing and broadcasting. Mr. Foudy's accomplishments
include creation of a 30,000 member Utility Shareholder's Association to
intervene in rate legal cases and winning over $400 million in increased rate
base. During the 1992 Presidential primary campaign, he was actively engaged in
organizing a movement to draft an independent candidate for President (which
activities generally would permit an independent candidate for President to
obtain ballot access in all U.S. jurisdictions).
During 1974, while in law school, Michael Foudy founded a small marketing
communications Company in Tucson. When he sold his interest in the Company
thirteen years later, WFC/Westcom had grown to be the largest public
affairs/public relations Company in Arizona with billings of over $7 million,
with offices in Tucson, Phoenix and San Diego, a staff of twenty-five
professionals, a base of "blue chip" clients and a history of profitability.
Since 1987, Mr. Foudy has undertaken a variety of projects on behalf of
distressed clients. These range from a comprehensive marketing audit for the
owners of Garfinckel's Department Stores in Washington, D.C. to preparation of
promotional and sales materials for the liquidation of $86 million of commercial
property and the auction of 4,000 residential properties once owned by First
City Bank of Houston, Texas. He directed the successful repositioning of a
master planned golf and retirement community owned by Fairfield Homes in Green
Valley, Arizona and designed a comprehensive marketing communications program
which doubled home sales for the troubled home builder. He also supervised the
restructuring/liquidation of Compass Publishing based in Chicago, Illinois and
Sarasota, Florida.
Mr. Foudy wrote the book Reinventing America which was published by the
Institute for American Democracy. He serves on the Board of Directors of
Heartland Capital Corporation, which he co-founded, and is Of Counsel to the DCM
Group, an integrated communications strategy firm based in McLean, Virginia. Mr.
Foudy has been active in a variety of charitable and community organizations
including the Tucson Free Clinic, Tucson Community Food Bank, Arizona Opera
Company and Southwestern Film Consortium. He currently serves on the foundation
for American Liberty and the American Initiative Committee Board of Directors
and is Editor of the American Initiative Newsletter.
27
<PAGE>
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 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
28
<PAGE>
entrepreneurial enterprises in the sports promotion field, television
syndication and in newsletter publishing. In 1982, he founded Newslink, Inc. to
develop and market a satellite distribution service to connect public relations
enterprises with the nation's local TV newsrooms. By 1988, the firm had expanded
to include offices in New York and Washington, D.C. and diversified into
providing facilities management satellite services for broadcast and cable TV
clients as well; its largest client was Cable News Network ("CNN"). Mr. Niemcek
sold his interest in Newslink in 1988 and formed TV People, Inc., a television
facilities management firm and, from his new base in the Washington, D.C. area,
consulted on the development of a number of local and regional political
campaigns.
Bradford W. Baker, born 1955, Secretary -Treasurer of the Company, attended
the University of Dallas from 1974 - 1975. Mr. Baker's professional experience
spans 20 years of advertising, sales management and marketing. He is currently
President and partner of The Creative Network, Inc., an award winning
full-service advertising agency located in Knoxville, Tennessee. Prior to
helping form The Creative Network, Mr. Baker was a VP/Account Supervisor at
Charles Tombras Advertising, Inc. in Knoxville and at Caraway Kemp
Communications in Jacksonville, Florida. He has worked on both the client and
agency sides of the business and won several awards and distinctions including:
Who's Who in Advertising, a Presidential Citation for Private Sector Initiative,
two 1990 Telly Awards, a 1992 National ADDY award from the American Advertising
Foundation and a 1996 Knoxville ADDY Best of Show. Mr. Baker has extensive
experience in creating, marketing and publishing various media vehicles. These
include:
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.")
0 The Star: Published for MasterCraft Boat Company, this quarterly
publication has a circulation of 25,000. The Star, generally recognized
as one of the best publications within the boating industry, is
designed, written and produced entirely by he Creative Network.
0 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
29
<PAGE>
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.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation," and is hereby incorporated
by reference thereto. The Proxy Statement will be filed with the Commission not
later than April 30, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners And
Management," and is hereby incorporated by reference thereto. The Proxy
Statement will be filed with the Commission not later than April 30, 1998.
