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EX-32 - Debut Broadcasting Corporation, Inc. | v181811_ex32.htm |
EX-21 - Debut Broadcasting Corporation, Inc. | v181811_ex21.htm |
EX-3.1 - Debut Broadcasting Corporation, Inc. | v181811_ex3-1.htm |
EX-31.2 - Debut Broadcasting Corporation, Inc. | v181811_ex31-2.htm |
EX-31.1 - Debut Broadcasting Corporation, Inc. | v181811_ex31-1.htm |
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
(Amendment
Number One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2008
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the transition period
from to
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Commission
file number 0001254371
DEBUT BROADCASTING CORPORATION,
INC.
(Exact
name of registrant as
specified in its charter)
Nevada
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88-0417389
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(State
or other
jurisdiction of
incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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1025
16th
Ave South, Nashville, TN
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37212
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(Address of
principal executive offices)
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(Zip
Code)
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Registrants
telephone number, including area code (615) 301-0001
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Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.003 per
share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller Reporting
Company þ
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The
aggregate market value of the registrant’s outstanding voting and non-voting
common stock as of June 30, 2008, the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately $7.9
million, based on 19,866,866 shares outstanding and a last reported per
share price of common stock on the Over the Counter Bulletin Board of $0.40 on
that date. As of March 31, 2009, the registrant had outstanding
19,866,866 shares of common stock.
Documents
Incorporated by Reference:
Portions
of the registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, have been incorporated by reference in Part III
of this Annual Report on Form 10-K.
Table
of Contents
PART
I
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3
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Item 1.
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Business
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3
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Item 2.
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Properties
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Item 3.
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Legal
Proceedings
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Item 4.
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Submission
of Matters To a Vote of Security Holders
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PART II
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20
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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20
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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22
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Item 8.
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Financial
Statements and Supplementary Data
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29
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Item 9A(T).
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Controls
and Procedures
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29
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Item 9B.
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Other
Information
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31
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PART III
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31
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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31
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Item 11.
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Executive
Compensation
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32
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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34
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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34
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Item 14.
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Principal
Accountant Fees and Services
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34
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PART IV
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34
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Item 15.
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Exhibits
and Financial Statement Schedules
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34
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2
EXPLANATORY
NOTE
This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the annual report
of Debut Broadcasting Corporation, Inc. (the “Company”) on Form 10-K for the
year ended December 31, 2008 as filed with the Securities and Exchange
Commission on April 1, 2009 (the “Original Filing”). This Amendment (i)
revises the discussion of liquidity and capital resources with management’s
discussion and analysis of financial condition, (ii) revises the disclosure of
controls and procedures (iii) adds certain information to paragraph 4 of
Exhibits 31.1 and 31.2, and (iv) adds certain information to disclose
executive compensation in Part III that was previously incorporated by reference
from the Company’s definitive proxy statement for the 2009 Annual Meeting of
Stockholders, As required by Rule 12b-15 under the Securities
Exchange Act of 1934, as amended (“Exchange Act”), the Company has set forth the
complete text of Items 10 and 15, as amended.
In
addition, as required by Rule 12b-15 under the Exchange Act, new certifications
by the Company’s principal executive officer and principal financial officer are
filed as exhibits to this Amendment. This Amendment does not reflect events
occurring after the date of the Original Filing or modify or update any
disclosures that may have been affected by subsequent events. Except as
described above, all other information included in the Original Filing remains
unchanged.
PART
I
Item 1. Business.
Certain
Definitions
In this
Form 10-K the terms “Company”, “Debut”, “we”, “us”, and “our” refer to
Debut Broadcasting Corporation, Inc. and its consolidated
subsidiaries. Unless the context otherwise requires, these
terms exclude California News Tech, our predecessor company, and Media
Sentiment, Inc., a wholly-owned subsidiary of the Company into which the former
assets and operations of California News Tech were transferred effective October
31, 2007.
We use
the term local marketing agreement (“LMA”) in various places in this
report. A typical LMA is an agreement under which a Federal Communications
Commission (“FCC”) licensee of a radio station makes available, for a fee, air
time on its station to another party. The other party provides programming to be
broadcast during the airtime and collects revenues from advertising it sells for
broadcast during that programming.
We use
the trademarked term Super-Regional Cluster in various places in this
report. A typical radio conglomerate uses the term “cluster” to
designate stations under ownership in an urban to suburban
area. We will acquire traditional clusters in neighboring
markets, and chain them together under common management. We have
defined this strategic collection of clusters as a Super-Regional
Cluster.
