SB-2: Optional form for registration of securities to be sold to the public by small business issuers
Published on February 10, 1999
Date Filed: February 8, 1999 SEC File No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM SB-2
Registration Statement Under the Securities Act of 1933
AMERICAN COMMUNICATIONS ENTERPRISES,
(Exact Name of Issuer as Specified in Its Charter)
7103 Pine Bluffs Trail, Austin, TX 78729 (512) 249-2344
(Address and Telephone Number of Issuer's
Principal Offices and Place of Business)
Corporate Service Center, Inc.
1475 Terminal Way
Suite E
Reno, Nevada 89502
( ) -
(Name, Address and Telephone Number of Agent for Service)
Approximate date of proposed sale to the public: As soon as this Registration
Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the box. |_|
CALCULATION OF REGISTRATION FEE
The registrant hereby amends this registration statement on such date oar dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a) ,
may determine.
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PROSPECTUS
AMERICAN COMMUNICATIONS ENTERPRISES, INC
Maximum of 10,000,000 shares of common stock
Price per share: $0.05.
Total proceeds if maximum sold: $500,000.
This is the Company's initial public offering so there is no public market for
the Company's shares. However, we hope to have prices for our shares quoted on
the bulletin board maintained by the National Association of Securities Dealers
after we complete our offering.
An investment in our Company is risky, especially given the young age of our
Company. Only people who can afford to lose the money they invest in our Company
should invest in our shares. A full discussion of the risks of owning our shares
begins at page of this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of our shares or determined if this
prospectus is truthful of complete. Any representation to the contrary is a
criminal offense.
We will probably sell the shares ourselves and do not plan to use underwriters
or pay any commissions. We will be selling our shares using our best efforts and
no one has agreed to buy any of our shares. There is no minimum amount of shares
we must sale so no money raised from the sale of our stock will go into escrow,
trust or another similar arrangement. We expect to end our offering no later
than June 30, 2000.
The information in this Prospectus is not complete and may be changed. We may
not sell our shares until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
our shares and it is not soliciting an offer to buy our shares in any state
where the offer or sale is not permitted.
, 1999.
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SUMMARY OF THE OFFERING
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RISK FACTORS:
The purchase of Shares in this Offering is highly speculative and involves a
high degree of risk for investors. Risk factors associated with this Offering
include, but are not limited to
o the Company is a development stage business with no operating history,
no revenues, and losses since inception.
o the dependence for success of the Company upon the receipt of all or
substantially all of the maximum proceeds of the Offering
o the need for substantial additional capital beyond the proceeds sought
in this Offering.
o no formal agreements or understandings to acquire any
radio stations and therefore no assurance of
effecting any radio station acquisitions.
o the fact that there can be no assurance that the
programming developed by the radio stations proposed
to be acquired will be popular with the public in
general
o best efforts Offering with no required minimum proceeds amount and no
escrow provision
o the dependents of the Company's success on successful marketing in
promotion
o reliance on management
o competition in the industry and general economic conditions
o potential conflicts of interest between management and the Company and
the fact that the Company, at present, has no independent directors
o the fact that existing management has effective control of the Company.
o the issuance of additional shares, thereby diluting the ownership
interests of potential shareholders.
o the resale under Rule 144 of restricted stock issued to the Company's
management.
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o the arbitrary determination of the Offering price.
o the lack of dividends paid with respect to the Company's stock.
o the lack of an existing market in the common stock of the Company
o the applicability of the "penny stock" rules to the Common Stock of the
Company. An investor may lose his entire investment.
PLAN OF DISTRIBUTION:
This is a best efforts underwriting, with no commitment by anyone to purchase
any shares. The shares will be offered and sold by the Company's
principal executive officers and directors, although the Company may
retain the services of one or more NASD registered broker-dealers as
selling agent(s) to effect offers and sales on behalf of the Company.
The Company will close the offering no later than June 30, 2000.
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RISK FACTORS
An investment in the shares involves a high degree of risk, including a
risk of loss of an investor's entire investment in the company. Prospective
investors should consider carefully, in addition to the other information
contained in this prospectus, the following risk factors before purchasing any
shares.
Development Stage Company. The Company was incorporated in October
1998, and is, therefore, a development stage company with no operating history
or revenues. The Company needs to receive substantially all of the Maximum
Proceeds of this Offering to proceed with its business plan and will require
substantial additional capital, for which no agreements or arrangements are
currently in place, to implement its business plan. The Company currently has no
agreements, understandings or arrangements with any person(s) to provide the
Company with additional financing which will be necessary to fully effectuate
the Company's business plan and no assurances are given that such funds will be
available, or if available, on terms that will be satisfactory to the Company.
In such event, the Company and its planned operations could be materially
adversely affected. No assurances can be given that the Company's business will
ultimately be successful or that the Company will ever be or remain profitable.
Accordingly, the Company's ability to continue as a going concern is dependent
upon it receiving the Maximum Proceeds of this Offering and/or securing
conventional financing, as to which no assurances of either are given.
Operating losses. As with most development stage companies, the Company
has experienced losses since inception. The Company has been dependent upon
loans from members of management in the aggregate amount of $6,140, to sustain
its development activities to date. In the Company's discretion, if the Company
receives the Maximum Proceeds, the entire principal amount of this loan,
including interest, may be repaid.
No Assurances of Radio Station Acquisitions. While the Company has
targeted approximately 4 radio stations in the state of Texas for acquisition
over approximately the next six (6) months after the effective date of this
Prospectus, no assurances are given that the Company will be successful in
acquiring any of such radio stations. While Company management has had and
continues to have ongoing discussions with the owners of such stations who have
expressed a willingness to sell such stations to the Company for the approximate
sales prices set forth herein, the Company does not currently have any binding
letters of intent, option agreements, purchase agreements, or any other formal
agreements or understandings concerning the acquisition of any radio stations.
The acquisition of radio stations will require significant funding beyond the
proceeds sought in this Offering, for which there are no financing arrangements
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currently in place. While the Company believes that the radio stations it has
currently targeted in the Texas market are not currently being targeted by radio
consolidation companies having significantly greater financial and other
resources than the Company in view of their focus on larger markets, no
assurances are given that such companies may not in fact target the specific
radio stations that the Company is currently targeting and acquire one or more
of such stations prior to the Company's ability to close on any of such
transactions. In the event of the Company's inability to acquire one or more of
the radio stations currently sought, the Company will seek to acquire one or
more other radio stations in small-to-medium sized markets in other areas of the
United States. Management has not, as of this time, expended any significant
time, effort or resources in reviewing or analyzing other potential radio
station candidates for acquisition in other parts of the United States and
therefore, would have to devote significant time and energy to do so.
Lack of diversification. If the Company is successful in selling the
maximum number of shares offered, the Company will only have enough money to
obtain rights to a handful of radio stations. As a result, the Company will have
no real diversification of operations, at least initially. This will mean that
the Company's fortunes will depend significantly upon the performance of a
limited number of formats; if the public does not like the Company's few radio
stations, the Company will not succeed.
No Assurance of Continued Programming Acceptance of Radio Stations
Desired to be Purchased. The Company has conducted only limited market research
concerning consumer tastes and preferences in the markets of the radio stations
it intends to acquire and does not anticipate conducting any significant
marketing research, studies or surveys itself on a going forward basis. Instead,
the Company has relied and will continue to rely upon the programming currently
aired by such stations due to their perceived success as evidenced by the
marketing success these stations have enjoyed, as well as industry research
firms and their published data regarding industry and market trends in those
geographic areas where it plans to operate and acquire radio stations when and
where applicable. Due to changes in consumer taste and preferences, there can be
no assurance that any programming continued by the Company or introduced will
continue to or otherwise achieve any significant degree of market acceptance, or
that such acceptance will be sustained for any significant period. Failure to
sustain or achieve market acceptance would have a material adverse effect on the
Company's operating results and financial condition as the Company's revenues
from advertising will undoubtedly will be adversely impacted.
"Best Efforts" Offering This Offering is being conducted on a "best
efforts" basis. As such, no assurances are given as to what level of proceeds,
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if any, will be obtained. In the event the Company fails to obtain all or
substantially all of the proceeds sought in this Offering, its ability to
effectuate its business plan will be materially adversely effected, and
investors may lose all or substantially all of their investment.
No assurances are given that the subscription proceeds that may be
received by the Company will be sufficient to sustain the operations of the
Company prior to its anticipated receipt of revenues from advertisers or that
additional working capital will not otherwise be necessary. The Company has no
agreements with any persons to provide the Company with additional financing
which will be required to fully effectuate its business plan, and no assurances
are given that the Company will be able to obtain additional financing, on terms
acceptable to the Company, if available. In such events, the Company and its
intended operations could be materially adversely affected.
Dependence on Marketing and Promotion . The Company plans to market and
promote its stations as unique and "fun to listen to" in their respective
markets with the goal to increase station awareness and "dial position
recognition" among retailers, buyers and listeners. The Company expects to
market and promote its stations through its own sales and marketing personnel as
well as through advertising in recognized trade publications and on a proposed
Internet web site. Depending upon the level and timing of funding received in
this Offering, such marketing and promotional efforts will commence by the end
of Second or Third Quarter, 1999. No assurances are given that such marketing
and promotional efforts will prove or continue to be successful.
Dependence on Management. The Company's future success is materially
dependent on the continued services of Mr. Dain Schult, its Chief Executive
Officer, President and Chairman of the Board, who intends to devote full time to
the business of the Company and of Mr. Robert Ringle, its Chief Marketing
Officer and Vice President, who also intends to devote full time to the affairs
of the Company. The Company's success is also dependent on its ability to
attract, motivate and retain highly-qualified employees. The loss of the
services of Mr. Schult or Mr. Ringle could have a material adverse effect upon
the Company's business and operations until a suitable replacement may be
located, of which no assurances are given. While the Company intends to obtain
key man life insurance on each of Mr. Schult and Mr. Ringle for approximately
$1,000,000 with the Company to be named as beneficiary, no assurances are given
that such insurance will in fact be obtained.
FCC Regulation Regarding Radio Broadcasting. The Federal Communications
Commission ("FCC" or "Commission") is the federal regulatory body that oversees
the operation of all radio and television stations in the United States. The
Commission is responsible for granting licenses to all stations and insuring
that its rules and regulations are complied with at each station.
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The FCC grants seven year licenses for the operation of US radio
stations. All Texas stations just went through license renewal in 1997.