Item 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement under the caption "Certain Relationship and Related Transactions," and
is hereby incorporated by reference thereto. The Proxy Statement will be filed
with the Commission not later than April 30, 1998.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this report on Form 10-K
immediately following the signature page and Exhibit Index:
(a)(1) Financial Statements:
Report of Independent Certified Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1997 F-4
Statements of Operations for the period March 27, 1996 (date of
formation) through December 31, 1996 and the year ended December
31, 1997 and the period March 27, 1996 (date of formation) through
December 31, 1997 F-5
Statements of Stockholders' Equity for the period March 27, 1996
(date of formation) through December 31, 1996 and the year ended
December 31, 1997 F-6
Statements of Cash Flow for the period March 27, 1996 (date of
formation) through December 31, 1996 and the year ended December
31, 1997 and the period March 27, 1996 (date of formation) through
December 31, 1997 F-7
Summary of Accounting Policies F-9
Notes to Financial Statements F-14
30
<PAGE>
(a)(2) Financial Statement Schedule
Valuation and Qualifying Accounts and Accountant's report thereon F-25
Other schedules are omitted because they are not applicable or the
required information is shown in the financial statement or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation *
3.2 Amendments to Certificate of Incorporation *
3.3 Bylaws of Registrant *
3.4 Form of stock certificate *
10.1 Executed Escrow Agreement among the Registrant, the Selling
Agent and George Mason Bank, McLean, Virginia (the Escrow Agent) *
10.2 Intentionally not used
10.3 Employment Agreement between Registrant and Michael L. Foudy. *
10.4 Employment Agreement between Registrant and Bradford W. Baker *
10.5 Employment Agreement between Registrant and Bradley B. Niemcek. *
10.6 Assignment Agreement between Registrant and Heartland Capital
Corporation. *
10.61 Amended and Restated Teen Magazine Venture Agreement between
Heartland Capital Corporation and Xpress Ventures, Inc. *
10.611 License Agreement between Xpress Ventures, Inc. and Gerald
Garcia and Bradford W. Baker. *
10.62 Amended and Restated National Sports Magazine Venture
Agreement between Heartland Capital Corporation and Xpress
Ventures, Inc. *
10.63 Representation Agreement between Heartland Capital Corporation
and ATB Productions, L.L.C. *
10.66 Credit Agreement between Heartland Capital Corporation and
ATB Productions, L.L.C. *
10.68 Employment Agreement between Registrant and Gerald Garcia. *
10.69 Barter Trade Agreement between ICON International, Inc. and
Registrant *
27.1 Financial Data Schedule and Accountant's report thereon F-25
- -------
* Incorporated by reference from Company's Registration Statement on Form S-1
(File No. 333-8935) and amendments thereto.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
Date: April 14, 1998
Signature
- ---------------------
Michael L. Foudy President, Chief Executive April 14, 1998
Officer and Director
- ---------------------
Linda G. Moore Chief Financial Officer and April 14, 1998
Assistant Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
- ---------------------
Bradley B. Niemcek Director April 14, 1998
- ---------------------
Thomas Burgum Director April 14, 1998
- ---------------------
B. Eric Sivertsen Director April 14, 1998
- ---------------------
Sharon M. Murphy Director April 14, 1998
32
<PAGE>
Exhibit Index
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation *
3.2 Amendments to Certificate of Incorporation *
3.3 Bylaws of Registrant *
3.4 Form of stock certificate *
10.1 Executed Escrow Agreement among the Registrant, the Selling
Agent and George Mason Bank, McLean, Virginia (the Escrow Agent) *
10.2 Intentionally not used
10.3 Employment Agreement between Registrant and Michael L. Foudy. *
10.4 Employment Agreement between Registrant and Bradford W. Baker *
10.5 Employment Agreement between Registrant and Bradley B. Niemcek. *
10.6 Assignment Agreement between Registrant and Heartland Capital
Corporation. *
10.61 Amended and Restated Teen Magazine Venture Agreement between
Heartland Capital Corporation and Xpress Ventures, Inc. *
10.611 License Agreement between Xpress Ventures, Inc. and Gerald
Garcia and Bradford W. Baker. *
10.62 Amended and Restated National Sports Magazine Venture
Agreement between Heartland Capital Corporation and Xpress
Ventures, Inc. *
10.63 Representation Agreement between Heartland Capital Corporation
and ATB Productions, L.L.C. *
10.66 Credit Agreement between Heartland Capital Corporation and
ATB Productions, L.L.C. *
10.68 Employment Agreement between Registrant and Gerald Garcia. *
10.69 Barter Trade Agreement between ICON International, Inc. and
Registrant *
27.1 Financial Data Schedule and Accountant's report thereon F-25
-------
* Incorporated by reference from Company's Registration Statement on Form S-1
(File No. 333-8935) and amendments thereto.