Therefore the stations the Company proposes to buy will not be due for license
renewal until the year 2004. In both the license renewal process and the license
transfer process which takes place when a company buys a radio station from a
current owner (and license holder), the Commission is interested in knowing the
makeup of the station ownership. The FCC prohibits foreigners or foreign
corporations from owning more than 25% of any radio station in the US. Further,
the FCC prohibits convicted felons from owning a radio station in the US.
Messrs. Schult and Ringle are both citizens of the United States and neither of
them have ever been convicted of a felony. Mr. Schult is currently part owner of
several other radio stations and has never been denied a license transfer by the
FCC nor has he or Mr. Ringle ever been cited by the FCC for any violation of any
of its rules or regulations.
Currently there are no FCC ownership restrictions relating to the
number of stations one company may own across the US. This is due to the passage
of the 1996 Telecommunications Act by Congress. Before passage of this
legislation, an individual or company was prohibited from owning more than 20 AM
radio stations and 20 FM stations in the US.
Since passage of the Telecommunications Act, however both the FCC and
the US Department of Justice have shown particular interest and concern when a
company tries to own a cluster of radio stations in a particular
medium-to-large-market or city where the company would control more than 50% of
the total radio listening audience. The Company does not propose to own more
stations in a particular market or city that would be cause for investigation by
either the FCC or the Department of Justice. This scrutiny does not apply to
smaller communities that are unrated by any audience measuring service nor does
it apply to situations where a buyer purchases an existing cluster of stations
that the FCC had already approved in the past. The stations the Company is
proposing to acquire are in small, unrated markets and have already been
clustered together by the current owner with FCC approval posing no potential
target for additional FCC or Department of Justice review.
From 1981 until the present, there has been a consistent program of
deregulation within the FCC. This began with the appointment by President Ronald
Reagan of Commission Chairmen and commissioners who were dedicated to reducing
unnecessary paperwork requests and rules and regulations that were burdensome to
radio broadcasters. At present, the FCC requires all radio stations to submit
annual ownership reports, reports dealing with EEOC rules compliance (regarding
the search for and hiring of qualified minority employees) and the Spectrum fee
report. Each station is accessed an annual fee for use of a part of the total
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broadcasting spectrum. This fee varies from between $900 for AM stations to as
high as $2,500 for the most high-powered FM stations.
The FCC maintains field offices around the US where local FCC
inspectors periodically visit stations for field inspections. These inspections
include checking the facilities' equipment, the ownership's adherence to all
applicable rules and regulations and its record keeping in the areas where
paperwork forms and information gathering are required.
It takes between three (3) and six (6) months for a station license
transfer approval to be granted by the FCC from the time of filing the
application with the Commission and its issuance of its final approval. Once
granted, the license holder is assured that the station's frequency is set and
that no other radio station will begin broadcasting on its frequency.
Competition. The programming, advertising and audience ratings of any
radio stations proposed to be acquired by the Company are subject to change and
any adverse change could have a material adverse effect on the revenue and cash
flow of the Company. The stations proposed to be acquired by the Company will
compete for audience share and advertising revenue directly with other radio
stations and with other media within their respective market areas. In addition,
to the extent that many of the Company's competitors have or may in the future
obtain greater financial and other resources than the Company, its ability to
successfully compete in each market area may be significantly and adversely
impeded. There can be no assurances that the Company will be able to obtain or
maintain significant audience ratings and advertising revenue. The failure to do
so could have a material adverse effect upon the Company, its business and
operations.
The profitability of each station, and thus the Company, will also be
subject to various factors that influence the radio broadcasting industry as a
whole, including changes in audience taste, priorities of advertisers, new laws
and governmental regulations and policies, changes in broadcast technical
requirements, technological changes, proposals to eliminate the tax
deductibility of expenses incurred by advertisers and changes in the willingness
of financial institutions and other lenders to finance radio station operations.
The Company's revenue may also be adversely affected by a recession or downturn
in the U.S. economy or other events or circumstances that adversely affect
advertising activity. In addition, operating results could be adversely affected
by local or regional economic downturns.
Potential Conflicts of Interest Between Management and the Company. The
Company's principal executive officers, Messrs. Schult and Ringle, have devoted
and intend to continue to devote full time as may be required, to the business
and affairs of the Company. Management is not currently aware of any known or
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potential conflicts at this time except for Mr. Schult's current ownership of
common stock equal to 2% ownership of Equicom, Inc., a radio group located in
Texas with stations exclusively in Texas and as may otherwise be disclosed
herein. Should any conflicts develop, management of the Company has not
established any policies for handling any conflicts which may arise between the
interests of the Company and the interests of any member of management and/or an
affiliated entity. Purchasers of Shares in this Offering will be relying solely
on management's and the Company's Board of Directors' judgment concerning the
resolution of any conflicts or potential conflicts. The Company has no
independent directors at this time.
Voting Control by Management. After completion of this Offering,
assuming all of the Shares offered hereby are sold, of which no assurances are
given, management of the Company, inclusive of its Board of Directors, will own
10,500,000 shares of the Company's outstanding Common Stock. Thus, management
will control approximately 51% of the voting securities of the Company, if all
Shares offered hereby are sold, without giving effect to (i) any stock option
plan if adopted by management and approved by a majority of the shareholders or
(ii) any additional issuances of Common Stock or other securities of the Company
to management and/or others, in management's sole discretion. As a result,
management of the Company will effectively control the affairs of the Company,
including the election of all of its Board of Directors, the issuance of
additional shares of Common Stock for a stock option plan or otherwise, the
distribution and timing of dividends, if any, and all other matters.
Dilution. The Company is authorized to issue a substantial number of
shares of Common Stock in addition to the Shares comprising the Shares offered
hereby, as well as potentially shares of preferred stock in such series and with
such designating rights and preferences as may be determined by the Company's
Board of Directors in its sole discretion. The Company will require significant
additional financing to fully implement its business plan, which funding could
entail the issuance of a substantial number of additional Company securities
which could in turn cause material dilution to investors in this Offering.
This Offering itself involves immediate and substantial dilution to
investors. Any securities issuances in the future, including issuances to
management, could reduce the proportionate ownership, economic interests and
voting rights of any holders of shares of the Company's Common Stock purchased
in this Offering.
Shares Available For Resale Under Rule 144. All of the Company's
presently outstanding shares of Common Stock, aggregating 10,500,000 shares of
common stock, are "restricted securities" as defined under Rule 144 promulgated
under the Securities Act and may only be sold pursuant thereto or otherwise
pursuant to an effective registration statement or an exemption from
registration, if available. Rule 144, as amended, generally provides, in
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summary, that a person (including a group of persons whose shares may be
required to be aggregated) who has satisfied a one year holding period for such
restricted securities may sell, within any three month period, provided the
company is current in its reporting obligations under the Exchange Act or, if
not required to file such reports and not filing such reports on a voluntary
basis, makes publicly available certain information set forth under Rule 15c2-11
under the Exchange Act, subject to certain manner of resale provisions, an
amount of restricted securities which does not exceed the greater of 1% of a
company's outstanding common stock or the average weekly trading volume in such
securities during the four calendar weeks prior to such sale. Generally, persons
who are not affiliated with a company (i.e., not an officer, director or 10% or
greater shareholder) and who have held their restricted securities for at least
three years are not subject to such quantity and manner of resale limitations
and may freely sell such securities pursuant to Rule 144(k). Messrs. Schult and
Ringle, the Company's principal executive officers, own an aggregate of
10,500,000 restricted shares for which the one year holding period expires on
October 30, 1999. A sale of shares by such security holders, whether pursuant to
Rule 144 or otherwise, may have a depressing effect upon the price of the
Company's Common Stock in any market that might develop.
Arbitrary Determination of Offering Price. The Offering price and other
terms and conditions relative to the Shares offered hereby have been arbitrarily
determined by the Company and do not necessarily bear any direct relationship to
assets, earnings, book value or any other objective criteria of value.
No Dividends on Common Stock. The Company intends for the foreseeable
future to retain earnings, if any, for the future operation and expansion of its
business and does not anticipate paying dividends on its shares of Common Stock
for the foreseeable future.
No Firm Commitment. There is no underwriter and no firm commitment on
the part of anyone to purchase all or any part of this Offering, and no
assurances are given that any part of the Offering will be sold. The receipt of
no or nominal proceeds will have a material adverse effect upon the Company and
investors.
Illiquidity of Investment in Securities. There is currently no market
for any of the Company's Shares and no assurances are given that a public market
for such securities will develop after the Termination Date of the Offering or
be sustained if developed. While the Company plans following the termination of
this Offering to take affirmative steps to request or encourage one or more
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broker/dealers to act as a market maker for the Company's securities, no such
efforts have yet been undertaken and no assurances are given that any such
efforts will prove successful. Generally, in order for a broker/dealer to make a
market in a company's securities, such company must either timely file reports
on a required or voluntary basis with the Commission under the Exchange Act
(i.e., Forms 10-KSB, Forms 10-QSB) or otherwise, if not required to file such
reports or not filing such reports on a voluntary basis, make publicly available
certain information set forth under Rule 15c2-11 under the Exchange Act. The
Company is not currently and after the Termination Date of this Offering,
regardless of the amount of proceeds which may be received hereby, will not be
required to file Exchange Act reports with the Commission but does intend to
voluntarily do so. While the Company does intend to become a reporting company
under the Exchange Act to facilitate potential market making in the Company's
securities, no assurances are given that it will do so. As such, investors may
not be able to readily dispose of any securities purchased hereby.
Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Commission. Penny stocks generally are equity securities with a
price of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure documents that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock, the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. As the Company's securities immediately following this
Offering will likely be subject to such penny stock rules, investors in this
Offering will in all likelihood find it more difficult to sell their securities.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered
hereby, assuming all of the Shares offered hereby are sold, of which no
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assurances are given, are estimated to be $450,000, giving effect to the
estimated expenses of the Offering of approximately $50,000 and exclusive of
Selling Commissions, if any.
The following table sets forth the anticipated use of the net proceeds
of this Offering in the event that all 10,000,000 Shares offered hereby are
sold. The Company may not be able to sell all of the Shares and thus generate
$500,000. The receipt by the Company of no or nominal proceeds will have a
material adverse effect upon the Company and investors.
The entry in the table for station purchase options are amounts that
would be paid to existing station owners giving the Company one and eighty days
to arrange financing to purchase the stations or to put into place leases on the
stations that are acceptable by the FCC. The entry below for administrative
costs includes costs expected to be incurred for leasing office space,
furniture, fixtures, equipment, licensing agreements to use certain broadcast
programing, office expenses, long distance calls, officers salaries and related
expenses. The aggregate dollar amount of net offering proceeds that may be
payable to promoters, management, principal shareholders or their affiliates may
be as much as $200,000, generally representing officers salaries and out of
pocket expenses related to the Company. This amount is significant as it reduces
the amount of working capital available for other purposes.
Programming Development $ 50,000
Station Purchase Options $130,000
Administrative Costs $250,000
Working Capital $ 20,000
Offering Costs $ 50,000
Total Offering Proceeds $500,000
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Because the Company presently anticipates selling the Shares strictly
through the efforts of its officers and directors, the above numbers do not
include any deductions for Selling Commissions. If broker/dealers are used in
the sale of the Shares, up to 10% of any gross proceeds raised in this Offering
will probably be payable to one or more NASD registered broker-dealers. In such
event, net proceeds to the Company will be decreased and the use of proceeds may
be proportionately reallocated in Management's sole discretion. Concurrent with
this Offering, the Company may seek to obtain debt financing in the form of
senior bank debt as well as subordinated seller financing from the radio station
owners. In the event of the Company's receipt of any such debt financing, the
Company may seek to convert a part of such debt financing to shares of the
Company's Common Stock or some other class of Company securities which may have
a dilutive effect on investors in this Offering. There are no current
agreements, arrangements or other understandings in connection with any of the
foregoing.
In the event the Company's receives the Maximum Proceeds of $500,000,
management believes that the net proceeds therefrom, together with anticipated
funds from operations, will provide the Company with sufficient funds to meet
the Company's cash requirements for approximately twelve (12) months following
the Termination Date. This will provide the necessary funding for creation of
the music programming services and provide the initial capital necessary to
locate additional potential station acquisitions. In such event, management
believes the Company will in all likelihood, only have sufficient funds to
commence production of Internet music programming and possibly certain other
Internet products as well as establishing a FCC-acceptable lease of the
initially proposed station acquisitions. If the Company's receives net proceeds
in amounts less than the Maximum Proceeds, this twelve month time frame will be
diminished and the Company's business operations will be curtailed to an extent
not presently determinable by Management. The receipt of no or nominal proceeds
will have a material adverse effect upon the Company and investors. No
assurances are given that the Company will sell any of the Shares offered
hereby, or raise any proceeds or consummate any other financing.
If the Company receives less than approximately the Maximum Proceeds,
the Company's only two employees, its President/Chief Executive Officer and the
VP/Chief Marketing Officer have agreed in principle to temporarily reduce their
salaries until such time as the Company may be in a financial position to
commence full payment of their salaries. None of the Offering proceeds that the
Company may receive will be used to make loans to officers, directors and/or
affiliates.
The estimated allocation of net proceeds of this Offering set forth
above is based upon the Company's present plans and its assumptions and
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estimates regarding its intended operations, anticipated expenditures and
revenues and general economic and broadcast industry conditions. The actual
allocation of net proceeds of this Offering may be shifted at the discretion of
the Company's Board of Directors, if the Company's assumptions and estimates
concerning anticipated expenditures and revenues prove to be inaccurate. The
allocation may also be changed if problems, expenses and delays frequently
encountered in growing a new business within the radio industry, implementing
new business strategies, as well as changes in the economic climate and/or the
Company's planned business operations are experienced by the Company.
Proceeds not immediately required for the foregoing purposes will be
invested principally in federal and/or state government securities, short-term
certificates of deposit, money market funds or other short term interest-bearing
investments as well as repay Mr. Schult for his loan of $6,140 to the Company.
DETERMINATION OF OFFERING PRICE
There is no established public market for the shares of common stock
being registered. As a result, the offering price and other terms and conditions
relative to the shares of common stock offered hereby have been arbitrarily
determined by the Company and do not necessarily bear any relationship to
assets, earnings, book value or any other objective criteria of value. In
addition, no investment banker, appraiser or other independent, third party has
been consulted concerning the offering price for the Shares or the fairness of
the price used for the Shares.
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DILUTION
At December 31, 1999, the Company had a net tangible book value of
- -$70,730. The following table sets forth the dilution to persons purchasing
Shares in this Offering without taking into account any changes in the net
tangible book value of the Company, except the sale of 10,000,000 Shares at the
offering price and receipt of $500,000, less offering expenses. The net tangible
book value per share is determined by subtracting total liabilities from the
tangible assets of the Company divided by the total number of shares of Common
Stock outstanding.
(1) The Company's net tangible book value per share is determined by
dividing the number of shares of Common Stock outstanding into the net
tangible book value of the Company and is significantly less than zero
prior to this offering.
PLAN OF DISTRIBUTION
General
The Company is offering up to a maximum of 10,000,00 Shares at a price
of $0.05 per Share to be sold by its executive officers and directors. If the
Shares are sold through its executive officers and directors, no compensation
will be paid with respect to such sales. However, the Company may retain a NASD
18
registered broker-dealer to act as the Selling Agent in connection with all or
part of this Offering and will pay a cash commission of up to an aggregate of
10% of the proceeds of this Offering (the "Selling Commission"). Since the
Offering is conducted on a "best efforts" basis, there is no assurance that any
of the Shares offered hereby will be sold. See "USE OF PROCEEDS."
The Offering will remain open for a period until June 30, 2000 or an
additional 60 days in the sole discretion of the Company, unless the maximum
proceeds are earlier received or the Company determines, in its sole discretion,
to cease selling efforts. The officers, directors and stockholders of the
Company and their affiliates may purchase Shares in this Offering.
No Escrow of Proceeds
There is no escrow of any of the proceeds of this Offering.
Accordingly, the Company will have use of such funds once it accepts a
subscription and funds have cleared. Such funds shall be non-refundable to
subscribers except as may be required by applicable law.
19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are as follows:
Name Position Age
Dain L. Schult President and Chief Executive Officer,
Secretary, Chairman of the Board 44
Robert E. Ringle Vice President of Internet Operations
Director of Sales, Treasurer and Director 55
Dain L. Schult - President and Chief Executive Officer: Mr. Dain Schult has
served as both President and Chief Executive Officer of ACE since its inception
Mr. Schult is a broadcast veteran of over 30 years in the radio industry.
For the period from 1996 to the inception of the Company, Mr. Schult
was President and Chief Executive Officer for Equicom, Inc., a group
consolidator of radio stations in Texas.
For the period from 1977 to 1996, Mr. Schult was President of
Radioactivity, Inc., a full-service radio broadcast consulting firm located in
Atlanta, Georgia serving over 150 radio stations in various parts of the U.S..
While there, Mr. Schult participated in the turnaround of several stations,
created a unique turn-key management service for new station owners, conducted
station appraisals and market analysis projects for sellers and buyers, and
developed specific music formats for on-air use by client stations.
Concurrently, Mr. Schult was Chief Operating Officer for Sunbelt Radio Group,
Inc., a radio station group created to acquire and operate radio stations in
Texas.
Prior to 1977, Mr. Schult held various program manager, operating
manager, and on-air personality positions at several radio stations in the
Southeast and Southwest.
Mr. Schult holds an A.S. degree in Commercial Music-Recording from Georgia
State University. Mr. Schult is married to Sherry Schult, the sister of Robert
E. Ringle, a director and executive officer of the Company. As a result, Mr.
Schult is Mr. Ringle's brother-in-law.
Robert E. Ringle - Vice President Internet Operations/Director of Sales:
Mr. Ringle has served as Vice President, Director of Sales an Treasurer of the
Company since its inception. Mr. Ringle has more than 20 years experience in
owning and operating advertising agencies and marketing companies.
For the period from1997 to the inception of the Company, Mr. Ringle
served as the Chief Marketing Officer and Director of Sales for Equicom Inc., a
regional radio broadcasting network.
20
For the period from 1995 to 1997, Mr. Ringle served as the Chief
Executive Officer of Quadra Group, Inc., a small consulting company specializing
in marketing and management.
For the period from 1993 to 1995, Mr. Ringle served as the Marketing
Director and Sales Manager for Pell Automotive Group, a car dealership in
Tucson, Arizona.
Mr. Ringle has a B.S. degree in Marketing from Wayne State University.
As stated previously, Mr. Ringle is Mr. Schult's brother-in-law.
Directors. All of the Directors serve for one year periods. The Company
presently expects to conduct its first annual meeting of shareholder and
directors in October, 1999 at which time directors will again be elected. All
directors serve for a period of one year unless removed in accordance with the
bylaws of the Company.
21
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock before and after giving
effect to the sale of the maximum number of shares of common stock offered. All
shareholders have sole voting and investment power over the shares beneficially
owned.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
no par value per share, of which 10,500,000 shares are issued and outstanding.
The outstanding shares of Common Stock are fully paid and non-assessable. The
holders of Common Stock are entitled to one vote per share for the election of
directors and with respect to all other matters submitted to a vote of
stockholders. Shares of Common Stock do not have cumulative voting rights, which
means that the holders of more than 50% of such shares voting for the election
of directors can elect 100% of the directors if they choose to do so the common
stock does not have preemptive rates meaning that the common shareholders
ownership interest in the Company would be diluted if additional shares of
common stock are subsequently issued in the existing shareholders are not
granted the right, in the discretion of the Board of Directors, to maintain
their ownership interest in the Company.
Upon any liquidation, dissolution or winding-up of the Company, the
assets of the Company, after the payment of Company debts and liabilities and
any liquidation preferences of, and unpaid dividends on, any class of preferred
stock then outstanding, will be distributed pro-rata to the holders of the
Common Stock. The holders of the Common Stock do not have preemptive or
22
conversion rights to subscribe for any securities of the Company and have no
right to require the Company to redeem or purchase their shares.
The holders of Common Stock are entitled to share equally in dividends,
if, as and when declared by the Board of Directors of the Company, out of funds
legally available therefor, subject to the priorities given to any class of
preferred stock which may be issued.
Preferred Stock
The Company is not presently authorized to issue shares of preferred
stock However, the majority of the shareholders of the Company may later
determine to establish preferred stock for the Company. If done, the preferred
stock may be created and issued, in one or more series and with such
designations, rights, preference and restrictions as shall be stated and
expressed in the resolution(s) providing for the creation and issuance of such
preferred stock. If preferred stock is authorized and issued, if the Company is
subsequently liquidated or dissolved, the preferred stock would be entitled to
assets of the Company, to the exclusion of the common stockholders, to the full
extent of the preferred stockholders interest in the Company.
Dividend Policy
To date, the Company has not paid any dividends. The payment of
dividends, if any, on the common stock in the future is within the sole
discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements and financial condition, and other relevant
factors. The Board of Directors does not intend to declare any dividends on the
common stock in the foreseeable future, but instead intends to retain all
earnings, if any, for use in the Company's business operations.