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
----
<S> <C>
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company)
Independent Certified Public Accountants' Report F-2
Balance sheets as of December 31, 1996 and 1997 F-4
Statements of operations for the period March 27, 1996 (date of formation)
through December 31, 1996, the year ended December 31, 1997 and the period March
27, 1996 (date of formation) through December 31, 1997 F-5
Statements of changes in shareholders' equity for the period March 27, 1996
(date of formation) through December 31, 1996 and the year ended December 31,
1997 F-6
Statements of cash flows for the period March 27, 1996 (date of formation)
through December 31, 1996, the year ended December 31, 1997 and the period March
27, 1996 (date of formation) through December 31, 1997 F-7
Summary of accounting policies F-9
Notes to financial statements F-14
Financial statement schedules
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are
not required or are not applicable, or the required information has been
included in the financial statements or notes thereto F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders
HEARTLAND COMMUNICATIONS & MANAGEMENT, INC.
(A Development Stage Company)
We have audited the accompanying balance sheet of HEARTLAND COMMUNICATIONS
& MANAGEMENT, INC. (A Development Stage Company) as of December 31, 1996 and
1997, 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 and the year ended December 31, 1997. 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 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 COMMUNICATIONS &
MANAGEMENT, INC. (A Development Stage Company) as of December 31, 1996 and 1997
and the results of its operations and its cash flows for the period March 27,
1996 (date of formation) through December 31, 1996 and the year ended December
31, 1997 in conformity with generally accepted accounting principles.
F-2
<PAGE>
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has had no substantial
operations and has incurred significant operating losses and working capital
deficits since formation. In addition, the Company expects to fund development
expenditures and incur additional losses until its operations are able to
generate sufficient revenue and cash flows to meet anticipated expenditures and
other cash requirements. The Company does not currently have sufficient cash
reserves to cover such anticipated expenditures and cash requirements,
necessitating additional capital or financing. These factors, in addition to
other factors discussed in Note 2 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding these matters are also discussed in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Washington, D.C.
April 10, 1998
F-3
<PAGE>
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash $ 88 10,919
Accounts receivable from related parties 6,406 -
Deposits - 4,940
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,494 15,859
- -------------------------------------------------------------------------------------------------------------------
Note receivable from related party (Note 3) 172,780 -
Office equipment, less accumulated depreciation of $1,000 (Note 9) - 8,004
Deferred offering costs (Notes 7 and 8) 618,690 407,454
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 797,964 $ 431,317
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 293,235 $ 586,883
Accrued payroll 8,970 157,175
Accounts payable to related parties (Note 8) 220,616 487,830
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 522,821 1,231,888
- -------------------------------------------------------------------------------------------------------------------
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
and 6,190,900 shares issued at December 31, 1996 and 1997, respectively
and 1,326,811 and 1,389,314 shares outstanding at December 31, 1996
and 1997, respectively 1,327 1,389
Additional paid-in capital 588,831 620,019
Deficit accumulated during the development stage (315,015) (1,421,979)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 275,143 (800,571)
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 797,964 $ 431,317
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the period For the period
March 27, 1996 March 27, 1996
(date of formation) For the year (date of formation)
through ended through
December 31, December 31, December 31,
1996 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Marketing commissions received from
related party (Note 3) $ 3,507 $ 9,908 $ 13,415
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries 165,084 193,840 358,924
General and administrative 156,337 132,108 288,445
Write-off of offering costs (Note 8) - 618,690 618,690
Bad debt expense (Note 3) - 185,958 185,958
- -------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 321,421 1,130,596 1,452,017
- -------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (317,914) (1,120,688) (1,438,602)
Interest income (Note 3) 2,899 13,724 16,623
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (315,015) $ (1,106,964) $ (1,421,979)