Transfer Agent and Registrar
The Company intends to use Signature Stock Transfer, Inc., in Dallas,
Texas as its transfer agent for the common stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Article V of the Bylaws of the Company provides that the Company shall
indemnify its officer or directors against expenses incurred in connection with
the defense of any action in which they are made parties by reason of being
officers or directors of the Company, except in relation to matters as to which
such director or officer shall be adjudged in such action to be liable for
negligence or misconduct in the performance of his duty. An officer or director
of the Company could take the position that this duty on behalf of the Company
to indemnify the director or officer may include the duty to indemnify the
officer or director for the violation of securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the Company's Articles of Incorporation,
Bylaws, Nevada law or otherwise, the Company has been advised that in the
23
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or payed by a director,
officer or controlling person of the Company and the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
DESCRIPTION OF BUSINESS
General
American Communications Enterprises, Inc. ("ACE" or the "Company"), a
recently formed Nevada corporation, based in Austin, Texas, was created to
acquire, consolidate and operate small-to-medium-sized market radio stations,
initially in Texas and then in other geographic regions of the United States.
The Company hopes to develop related "state-of-the industry" Internet services
to network the Company's planned regional clusters of radio stations in such
markets, the Company believes that such cross-marketing strategy will allow it
to offer greater advertising capabilities to potential advertisers, and
therefore avail itself of possibly greater revenue opportunities than available
to radio stations on a "stand alone" basis or other consolidators who do not
follow such strategy.
Management believes, based upon its collective experience and the
reported experience of established industry consolidators (See "Industry
Consolidation" herein) that operating radio station clusters provides a number
of opportunities for an operator to significantly increase revenue and cash flow
within approximately 18 months after acquisitions are made. Such opportunities
include:
o Improved pricing of available advertising time;
o Reduced promotional expenses;
o Improved inventory control;
o A broadened audience through programming services will hopefully
provide the Company greater flexibility to increase the level of
commercials presented on the air when and where applicable and prudent;
and
o Lowered overhead and facilities expenses.
The Company plans to lease or acquire radio stations in Brownwood and
Coleman, Texas, with the proceeds of this Offering, assuming the Maximum
24
Proceeds are received, and plans to eventually acquire up to approximately 15
stations in the Southwestern section of the United States. Assuming the
continued availability of additional small-to-medium sized radio stations in
other parts of the U.S., the availability of financing and the Company's ability
to integrate the operations of additional radio stations, none of which
assurances may be given, the Company intends to acquire, consolidate, and
operate additional radio stations beginning by Third Quarter 1999. ACE intends
to operate throughout the US. The Company plans to pursue a regionally focused
acquisition strategy adding clusters of stations across the country when and
wherever possible. The total number of stations acquired will be a function of
availability, the Company's financing capability and marketing feasibility and
could result in the Company operating as many as 100 stations. The Company is
currently looking for additional acquisition targets in Texas, New Mexico,
Oklahoma, Arkansas and Louisiana.
Based on Management's prior experience in operating radio stations in
consolidated group, the Company believes that these stations can be linked
together for efficient operation in a reasonable time frame. ACE also intends to
develop a unique entertainment web site on the Internet. By combining the small
to medium market broadcast radio stations with the Internet, ACE believes it can
eventually create a dominant network presence across the country and
internationally. The strategy is a hybrid of a small-to-medium-market radio
station consolidation (which is only being applied on a limited regional basis
by other small networks) and an Internet approach that is cross-market oriented.
Acquisition and Operating Strategy
ACE will pursue a regionally focused acquisition strategy. The Company
proposes to create "Radio Wal-Mart" by initially purchasing
small-to-medium-sized radio stations in non-major metropolitan areas in Texas
and then expanding to surrounding states. The Company's management believes,
based upon personal, professional experience, that many of the non-major
metropolitan areas currently offer many attractively priced acquisition
candidates compared to the larger cities. ACE will strive to locate acquisition
candidates that are either already successfully positioned in the ratings in
their markets or, in management's belief, based upon such factors as strong
historical financial performance, offer the potential to be so positioned.
Besides its regional focus, ACE's growth strategy is planned to be founded
upon the achievement of synergies and economies of scale, including but not
limited to, the generation of incremental sales through network marketing for
greater national and regional advertising, the reduction of overhead expenses
and the realization of operational cost savings.
Assuming the completion of the initial station acquisitions by the Company
and the successful integration of such operations by Third Quarter 1999, the
25
Company believes it will be able to offer regional advertisers the ability to
access a population base of approximately 300,000 people in Central/West Texas.
As the Company acquires more stations, advertisers will be able to purchase the
entire ACE group as a network with one media buy which will also include
advertising capabilities on the Internet. Under current market conditions, an
advertiser would not be able to roll out a campaign targeting non-major Texas
areas without entering into a number of separate media purchases which is both
time consuming and non-cost effective due to having to contact each station
separately instead of as a group .
Based upon, the prior personal, professional experiences of Messrs. Schult
and Ringle as well as the success of other regional consolidators, management
believes ACE's ability to market its entire network will result in a
consolidated advertising approach with a distinctly higher component of national
and regional advertising versus local direct retail advertising. This is
favorable because national and regional advertising often command premiums over
local ad rates by as much as 50% and 100% in smaller cities.
ACE plans to utilize a blend of WAN (Wide Area Network) music programming
coupled with centralized satellite voice programming from a centrally located
control location. Additionally, all ACE stations are planned to operate with
centralized accounting, billing, marketing and promotions systems, an in-house
sales group that will be utilized for group advertising for the radio stations
as well as for Internet advertising, and specialized in-house sales training
programs for all Company salespeople. Due to such planned centralization of
services, it is believed that each station's general manager will have more time
to focus on sales instead of administration responsibilities. It is expected
that ACE will also eventually utilize "super regional managers" each of whom
will serve on-site as general manager in one market but also oversee the
operation of other stations within their designated region.
Current Radio Industry Conditions
The Company will compete in an industry that has undergone deregulation and
innovation. Deregulation by the Federal Communications Commission ("FCC") which,
in general, has permitted the elimination of station ownership limits, has given
rise to widespread opportunities within the radio industry but competitive
pressures have also increased. Consolidation activity has swept through the
larger-market radio stations and is now working its way through the small-to-
medium-sized markets. These sized market provides opportunities for
consolidation without the expense of large market or major city acquisitions
where one station alone can change hands for hundreds of millions of dollars.
As reported by Interep (a group of national radio rep firms), since its
inception in the 1920's as a commercial advertising medium, radio advertising
expenditures have declined only twice: a) in 1961 revenues declined 1% due to a
26
recession and b) in 1991, the combination of the Persian Gulf War and economic
recession led to a 3% decline in revenues. Interep further reports that, over
the last 36 years, radio advertisement spending has grown at a compound annual
rate of 8.3%, somewhat higher than total ad spending.
Among all of the usual advertising-supported media, the Radio Advertising
Bureau reports that radio's growth has been among the fastest over past 24
months, although cable, network television, outdoor and newspaper have also
experienced strong demand. With the bulk of radio listening taking place outside
of the home and on the road, where competition with other mediums is limited,
and the available audience is captive for specific periods of time (unable to
access televisions, newspapers, or the Internet), Arbitron reports that radio is
in a strong position for continued growth.
Background On The Radio Business
Overview
Radio station revenues are derived from the sale of advertising spots or
programs to national, regional, and local advertisers of commercials.
Advertising rates charged by a station are predicated on its performance in the
ratings based on estimates of the number of persons listening to a station as
well as the number of homes in a station's service area.
The only national radio audience measuring service, Arbitron, serves the
entire country and provides even the smallest markets with annual ratings
service. Ultimately, the success of a radio station (or group of stations)
depends on its ability to develop popular programming and promotions, thus
generating higher rates and allowing the station to charge more for airing
commercials.
Historical Trends in Radio Ad Revenues
As evidenced by Interep, radio industry revenues have consistently grown
faster than the Gross National Product and have historically demonstrated an
ability to be somewhat recession resistant.
Radio advertising expenditures have declined only twice in its history-in
1961 revenues declined 1% due to a recession and in 1991, the combination of the
Persian Gulf War and economic recession led to a 3% decline in revenues. Interep
reports that over the last 40 years, radio advertiser spending has grown at a
compound annual rate of 8.3%, somewhat higher than total ad spending for other
forms of advertising (television, cable, outdoor and print) which has grown at a
7.5% annual rate.
Economic downturns can have an impact on broadcasting, as it would any
other form of advertising or business in a recession but not to the same degree
that they affect consumer discretionary spending in general. As reported by the
Radio Advertising Bureau, many national and regional brand advertisers have
27
found by experience that they must maintain their broadcasting advertising
budgets during periods of recession if they do not wish to lose market share
when the economy recovers.
The Radio Advertising Bureau reports that the main factor for radio's
growth is radio's unique ability for "narrowcasting" or reaching specific
demographic groups. By offering specialized audiences for advertisers, radio has
become more cost-effective, versus television or newspapers, which tend to sweep
a broader demographic scale.
Industry Consolidation
The radio broadcast industry is currently subject to consolidation activity
which is having a major impact on the competitive landscape. In general, and as
further discussed below, such consolidation activity has been triggered by the
Telecommunications Act of 1996. Up until the mid-1980s, there was no public
market for radio stocks. Local ownership limits by the FCC of one AM and one FM
station per market and a total limit of 14 total stations prevented radio groups
from amassing greater size to attract outside capital. Because of these strict
limits, radio station ownership was highly fragmented and characterized by "mom
and pop" operations in even the largest markets. By 1984, however, FCC ownership
rules had begun to be relaxed, with major relaxation of such rules occurring in
1992 and 1994.
The passage of the 1996 Telecommunications Act (the "Telecom Act")
eliminated the national limits on the number of radio stations that one entity
could own (the last cap was 40) and eased local ownership rules so as to allow 1
operating entity to control up to 8 stations (versus 4 previously) in most
medium and major markets. Much of the consolidation activity to date has been
centered on major markets, resulting in increased competition and higher
valuations in such markets.
The mid-sized markets (generally defined to mean US markets ranked #50 to
#265 based on population) have recently begun to see upward price pressure, with
10.0x to 14.0x EBITDA (Earnings before Income Taxes, Depreciation and
Amortization) multiples not uncommon (vs. 8.0x to 10.0x EBITDA multiples as
recently as 1997). The consolidation activity of large market operators such as
Chancellor/Capstar Communications (Hicks, Muse), Sunburst (Bain Capital), and
Cumulus (Wisconsin State Teachers Retirement/Quaestus Capital) all of whom have
consolidated stations across the US, have begun the process in some of the same
markets that ACE is exploring for acquisitions thus tending to indicate that
consolidation has begun in the smaller markets. ACE believes that it will only
encounter these larger mid-market consolidators at the upper end of its target
markets in rated medium sized markets but not in the smaller, non-regularly
rated markets. The Company believes it can be as successful with consolidation
of smaller market stations. Few groups have ventured beyond focusing on the top
28
100 markets, which has kept acquisition multiples in ACE's markets low but that
could change should other consolidators follow ACE's small market strategy.
Competition
Competition within the radio broadcasting industry has historically been
and will continue to be very intense. Overall, the principal factor affecting
competition in this industry is the number of audience members reached with one
advertising medium. With the advent of deregulation, competition has increased
since the key to success is no longer how many listeners can an independent firm
reach in one market, but rather, how many listeners can a consolidator reach in
multiple markets. Competition with newspapers and television for advertising
dollars is also high. However, radio's audience has held up well over time. In
the past five years listenership has actually increased as reported by the Radio
Advertising Bureau. In addition, with the bulk of radio listening taking place
outside of the home and on the road, where competition with other mediums is
limited, and the audience somewhat "captive" (unable to access television,
newspapers, or the Internet), radio appears to be well positioned for continued
growth.
Regulation
The radio broadcast industry is subject to extensive regulation at the
federal level. Any change in existing statutes and regulations, or the adoption
of new statutes and regulations, could force stations to alter their methods of
operation at substantial costs.
All firms, whether large or small, are affected by these changes. Also, as
seen in recent legislative action (the 1996 Telecom Act), changes in
regulations, especially, deregulation, can drastically shift the competitive
landscape. Going from being able to own 7 AM and 7 FM stations in 1992 to 18 and
18 to 20 and 20 to now no limits, the FCC has now allowed for a free and open
market on radio station ownership. Additionally the FCC has continued a pattern
of reducing paperwork requirements of its license holders and eliminating
outdated rules and regulations.
Background on the Internet Industry
Overview
The Internet's brief and meteoritic existence provides little historic
performance data. From a few hundred thousand users seeking information,
entertainment and commerce in the early 1990's the Internet community has grown
to a billion plus in 1998. Entrepreneurs and Fortune 500 companies are now
racing forward to be a part of what many believe will be part of the premier
media market of the next millennium. Only a few short years ago, Internet
companies were struggling to carve out revenue and many Internet sites offered
free information posted by various entities with links to related and unrelated
sites. Now, as reported by Advertising Age, billions of dollars in revenue are
generated from advertising, website development and retailing.
29
Major electronic manufacturers have products and/or are developing
integrated Internet products for next generation home systems and mobile
systems. Future delivery of the Internet is slated to arrive via increased cable
usage and/or satellite to multi-purpose home entertainment systems that will
function as Internet links, computers, radios and TV sets. Cellular phones
currently can connect to the Internet as well as automobile radios. There
appears to be little or no limit to the ways and means one can and will be able
to access the "Net".
Trends in Ad Revenues
Currently, as reported by Advertising Age, the most lucrative Internet
advertising comes from banner advertising. Banner advertisers pay for "hits" or
"impressions" based on the number of user exposures to their ads. National
brands in every industry are now using the Internet as part of an integrated
approach to marketing. Although difficult to exactly quantify, it is estimated
that national Internet ad revenues reach into the billions of dollars. According
to Advertising Age, local and regional web sites offer similar opportunities to
local and regional advertisers.
The Internet has become a global market place for commercial and consumer
goods from banking to soft goods. Entrepreneurs and national brands are also
enjoying phenomenal growth through "catalog", retail sales on the Internet. The
Internet user can access VAR (Value Added Retailer) and factory direct products
over secure sites using most types of credit cards and generally save time and
money in the process.
Competition
Competition within the Internet community will be fierce. Internet
"audiences" will continue to be exposed to newspaper, TV, radio, direct mail,
etc. The advantages of the Internet lie in the totality of content and the
ability to deliver messages in audio and visual media twenty-four hours a day
seven days a week. Furthermore, studies by Arbitron have indicated that the
Internet is the media of choice for the 24 to 35 age group with increasing
numbers of users in the affluent 35 to 55 age group.
Regulation
The Internet is under no enforceable broadcast or entertainment content
regulation at this time. Although the U.S. Government may prevail in regulating
some functions of U.S. based web sites and portals, there is good reason to
believe it will be many years before regulation will be enforceable.
Summary of Industry Attractiveness
The Company believes the Internet industry will prevail as the media of
choice for the aforementioned demographics groups in the foreseeable future. The
almost unlimited opportunities for growth and expansion are the key points for
30
selection of the Internet as a component of the Company's planned sales and
marketing strategy. The ability to access users across the country and even
internationally may offer the opportunity for increased revenues in National and
Regional advertising.
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview of Operating Model and Growth Strategy
The key elements of the Company's operating model and growth strategy,
which incorporates concepts utilized by other radio broadcast consolidators as
well as in other industries, are highlighted below:
Station/Market Selection: The Company's initial strategy is to acquire
radio assets in small-to-middle-market areas throughout the Southwest including
Texas, with additional ACE clusters to be formed in adjoining states and/or in
close proximity with such strategy to be financed with the proceeds of this
offering, seller debt financing, when and where applicable, senior debt
financing and other potential equity funding sources.
By avoiding the major metropolitan areas (ie. Dallas, Houston, San Antonio
and Austin), the Company believes it may be able to acquire stations at very
attractive prices. Medium-to-major-market radio stations have been selling for
12.0x to 17.0x EBITDA. In contrast, the Company believes, based upon its
management's personal, professional experiences in locating and acquiring radio
stations, that it may acquire its small market radio assets at between 7.5x -10x
EBITDA.
Assuming the Company's success in its acquisition strategy, the Company
believes it may itself become an attractive acquisition candidate in the future
to a larger market consolidator.
Clustering by State/Region: In addition to focusing on smaller markets, the
Company plans to also pursue a regional clustering strategy. Accordingly, the
Company's first planned acquisitions of radio stations (approximately four (4))
is only focused in Texas. By clustering stations within a tight, regional
market, the Company believes it can achieve certain back office cost benefits.
Management's plan for the Texas regional cluster evolves into a centralized hub
where the major managerial and administrative functions will be housed to where
the Company should be able to serve up to approximately 70 stations in local
markets throughout the state.
Localization: A key element of the Company's strategy is to be able to
"sound live - sound local" in every market. Listeners in smaller markets view
local stations as important parts of the community. The Company plans to present
a live morning show in each local market, the popularity of which is viewed as
material to the success of a radio station's operation as live morning shows
serve to perpetuate a strong local image in a market. The concept of
31
"localization" is complementary to the Company's regional focus and extends past
the morning drive period to the rest of the broadcast day. Unlike nationally
syndicated formats, the Company plans to make its regional flagship announcers
available for promotional campaigns or on-site advertising engagements
throughout the region and state. The ability to utilize well known radio
personalities is a major selling point to advertisers in smaller-market areas.
Centralized Operating Cost Savings: The Company plans to centralize much of
its administrative and operating functions at one of its station locations (to
be determined later) while maintaining an office in Austin to serve as corporate
headquarters and marketing center for regional and national advertising.
Programming is one of the key areas targeted for cost savings by elimination of
separate programming staffs at each station, replaced with one consolidated
network programming staff which will provide greater programming quality. Radio
voice programming is planned to be created at the flagship stations for each
format featured by the ACE network. By satellite transmission and use of WANs
and integrated computers, ACE will be able to minimize redundant equipment used
at each individual station and more efficiently utilize on-air talent by having
one centralized programming staff. Most important, based upon the written
proposal provided by National Supervisory Network, the incremental equipment
cost to bring an additional station into the ACE satellite network is currently
expected to be less than $7,000. In addition, accounting and bookkeeping is also
planned to be located at the flagship station site. One billing/traffic person
at the flagship headquarters can handle 4 stations at once which is a great
savings over having a billing/traffic person located at each individual station.
Other functions such as engineering, advertising, purchasing, and human
resources will also be handled from the flagship site. As new stations may be
added into the regional cluster, it is believed that the achievement of
economies of scale will result in increasing levels of operating profitability.
Generating Incremental Growth in Ad Revenues: Management believes that as a
result of the personal, professional experience of Messrs. Schult and Ringle,
the Company will achieve incremental revenue growth out of the planned combined
ACE radio group compared to the sales level that such stations have generated on
a stand-alone basis. In many small markets, the general manager is often the
head salesperson, in addition to being the overseer of the day-to-day
operations, on which the majority of such person's time is frequently spent.
The size of the sales staffs at each ACE station is planned to be
adequate to handle the flow of business allowing salespeople to handle between
30-50 accounts each while the programming, traffic/billing and technical staffs
32
will be pared down to reflect the Company's centralized operating structure.
Importantly, employees who face the possibility of having their job functions
reduced due to centralization will be given opportunities to move into a sales
role.
Attracting National and Regional Advertisers
As reported by the Radio Advertising Bureau, national and regional
advertising accounts for approximately 10% to 25% of the revenue mix for a
typical radio station in the market sizes that the Company has identified with
local advertising representing `the balance of the sales mix.
Historically, it has been difficult for national/regional advertisers
to target the small-to-middle-market areas due to the large number of separate
purchases of advertising spots that would be required. The Company intends to
market its entire network of stations within a region to national and regional
advertisers and thereby offer the convenience of the opportunity to reach an
aggregate substantial population in smaller cities and rural areas. In such
fashion, the Company believes it may attract national and regional advertising
which often commands a 50% to 100% premium over local advertising income.
The Internet Component
The Company recognizes the steady growth of broadcast radio within the
small-to-medium-station markets, but also recognizes the growth potential within
the Internet market. While large consolidators such as Capstar broadcasting
group and Cumulus broadcasting group dominate the major markets and continue to
compete with each other for market control in the major metropolitan areas,
ACE's cross-market approach is to look past this hotly contended arena towards
the expanding opportunities on the Internet.
Currently, radio sites on the Internet are focused on duplicating
standard broadcast type programming and formats. ACE plans to create a unique
entertainment site utilizing every technological advance and revenue-generating
feature available. ACE plans to deliver content in both streaming audio and
video and to utilize a major portal such as Yahoo to lead users to ACE's site.