===================================================================================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,270,503 1,360,373 1,299,405
===================================================================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (.25) $ (.81) $ (1.09)
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-5
<PAGE>
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Period March 27, 1996 (date of formation) through December 31, 1996 and
the year ended December 31, 1997
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Deficit
Common Accumulated
Subscribed Shares $0.001 Additional During the
Common Issued and Par Paid-in Development
Shares Outstanding Value Capital Stage Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscription to common
shares by Heartland
Capital Corporation 1,030,086 - $ 1,030 $ 3,728 $ - $ 4,758
===================================================================================================================
Payment of subscription (1,030,086) 1,030,086 - - - -
Cancellation of shares - (1,030,086) (1,030) (3,728) - (4,758)
Spin-off - 1,030,086 1,030 3,728 4,758
Other issuance - 43,338 43 157 200
Exercise of warrants - 253,387 254 584,946 - 585,200
Net loss - (315,015) (315,015)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 - 1,326,811 1,327 588,831 (315,015) 275,143
Shares issued to directors - 62,503 62 31,188 - 31,250
Net loss - - - - (1,106,964) (1,106,964)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 - 1,389,314 $1,389 $620,019 $(1,421,979) $(800,571)
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-6
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period For the period
March 27, 1996 March 27, 1996
(date of formation) For the year (date of formation)
through ended through
December 31, December 31, December 31,
1996 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (315,015) $ (1,106,964) $ (1,421,979)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATIONS
Shares issued to directors - 31,250 31,250
Depreciation - 1,000 1,000
Provision for uncollectible accounts - 185,958 185,958
Increase in accounts receivable from related parties (6,406) (10,182) (16,588)
Increase in deposits - (4,940) (4,940)
Increase in accounts payable 293,235 293,648 586,883
Increase in accrued payroll 8,970 148,205 157,175
(Increase) decrease in deferred offering costs (618,690) 211,236 (407,454)
Increase in accounts payable to related parties 220,616 267,214 487,830
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (417,290) 16,425 (400,865)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures - (9,004) (9,004)
(Increase) decrease in loans to related party (172,780) 3,410 (169,370)
- -------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (172,780) (5,594) (178,374)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period For the period
March 27, 1996 March 27, 1996
(date of formation) For the year (date of formation)
through ended through
December 31, December 31, December 31,
1996 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in subscription receivable and
other issuance $ 4,958 $ - $ 4,958
Proceeds from exercise of warrants 585,200 - 585,200
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 590,158 - 590,158
- -------------------------------------------------------------------------------------------------------------------
Increase in cash 88 10,831 10,919
CASH AND CASH EQUIVALENTS, beginning of period - 88 -
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 88 $ 10,919 $ 10,919
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-8
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
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 1997 and
the period March 27, 1996 (date of formation) through December 31, 1997. 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.
F-9
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
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 AND NOTES RECEIVABLE
HCMI provides a reserve for doubtful accounts based on a specific review of
the expected collectibility of individual outstanding accounts.
OFFICE EQUIPMENT
Office equipment is carried at cost. Depreciation is recorded over the
estimated useful lives of the assets using the straight-line method.
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 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).
F-10
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
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).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company include a note receivable from a
related party. In the opinion of management, the fair values of HCMI's financial
instruments as of December 31, 1996 are not materially different from the
carrying amounts shown in the accompanying financial statements.
F-11
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123). SFAS 123 will begin to affect the Company when its
grants options under the 1997 Omnibus Stock Plan. No options have been granted
to date. The Company will adopt only the disclosure provisions of SFAS 123 and
account for stock-based compensation using the intrinsic value method set forth
in APB Opinion 25.