Once there, ACE plans to offer a wide array of entertainment and products
including; 1) several music formats ranging from country to jazz; 2) MTV-like
videos of their favorite artists; 3) contests; 4) gaming; 5) shopping carts of
VAR merchandise from CD's and concert tickets to A/V equipment; 6) ACE branded
merchandise; 7) Entertainment news; 8) special programming including music and
travel features and 8) links to points of interest.
The synergy of the broadcast component and the Internet component rests
in the partially shared programming costs and the National/Regional advertising
revenue opportunities.
33
Proposed Potential Radio Station Investments
Phase One Acquisitions - Texas
Assuming the continued availability of the following radio stations and
the Company's success in obtaining additional financing for such acquisitions
(owner offered of otherwise), neither of which assurances are given, the Company
plans to acquire the stations identified below, with such acquisitions including
the assets of each station which normally include the broadcast equipment,
broadcasting tower and antenna, transmitter, office furnishings, office
furniture, accounts receivable, station vehicles, station promotional items,
station advertising accounts, FCC Station License and real estate including
studio/office space as well as land upon which the tower and transmitter is
located or leases for that space instead. Because the Company will be making
asset purchases, it does not intend to acquire any existing liabilities of these
stations. The purchase prices reflected are not necessarily firm and are subject
to further negotiation. Following the assumed successful completion of this
Offering, the Company plans to negotiate purchase option agreements with some of
such station's owners granting the Company the right to acquire each of such
stations within approximately six (6) to nine (9) months from the execution of a
definitive agreement. No assurances are given: (a) as to the continued
availability of such stations (b) that the Company and each of such station
owners will agree on price and other material terms; (c) that the Company will
be able to timely secure required financing for such acquisitions on terms
satisfactory to the Company; (d) that the Company will be able to successfully
operate and integrate any of such stations' operations into its then operations,
notwithstanding management's substantial combined radio industry experience; or
(e) of FCC approval of any such transfers.
34
KXYL AM/FM, Brownwood and KSTA AM/FM, Coleman 1,600,000
Total Asset Acquisitions 1,600,000
Working Capital and Acquisition Costs 200,000
Total Funding Requirement $2,000,000
Estimated Average Cost per Closing
The following estimated expenses, based upon management's
experience, are anticipated per closing of each station transaction. These
initial Texas transactions are AM/FM combinations. Additionally, this estimate
does not include any extraordinary due-diligence in the form of any engineering
studies or protracted negotiations both of which would increase related closing
cost expenditures. Based upon the Company's personal knowledge of these stations
and the communities of Brownwood and Coleman, Texas, the Company does not
anticipate any such expenses with these proposed station purchases.
Local Legal Counsel $3,500
Communication (FCC) Law Counsel $10,000
Accounting Expenses $10,000
Long Distance Phone Calls $1,000
Overnight Delivery Services $300
Travel and Lodging $2,500
On-site Market Research/Due-Diligence $3,500
Miscellaneous Expenses $4,250
Total Estimated Closing Costs per transaction per market: $35,050
Acquisition and Closing Process
The Company plans to streamline the negotiating and closing process on the
proposed station transactions by, among other things, "standardizing" (a) a form
of purchase option agreement and purchase agreement and related documents which
will nevertheless be subject to at least some negotiation and revision; and (b)
the FCC station license transfer process
Subject to the availability of financing and the continued availability of
targeted stations, the Company anticipates staging the closing of the
transaction over approximately a six (6) month period so as to provide the
opportunity for a successful integration of such radio station operations.
35
Notwithstanding the fact that additional time has been "built-in" to such
timetable, no assurances are given that the Company will successfully operate
and integrate any of such acquisitions, assuming the successful completion
thereof.
Initial Acquisition Plans
Management believe that a major consideration in accomplishing its planned
acquisitions is to do so in as timely and low profile a manner as possible.
Normally, the sale of stations in the market sizes as proposed by the Company
would be a significant event within their respective marketplaces.
To maintain stability and consistency of these stations under the Company's
planned ownership, it is important that the perception, as well as the reality,
at least initially during the ownership transition period, be of little if any
change to the current operation. During the ownership transition period, it is
expected that ACE management will spend time with each station's employees to
discuss with and assure personnel about the pending transfer, with little, if
any, outside contacts with community civic or business leaders concerning such
matter. Emphasis will be placed in staff meetings that additional stations are
planned to be added, and that there will be opportunities for employees to move
into future management openings at other Company owned stations so that they can
experience personal professional growth inside the organization.
After ownership transfer of a station is effected, the Company plans to
implement minor operational changes which it believes will enhance financial
performance, including the following:
o The introduction of major-market-style promotions and contests.
o Modification of rate cards to better exploit a station's remote commercial
broadcast capabilities and increase national/regional advertising.
o Negotiating with interested third parties to lease for the station's
sub-carrier frequencies such as CUE Paging (a national paging service that
is on the lookout for additional radio stations to work with) that could
use a station's use the sub-carrier frequency for national paging services.
Such lease will not effect the station's main signal and may generate
between approximately $6,000 to $20,000 a year in fees.
o The leasing of portable music system through Disc Jockeys Unlimited of
Atlanta, Georgia, a service provider who builds portable music systems for
disc jockeys and radio stations at a cost of $225 a month This will allow
the station to earn equipment rentals as an additional revenue stream and
the staff's disc jockeys the opportunity to earn extra money weekly by
performing at wedding receptions, company and private parties, etc.
o
36
o The development of a firm (proposed to be referred to as ACENET) that will
literally represent the group for all of its national and regional
advertising and will include Internet advertising connections.
o The introduction of an internal, ongoing research system to allow the
station to track listener patterns between Arbitron ratings periods (where
applicable in markets that are rated). Such research will be conducted by
telephone utilizing existing staff personnel.
o A review and update of as appropriate with current music selections added
as necessary for the WAN music programming network element.
After Acceptance Of An Offer
(waiting for FCC approval of ownership transfer)
Following execution of a definitive purchase agreement (subject to FCC
approval, and completion by the Company of satisfactory due diligence), the
Company, in cooperation with the seller of a station, will submit the
appropriate transfer documents to the FCC. While the FCC has the authority, in
its sole discretion, to approve or reject a transfer request, transfer requests
are, in the normal course, generally approved within approximately three (3) to
six (6) months of submission of all required applications and related documents.
Preceding the FCC filing, a comprehensive due diligence investigation
including at least the following steps will be undertaken:
o A thorough inspection of station facilities including offices, studios and
transmitting sites.
o An independent engineering inspection of the station's facilities. Age and
condition of all equipment including transmitters and towers will be
recorded. A comprehensive program of schedule maintenance will be designed
and implemented after the closing.
o A survey will be conducted of the market to analyze existing and potential
competition, market growth trends, current marketing trends, past and
future programming, promotions, and advertising plans along with listener
and advertiser perceptions of the station. Included will be an independent
ratings survey for each market as well.
o Meetings with present management to gain insight into the stations' current
operations. This is expected to include written assessments of station
employees, job responsibility lists for themselves and their staff, budget
projections, plus any other input they can offer regarding the stations.
o A review of all station contracts with vendors and clients. All existing
station trade/barter agreements will be reviewed with the sellers to
37
determine their current status and disposition. Retention preference is
expected to be given to any trade agreements that directly benefit the
stations in the form of promotional considerations and advertising with
other media.
o General staff meetings will be conducted to help minimize anxiety caused by
the pending transfer. Each employee will be asked to submit in writing a
description of their job responsibilities as they perceive them with
comparisons then made by management to the station manager's views. The
Company will then compare the employee's lists against those submitted by
the managers.
o Review of staff members' levels of experience and expertise, job
responsibilities, station/market tenure and future potential.
o Review of existing standards and practices. A system-wide company
operations manual will be distributed post closing, that will set forth
operating rules and regulations, Company benefits and vacation policies.
o Investigating peripheral station revenue enhancement (ie. renting tower
space for use by one or more telecommunications service providers,
utilizing the air staff for remote broadcasts or private parties using a
portable music system or other similar methods.)
Closing and Post Closing Matters
Assuming receipt of final FCC notification of transfer approval, the
Company will immediately proceed to closing, and then commence implementing
those operational changes earlier discussed as deemed appropriate.
On a post-closing basis, the Company plans that reports will be
generated for senior management's review within 30 days after the close of each
month including but not necessarily being limited to the following information:
o Unaudited year-to-date financial statements
o Any and all documents filed that month with government agencies
o A weekly general manager's report including, but not necessarily
limited to the following information:
Cash on hand
Total value of new orders written
Cancellations taken
Accounts receivable aging
Average rate for cash spots run
38
Sales booked for the next 13 weeks
Percent of inventory sold previous month
Percent of inventory available next month
Sources of revenue by percent
(Local Cash-Agency, Local Cash-Direct, National-Cash and trade).
Personnel status and turnover.
Equipment failures or discrepancies leading to any station down time.
Legal actions and management responses.
Audience ratings data received.
Corporate Operating Controls
For the Company to manage its growth strategy, effective, consistent
due-diligence is paramount. Prior to completing an acquisition, the Company
plans to undertake the type of due-diligence analysis described above. Besides
helping the management team form an opinion about the merits of a particular
station opportunity, the due-diligence process should also help to effect a
smooth integration of the target acquisition upon closing.
Upon the completion of an acquisition, corporate operating controls
are planned to be implemented at each station, including tracking every expense
item and actively searching for vendors that will provide the Company with group
discounts for using their service or product. In addition, all station computer
systems are planned to be networked with headquarters in order to produce
station-level information on a real time and on request basis. The Company plans
to generate financial reports within 30 days of month end, including the type of
information described above for review by senior and station management.
Administrative and accounting controls will be centralized in the Company's
Austin headquarters. Corporate staff at both headquarters and each station is
planned to be kept to a minimum. It is anticipated that the only other person in
the Company's Austin headquarters besides the Company's Chief Executive Officer
and CMO will be an administrative assistant.
The majority of commercials and station promotions productions are
planned to be created at the flagship stations and then "fed" to the other
stations in the group via the satellite link that will created at the flagship
stations.
Marketing, Advertising and Promotion
Company stations are planned to be marketed, advertised and promoted
as the leading "fun-to-listen-to-station" in each market, with the goal to
increase station awareness and "dial position recognition" among retailers,
buyers and listeners.
39
Being viewed as a truly local station is highly valued by both
advertisers and listeners in the mid-size and smaller markets in which the
Company plans to operate. The Company, therefore plans to aggressively promote
its stations in their respective markets independently as well as cooperatively
with client retailers and companies with whom the Company may establish joint
marketing/sales relationships through on-air contests, local promotions, direct
mail, website and e-mail promotion, local publications, outdoor advertising and
"word-of-mouth" advertising endorsements.
The Company's sales force, will be trained on an ongoing basis in
marketing their respective stations. In order to attract and retain qualified
personnel, the Company recognizes that it is imperative to structure a
compensation plan for its sales staff that is both fair and appealing. As such,
compensation is expected to be both salary and incentive based. Management also
plans to selectively use bonus programs as a method of rewarding outstanding
salespeople. The sales force at each station will handle local advertising, with
National and regional advertising to be handled by ACENET or another rep firm.
Assuming the Company successfully executes its acquisition strategy of
a planned ACE group of stations, management believes it will be possible to
increase group revenues over the current operators' level for the following
reasons:
o Because not currently existing as a group, none of these stations are
currently offered as a total advertising package. Therefore, any
regional and/or national desiring to advertise in such markets
presently must effect separate media buys with each individual station
and thus deal with sales people in each of such markets Under the
Company's plan, this same advertiser will be able to contact any one
of such stations and buy advertising time from the whole group or any
of its component parts by contacting just one marketing consultant
o As the Company may add affiliate stations to its programming network
(i.e., stations that buy the Company's planned satellite programming
content but in which the Company has no financial interest), such
relationships may also enhance its ability to sell network advertising
and increase revenues.
o Generally speaking, the size of the sale staffs at each ACE station
will grow while the programming staffs will be down-sized to reflect
the Company's satellite programming approach.
o Greater emphasis will be placed on the actual in-house production of
advertiser's commercials to improve the quality of the commercial for
each client.
40
o All Company marketing consultants will be thoroughly trained in
marketing their respective stations without reliance on ratings
because stations which build relationships with its clients to buy
advertising based on results and not just ratings tend to do better
than stations which rely strictly on ratings as their selling point.
o The Company expects to develop, through on-going market research,
specific information to help clients develop immediate and long- term
marketing plans. This will include specific "Top-of-Mind-Awareness"
(TOMA that gauge listener's awareness of the station and measure time
spent listening) research projects.
o The Company expects to coordinate sales literature, telemarketing
programs and direct response promotions with the goal to increase
Company billings.
o The Company's marketing strategy includes offering multiple broadcast
formats in each of the markets it serves. The Company believes that
cross-selling synergies can be achieved with this approach as all
formats do not appeal to all types of advertisers. For example, an
independent station owner broadcasting a big-band format would not be
able to sell advertising to a retailer that targets the teenage
demographic sector. However, by offering a CHR (Top 40) format in many
of its markets, the Company believes it will be able to capture sales
that the individual operator could not.
Leasing each of the FM stations' Sub Carrier Frequency. Each FM
station has one sub carrier "frequency" beneath the main frequency upon which it
broadcasts which may be leased to such types of entities as CUE Paging or Muzak
franchises, local data-processing sources and pager services. The lessee would
be responsible for all costs of setting up the equipment for use of the sub
carrier as well as covering all its own expenses including utilities and
maintenance. Such leasing arrangements could potentially net the Company
approximately $1,000 per month per FM station.
Leasing space on any and all towers that are acquired as a package of
this package. While certain of the stations ACE intends to acquire do not own
the towers on which their antennas are located, on those stations which do own
their own towers, the Company, can offer space on a rental basis to pager
services and other telecommunications vendors. As with the sub carrier, all
start-up costs, utilities and maintenance are borne by the lessee. The Company
estimates that tower space leases could generate approximately $1,000 per month,
per lease.
Picking up affiliates to ACE's satellite networks. As ACE plans to
produce specialized satellite programming for its own stations each day, the
41
Company will have the capability of selling that programming concept to
affiliate stations. In markets too small for ACE to consider for acquisition,
ACE will be able to provide more localized satellite programming than any of the
large nationally syndicated satellite services can offer because the national
syndicators are not able to localize each individual commercial break the way
ACE will be able to. Additionally, ACE will be able to offer affiliates the
opportunity to "tie into" the Company's centralized bookkeeping system and
become an affiliate of its ACENET sales force, allowing the affiliate stations
to be marketed as a part of the overall ACE network. These are services for
which ACE plans to charge additional fees.
Creation of in-house Sales "Firm" (ACENET). ACE plans to market not
only its own stations but also affiliates with which it may enter into joint
marketing relationships. Such joint marketing plan, if successful, is expected
to provide ACE the size and marketing strength necessary to eventually operate
its own in-house rep "firm" eliminating the need to outsource such business, and
the 15%+ commissions that go with it, to some other rep firm. A rep firm
infrastructure is being created on the Internet (Media Reps) right now, being
the platform on which ACE will market regional and national advertising.
Syndication of special weekend programming. ACE plans to create
special weekend programming at some point in the future - probably 24 months out
from the offering - that will be broadcast first over its own network of
stations and affiliates. It may also be possible to syndicate some, if not all,
of these programs on a national basis and possibly receive national advertising
rates for this kind of programming.
Creation of sales training programs. To insure a steady flow of
qualified salespeople to market its stations and its network affiliates, ACE
plans to create, with the assistance of the network of junior colleges in Texas,
training courses, programs and classes for media sales training that will be
offered around the such state to train new sales people. While there are any
number of schools around the country training disc jockeys, to the Company's
knowledge, there are no schools training radio sales people. In this fashion,
ACE believes it can identify and train the most qualified sales people rather
than rely strictly on currently available pools of sales people. Such programs,
if implemented, are expected to generate tuition revenue on a shared basis
between the Company and participating schools and provide interns for internal
sales department utilization. The Company anticipates implementing this program
at some point in the second year of its operations.
Programming. Strong, consistent programming is important for the
Company's success. The Company recognizes that issues related to questions of
morality and decency receive more consideration in smaller markets than larger
42
markets such as Dallas or Houston. Regardless of the format offered, the Company
plans to take a relatively conservative approach to its programming by at least
initially operating each acquired station with the format it is currently using
since all acquisition targets are planned to be generating positive cash flow.
Music for each format will be stored on hard drives inside computers
located in the control rooms of each individual station. This music will be
format specific to that particular station. A station that features country
would have a Country music programming library on its hard drives.
Each station will feature a live morning show. Depending on the needs
of the market, this may be a one or two person show. In most markets, there will
be a local newscaster for presenting local news, events, etc. These local air
talents will also be responsible for local commercial production and public
appearances.
Each station's music programming computer will be wired to the
Company's Satellite Network. which literally serves as a pipeline for sending
specific programming and disc jockey patter to each individual station in the
group. All music and programming logs will be sent directly to each station's
programming computer from the flagship uplink site. When the live morning show
is finished, the disc jockey merely has to flip a switch and the on-site music
computer takes over the programming for unattended walk-away capabilities.
The planned uplink site will provide the voice tracks to go with the
music being played by the local music computers at each station. Instead of
having a disc jockey actually sit in a control room for a full 4 or 6 hour
airshift, the satellite disc jockey can pre-record a full 4 hour show in less
than 30 minutes and send it on its way to the respective station receiving it.
The on-site music computer will insert the actual recorded breaks by the disc
jockey at the appropriate times.
The capability exists of breaking into regular programming with any
urgent weather forecast or breaking news story. The technology is now here to
allow for a pre-recorded show to sound perfectly live - even down to actual time
checks.
Because of this system, the Company is planning for one "super staff"
of announcers to be located at its uplink center capable of handling a variety
of formats. Such staff of approximately 12 full-time announcers will be capable
of producing formats ranging from country, adult contemporary, classic rock,
contemporary hit radio and oldies. Depending on the mix of stations available
for acquisition, a specific Hispanic (Tejano) format may also be available.
These announcers will also be capable of producing all network commercials as
well as local commercials for specific stations. It is believed such system will
afford the Company the widest possible format range and allow it to seek out a
number of available properties in its proposed markets.
43
Broadcast Equipment. The Company plans to utilize the acquired
stations' existing transmitters, audio chain equipment, and tower space wherever
possible or feasible, based on the Company's initial due-diligence. The Company
will upgrade particular station equipment on an as-needed basis. All other
equipment required to network each station into headquarters will either be
purchased or leased.
To establish the in-house satellite network, the Company intends to
install its satellite uplink/downlink systems at its planned flagship stations.
The Company will then install satellite downlink systems at its other stations.
CAPITAL EXPENDITURES - BROADCAST EQUIPMENT
To establish the satellite network connection, the following equipment
will be required:
The flagship satellite control center will require the following
equipment:
Description: Approximate Cost:
8-watt RF Transmit/Receive Unit. $ 21,500
Digital Audio Codecs 8,000
Channel Master TC/RC Antenna 3,495
Variable Rate Modems 8,000
Uplink Kit with Cable/Combiners 695
Uninterruptible Power Supply 1,795
486-Notebook PC w/Pwr Control 1,695
Total $ 45,180
44
Each receiving or satellite would have the capability of down-link
receiving which includes the following equipment:
Digital Audio Receiver $1,995
1.8 M Receive-Only Antenna 350
PLL/LNB Downconverter 350
Total for each downlink $2,695
Total Downlinks (4) $ 10,780
Total Group Satellite Equipment $ 55,960
ACE proposes to purchase this equipment. The monthly satellite time
fee for the satellite channel (24 hours a day/seven days a week) is expected to
be approximately $3,040 a month or approximately $36,480 per year. This is the
highest-powered KU band satellite feed available. The signal will be strong
enough to resist rain fade and other weather conditions that can sometimes
effect signal strength.
Besides the hardware costs, the initial network investment costs would
include:
Lease Initiation Fee (estimated) $ 8,000
Space Segment Initiation Fees 10,360
Installation and Licensing Fees 5,000
Total Network Up-Front Investment $23,360
ACE's satellite service connection will be provided by National
Supervisory Network of Avon, Colorado which is nationally recognized as the
leader in satellite technology and whose VSAT system has already been
"road-tested" for several years, so the technology ACE will use is actually
"off-the-shelf".
Additionally, to bring each station on-line, with true compatibility,
the following equipment would also be required:
Control Room Computerized Operation System including PC computer with
printer and hard drive music/commercial storage system.....$7,000
45
Information-Line Computer that would answer a special phone line at the
station for listeners and advertisers.....$600
Bookkeeping Computer with printer that would handle all billing, traffic
and payroll functions on a local level, tied by modem to ACE's computers at
headquarters.....$600
Dedicated-Use Sales Department computer with printer that would handle
voice-mail capabilities and could be used simultaneously for creation of local
sales presentations to advertisers.....$1,000
Total extra equipment per station and/or market - $9,200
DESCRIPTION OF PROPERTY
The Company is newly organized and has only conducted organizational
activities. As a result, the Company has acquired no property.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since inception of the Transaction Company, the Company's President,
Mr. Schult has loaned the Company approximately $6,140 pursuant to an oral
agreement. This agreement generally provides for the repayment of the loan with
interest at 10% per annum within twelve(12) months from the time of the loan to
the Company. In the event the Company's receives the Maximum Proceeds, the
Company may, in its discretion, repay the entire amount of such loan.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company is newly organized and this is the Company's initial
public offering so there is currently no public trading market for the Company's
common stock. The Company hopes to have the Company's common stock prices listed
on the bulletin board maintained by the National Association of Securities
Dealers. To be eligible to have the Company's common stock quoted on the
bulletin board, the Company will be required to be a "reporting company" a step
the Company will attempt to accomplish after the effective date of this
registration statement.