In March 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 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 stockholders 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. The Company adopted the provisions for computing earnings per share
set forth in SFAS 128 in December 1997. There is no difference in basic and
diluted 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, established standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participants rights, call prices and dates, conversions
or exercise prices and redemptions requirements. Adoption of SFAS 129 will have
no effect on HCMI as it currently discloses the information specified.
F-12
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
SUMMARY OF ACCOUNTING POLICIES
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), 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 SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management believes the impact, if any, would
not be material to the financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
F-13
<PAGE>
- -------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 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 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 $1,106,964 during the period March 27, 1996 (date of formation)
through December 31, 1996 and for the year ended December 31, 1997,
respectively. At December 31, 1996 and 1997, HCMI had a working capital deficit
of $516,327 and $1,216,029, respectively. As of December 31, 1996 and 1997, HCMI
had also expended $618,690 and $407,454 for direct incremental offering costs
whose recovery is dependent on the success of its IPO. 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
F-14
<PAGE>
- -------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 and HCC's exercise of warrants, HCC's sale of
preferred stock and warrants and other alternatives, such as the formation of
HCMI, including the transfer thereto of many of HCC's development options, with
HCMI, in turn, undertaking an IPO of a portion of its common stock. To preserve
operating funds, HCC and HCMI have developed a strategic plan which provides for
reductions of, and deferrals of payments for, expenditures and a prioritization
of development options.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary should HCMI be unable to
complete its proposed public offering and continue as a going concern.
3. 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 year ended December 31, 1997 amount to
$3,507 and $9,908, 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
F-15
<PAGE>
- -------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 December
31, 1997, interest payments of $13,450 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 1997, HCMI had advanced $172,780 and $169,370,
respectively, while HCC had advanced $338,695 and $434,248 as of December 31,
1996 and 1997, respectively. Although the total advances ($511,475 and $603,618
as of December 31, 1996 and 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 $13,724 during the period March 27, 1996 (date of formation) through
December 31, 1996 and the year ended December 31, 1997, respectively.
At December 31, 1997, the Company concluded that the recorded assets and
known business of ATB did not, at the present time, support the assured
collectibility of the receivables from ATB, including $169,370 advanced under
the Credit Agreement and $16,588 from accrued interest under the Credit
Agreement and unpaid fees under the HCC Agreement. Although an affiliate of ATB
received consideration subsequent to December 31, 1997 for certain radio
properties it had sold, management of the Company again concluded there was not
yet sufficient assured asset value and in the fourth quarter the Company
recorded a reserve of $185,958 related to these receivables. The Company,
however, intends to vigorously pursue and expects to fully collect these
receivables. Any repayments of these receivables will be recorded as income when
received.
F-16
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 shares of common
stock were issued to HCC. In conjunction with HCMI's spinoff to the shareholders
of HCC, on May 18, 1996, HCMI retired those shares and issued 1,030,086 shares
of common stock as follows: 426,280 shares to the existing common shareholders
of HCC and 603,806 shares to the preferred shareholders of HCC and 3,727,914
shares were issued into escrow on behalf of the HCC shareholders.
In addition, HCMI issued 1,394,500 warrants to the HCC preferred
shareholders who held contingent HCC warrants on the basis of 1 warrant for each
two HCC preferred shares. Each warrant shall entitle the holder to purchase an
additional share of common stock for $.50. During May 1996, HCMI notified these
warrant holders of its intent to do an initial public offering ("IPO") stating
that the holders had until July 6, 1996 to exercise their warrants at $.50 per
share versus $4 per share thereafter (80% of the expected IPO price of $5 per
share). On July 19, 1996, HCMI extended this warrant exercise period until July
23, 1996. Through July 23, 1996, warrants to purchase 253,387 after-split shares
(1,170,400 pre-split shares) were exercised for proceeds of $585,200.
F-17
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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.
On June 19, 1997, 62,500 shares of common stock were issued to various
members of the Board of Directors. The issuance of these shares resulted in
compensation expense of $31,250.