None of the Company's common stock is subject to outstanding options
or rules to purchase nor does the Company have any securities that are
convertible into common stock of the Company. The Company has not agreed to
register any stock of the Company for anyone nor does the Company presently have
in effect employee stock options or benefit plan that would involve the issuing
of additional shares of the common stock of the Company.
46
Dain Schult, the President of the Company and Bob Ringle, the Vice
President of the Company, collectively own 10,500 shares of the common stock of
the Company. Messrs Schult and Ringle's common stock is "founder stock" and was
issued to Messrs Schult and Ringle without registration under the Securities
Act. Because the stock owned by Messrs Schult and Ringle is not registered, it
is "restricted stock" within the meaning of Rule 144 under the Securities Act
and may only be sold in accordance with the various rules and regulations of
Rule 144. Specifically, after Mr. Schult and Ringle have held their common stock
for a period of at least one year, Messrs Schult and Ringle could begin to sell
part of their common stock. Generally speaking, the amount of stock that each of
Messrs Schult and Ringle could sell could not exceed one percent (1%) of the
outstanding common stock of the Company during any ninety (90) day period. If
the maximum number of shares are sold under this offering, the total number of
shares of common stock outstanding after the offering will be 20,500,000 shares.
As a result, each of Messrs Schult and Ringle could sell up to 205,000 shares
during any ninety (90) day period. Although neither of Messrs Schult or Ringle
have any present intention to sell any of their shares, the sale of the large
block of the Company's common stock could depress the per share price of the
Company's common stock.
Rule 144 is conditioned upon the Company making public certain
information concerning the Company. Although the Company does not currently make
information publically available that would allow the Company or Messrs Schult
or Ringle to use Rule 144, the Company anticipates making such information
available so that Messrs Schult and Ringle could sell the amount set forth in
Rule 144.
Dividends
The Company has never paid dividends and does not expect to declare
any in the foreseeable future. Instead, the Company expects to retain all
earnings for growth of the Company. Although the Company has no specific
limitations on its ability to pay dividends, the corporate law of Nevada, the
State under which the Company is organized, limits the ability to pay dividends
to those instances in which the Company has earnings and profits. If the Company
is unable to achieve earnings and profits in a sufficient amount to satisfy the
statutory requirements of Nevada, no dividends will be made, even if the Board
of Directors of the Company otherwise wanted to pay dividends. Investors should
not purchase shares in this offering if their intent is to receive dividends.
47
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's two
employees:
Name Position Annual Salary
Dain L. Schult Chief Executive Officer, President, Chairman
Of the Board and Secretary $126,000
Robert E. Ringle Vice President of Internet Operations
Director of Sales, Treasurer and Director $115,000
Mr. Schult is currently employed by the Company at an annual salary of
$126,000 per annum pursuant to a three (3) year written employment agreement
dated as of October 29, 1998. Mr. Schult's employment agreement generally
provides for a monthly vehicle allowance of $500, for reimbursement of business
related expenses, and for bonuses as may be determined in management's sole
discretion.
Mr. Ringle is currently employed by the Company at an annual salary of
$115,000 per annum pursuant to a three (3) year written employment agreement
dated as of October 29, 1998. Mr. Ringle's employment agreement generally
provides for a monthly vehicle allowance of $500, for reimbursement of business
related expenses, and for bonuses as may be determined in management's sole
discretion.
The Company does not presently have a stock option plan but intends to
develop an incentive-based stock option plan for its officers and directors in
the future and may reserve up to approximately ten (10%) percent of its then
outstanding shares of Common Stock for such purpose.
FINANCIAL STATEMENTS
The following are the financial statements of the Company, with independent
auditor's report, for the period ending December 31, 1998.
48
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
TABLE OF CONTENTS
49
F-1
50
{Letterhead of BEARD NERTNEY KINGERY CROUSE & HOHL P.A.}
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of American Communications Enterprises, Inc:
We have audited the accompanying balance sheet of American Communications
Enterprises, Inc. (the "Company"), a development stage enterprise, as of
December 31, 1998, and the related statements of operations, stockholders'
deficit and cash flows for the period October 29, 1998 (date of incorporation)
to December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the significant estimates
made by management, as well as the overall financial statement presentation. We
believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for the period
October 29, 1998, (date of incorporation) to December 31, 1998 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its financing needs. This factor, along with its
negative working capital and deficit positions, raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BEARD NERTNEY KINGERY CROUSE & HOHL P.A.
January 25, 1999
F-2
51
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
BALANCE SHEET AS OF DECEMBER 31, 1998
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
52
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
for the period October 29, 1998 (date of incorporation)
to December 31, 1998
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
53
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' DEFICIT
for the period October 29, 1998 (date of incorporation)
to December 31, 1998
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
54
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
for the period October 29, 1998 (date of incorporation)
to December 31, 1998
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
55
American Communications Enterprises, Inc.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
American Communications Enterprises, Inc. (the "Company") was incorporated under
the laws of the state of Nevada on October 29, 1998. The Company is considered
to be in the development stage, as defined in Financial Accounting Standards
Board Statement No. 7. The Company intends to purchase and operate radio
stations throughout the United States. The planned principal operations of the
Company have not commenced, therefore accounting policies and procedures have
not yet been established.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has an accumulated
deficit and negative working capital position of $70,730 as of December 31,
1998, and accordingly its ability to continue as a going concern is dependent on
obtaining capital and financing for its planned principal operations. The
Company plans to secure financing for its acquisition strategy through the sale
of its common stock (see Note D) and issuance of debt. However, there is no
assurance that they will be successful in their efforts to raise capital. These
factors among others may indicate that the Company will be unable to continue as
a going concern for a reasonable period of time. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
NOTE C - RELATED PARTY TRANSACTION
The Company's president, who is also a shareholder, has advanced $6,140 to the
Company. As of December 31, 1998 the Company had not repaid any of the advances,
which are unsecured, non-interest bearing and due on demand.
NOTE D - PROPOSED COMMON STOCK OFFERING
During the first quarter of 1999, the Company intends to file a registration
statement for the sale of up to 10,000,000 shares of the Company's common stock
at $0.05 per share. The existing shareholders do not intend to offer any shares
for sale. The offering is on a best efforts, no minimum basis, and any proceeds
will be used to finance the Company's acquisition strategy as well as provide
working capital.
F-7
56
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Bylaws of the Company provides that the Company shall
indemnify its officer or directors against expenses incurred in connection with
the defense of any action in which they are made parties by reason of being
officers or directors of the Company, except in relation to matters as to which
such director or officer shall be adjudged in such action to be liable for
negligence or misconduct in the performance of his duty. An officer or director
of the Company could take the position that this duty on behalf of the Company
to indemnify the director or officer may include the duty to indemnify the
officer or director for the violation of securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the Company's Articles of Incorporation,
Bylaws, Nevada law or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or payed by a director,
officer or controlling person of the Company and the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
57
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimate by the Company of the
expenses of the offering:
Type of Expense Amount
Accounting Fees $ 2,000.00
Filing Fees $ 1,500.00
Attorneys Fees $35,000.00
Transfer Agent Fees $ 3,500.00
Printing Costs $ 3,000.00
Standard & Poor Listing $ 5,000.00
TOTAL $50,000.00
RECENT SALES OF UNREGISTERED SECURITIES
On or about October29, 1998, the Company was incorporated under the
laws of the State of Nevada. Effective as of October 29, 1998, the Company
issued a total of 10,500,000 shares of its stock to the two founders of the
Company, Dain L. Schult and Robert E. Ringle. The federal exemption the Company
relied upon in issuing the securities was Section 4(2) of the Securities Act.
The Section 4(2) exemption was available to the Company because the Company did
not solicit any investment in the Company and instead simply issued shares to
Messrs Schult and Ringle who are related to each other. In addition, given
Messrs Schult and Ringle's involvement in the establishment of the Company,
Messrs Schult and Ringle each had access to such information as he deemed
necessary to fully evaluate an investment in the Company. In addition, the
issuance of the shares of stock to Messrs Schult and Ringle was exempt under the
laws of the State of Texas, the State in which both persons resided at the time
of the commencement of the Company, pursuant to Section 5 I. (a) of the Texas
Securities Act. Section 5 I. (a) of the Texas Securities Act provides that the
provisions of the Texas Securities Act shall not apply to the sale of any
security by the issuer thereof so long as the total number of security holders
of the issuer thereof does not exceed thirty-five (35) persons after taking such
sale into account; and such sale is made without any public solicitation or
advertisements:
The actual consideration paid for the shares issued to Messrs Schult
and Ringle was $100 in cash. Because of the extremely limited nature of the
transaction by which the shares were issued to Messrs Schult and Ringle, no
underwriters were used.
58
EXHIBITS
Attached to this registration are the exhibits required by Item 601 of
Regulation S-B.
UNDERTAKINGS
The Company does not presently anticipate using an underwriter in
conducting this offering; if the company changes its plan and utilizes an
underwriter, the Company will provide to the underwriter, at the closing
specified in any underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the Company's Articles of Incorporation,
Bylaws, Nevada law or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or payed by a director,
officer or controlling person of the Company and the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
59
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Austin,
State of Texas on February
, 1999.
(Registrant) American Communications Enterprises, Inc.
By (Signature and Title): ___________________________________
Dain L. Schult, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
(Signature) ______________________________
Dain L. Schult
(Title) President, Chief Executive Officer, Secretary, Chairman of the
Board of Directors
(Date) February , 1999
(Signature) _______________________________
Robert E. Ringle
(Title) Vice President, Treasurer and Director
(Date) February , 1999
60
Date Filed: February 8 , 1999 SEC File No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
REGISTRATION STATEMENT
ON FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
AMERICAN COMMUNICATION ENTERPRISES, INC.
(Consecutively numbered pages through of this Registration Statement)
61
INDEX TO EXHIBITS
62