OUTSTANDING WARRANTS
A summary of the outstanding warrants as of December 31, 1996 and 1997 to
purchase HCMI Common Stock is as follows:
Original Exercise
Warrant Date Date of Price
Holder Issued Expiration* Shares Per Share
- --------------------------------------------------------------------------------
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
=========
*The terms of these warrants, and the contingent warrants discussed below, have
been modified in the reverse stock split which was approved in March 1997.
F-18
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
CONTINGENT WARRANTS
HCMI common stock which is contingently issuable as of December 31, 1996
and 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 founders reserved 600,000 shares of common stock
for a stock option plan. Conditions of grants, terms, exercise prices, etc. are
yet to be determined by the Board of Directors. The shareholders would be
required to approve the plan prior to granting options.
REVERSE STOCK SPLIT
In conjunction with the planned IPO (see note 8), 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.
F-19
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
The shareholders will also be reissued a number of shares equal to the
shares being surrendered (4,801,586 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 to these individuals as employees. 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
F-20
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 each with options to buy up to 12,500 shares of common stock. Terms,
including price, are yet to be determined by the Board of Directors.
6. INCOME TAXES
HCMI has no provision for income taxes for the period March 27, 1996 (date
of formation) through December 31, 1996 and the year ended December 31, 1997 due
to net operating losses generated in those periods. At December 31, 1997, HCMI
has net operating loss carryforwards of approximately $225,000 on a tax basis,
which expire in 2011 and 2012.
A reconciliation of the income tax benefit at the statutory rate to the amount
actually recorded is as follows:
Period Ended Year Ended
December 31, December 31,
1996 1997
- --------------------------------------------------------------------------------
Income tax benefit at statutory rate $ (110,000) $ (87,000)
State tax benefit (10,000) (55,000)
Increase in valuation allowance
related to deferred tax asset 120,000 442,000
- --------------------------------------------------------------------------------
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 and 1997.
F-21
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Period Ended Year Ended
December 31, December 31,
1996 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Net operating loss carry forw $ 58,000 $ 88,000
Reserve for bad debts - 73,000
Nondeductible expenses - 241,000
Cash basis accounting for income
tax purposes 62,000 40,000
- --------------------------------------------------------------------------------
120,000 442,000
Valuation allowance (120,000) (442,000)
- --------------------------------------------------------------------------------
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.
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
principally in conjunction with the public offering amounted to approximately
$107,000 and $260,000 as of December 31, 1996 and 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 approximately $54,000 and $45,000 as of December 31, 1996 and 1997,
respectively. These amounts are contained in deferred offering costs in the
accompanying balance sheets.
F-22
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
8. INITIAL PUBLIC OFFERING
As of February 13, 1998, HCMI began offering 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. The
registration statement under which these shares are being offered was declared
effective by the Securities and Exchange Commission on February 13, 1998.
Through April 10, 1998, no orders had been accepted for such shares. 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 1997, the net unpaid amount aggregated
$220,616 and $487,830, respectively. HCC's and HCMI's financial statements
reflect approximately $300,000 and $150,000 and of such costs from March 27,
1996 (date of information) through December 31, 1996 and during the year ended
December 31, 1997. Such costs have either been either specifically identified
or, where specific
F-23
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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.
9. OFFICE EQUIPMENT
Office equipment consists of the following at December 31, 1997 and 1997:
December 31, 1996 1997
- --------------------------------------------------------------------------------
Computers $ - $ 9,004
Less accumulated depreciation - 1,000
- --------------------------------------------------------------------------------
$ - $ 8,004
================================================================================
F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Heartland Communications &
Management, Inc.
The audits referred to in our report to Heartland Communications and
Management, Inc., dated April 10, 1998 which is contained in Item 8 of this Form
10-K, include the audit of the financial statement schedule listed in the
accompanying index for the year ended December 31, 1997. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audit.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Washington, D.C.
April 10, 1998
F-25
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND COMMUNICATIONS &
MANAGEMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning of Costs and Balance at
Year Expenses Deduction End of Year
- --------------------------------------------------------------------------------
Description
Year ended December 31, 1997
Allowance for doubtful
note receivable $ - $ 169,370 $ - $ 169,370
Allowance for doubtful
accounts receivable - 16,588 - 16,588
- --------------------------------------------------------------------------------
F-26