Unless
otherwise indicated:
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we
obtained total radio industry listener and revenue levels from public
statistics published by the Radio Advertising Bureau (the
“RAB”);
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we
derived historical market revenue statistics and market revenue share
percentages from data published by SNL Kagan Financial, a sector focused
business intelligence firm specializing in media and communications
data;
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we
derived all audience share data and audience rankings, including ranking
by population, except where otherwise stated to the contrary, from surveys
of people ages 12 and over, listening Monday through Sunday,
6 a.m. to 12 midnight, and based on the Fall 2008 Arbitron Market
Report; and
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all
dollar amounts are rounded to the nearest
thousand.
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Company Overview
We are
located in Nashville, Tennessee and conduct business from our principal
executive office, located at 1025 16th Avenue
South, Suite 102, Nashville, Tennessee 37212. On February 1,
2009, we relocated to our current address. We formerly conducted
business from offices located at 1209 16th Avenue
South, Suite 200, Nashville, Tennessee 37212. We produce and
distribute syndicated radio programs to radio stations across the United States
and Canada. In addition, we own and operate eight radio stations in
Mississippi.
3
We
maintain radio syndication in Nashville and produce and distribute 14 radio
programs, which are broadcast over approximately 1,400 radio station affiliates.
These radio programs have an estimated 45 million U.S. listeners per week. In
addition to syndication services, we own and operate a multi-media studio with
audio, video and on-line content production capabilities. This facility is
located on Music Row in Nashville, Tennessee. We also provide marketing,
consulting and media buying (advertising) for our radio broadcast station
customers in the United States.
The
Company was originally incorporated in Nevada on January 22, 1999 as
NewsSurfer.com Corporation (the “Predecessor Company”). In 2001, the
Predecessor Company changed its name to California News Tech and shifted its
business plan to focus on providing online access to news media analysis for a
subscription fee. On October 31, 2006, the Predecessor Company transferred all
of its assets, liabilities, and business operations to a new wholly-owned
subsidiary, Media Sentiment, Inc. (“MSI”).
On May
17, 2007, the Company issued a control block of its common stock to the former
shareholders of Debut Broadcasting, Inc. (“Debut Broadcasting”), a privately
held Tennessee corporation. Through a series of related transactions (the
“Reverse Merger”), the Company acquired Debut Broadcasting, which became the
Company’s wholly-owned subsidiary, and subsequently the Company changed its name
to Debut Broadcasting Corporation, Inc.
As part
of the Reverse Merger, the Company and MSI entered into a Post-Merger Operating
Agreement in which the two entities agreed to operate their respective
businesses separately, and agreed to not interfere in any manner with their
respective operations, have any rights to use, acquire or otherwise operate any
of their respective assets or intellectual property, or create any liabilities
for which the other party would be obligated.
As part
of this Post-Merger Operating Agreement, the Company agreed that if for any
reason the former president and director of the Predecessor Company, Marian
Munz, was unable to register the MSI shares, that the Company would sell our
shares to Munz, for $1.00. As a consequence, MSI has and will continue to
operate completely separate from the Company from the date of the Reverse
Merger.
In
addition, at the time of the Reverse Merger, the Company was released from
certain liabilities to its former president and director, Mr. Munz, and his
spouse; however, these liabilities continued as the sole responsibility of MSI
in the form of two separate convertible promissory notes. These notes remain
outstanding but, if converted under their terms into shares of MSI common stock,
would represent over an 80% interest and full voting control over
MSI.
As a
result, the Company considers MSI a non-controlled subsidiary for financial
purposes, and has not included any operating results, cash flow
analysis or assets and liabilities of MSI in its consolidated financial
statements.
On June
27, 2007, MSI filed a registration statement with the SEC with respect to its
issued and outstanding shares of common stock for the purpose of completing a
spin-off of MSI by transferring all its shares of common stock to stockholders
of record of California News Tech as of April 20, 2007. The spin-off
of MSI was completed during the third quarter of 2008.
Our
Focus
Our
strategic focus is on small, rural-sized markets in the Southeastern United
States. We believe that these markets represent attractive operating
environments and generally exhibit the following:
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Below-market
purchase prices;
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Rising
advertising revenues, as the larger national and regional retailers expand
into these markets;
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Small
independent operators, many of whom lack the capital to produce
high-quality locally originated programming or to employ more
sophisticated research, marketing, management and sales
techniques; and
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Lower
overall susceptibility to economic
downturns.
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4
We
believe that the attractive operating characteristics of small rural markets,
together with the relaxation of radio station ownership limits under the
Telecommunications Act of 1996 (the “Telecom Act”) and FCC rules, have created
significant opportunities for growth from the formation of groups of radio
stations within these markets. We have capitalized on these opportunities to
acquire attractive properties at favorable purchase prices, taking advantage of
the size and fragmented nature of ownership in these markets, and to the greater
attention historically given to the larger markets by radio station
acquirers. Our business model allows us to capitalize on the
synergies created by acquiring geographic clusters while providing centralized
programming and distributing administrative overhead across the
cluster. According to FCC statistics, as of March 31,
2008, there were 9,201 FM and 4,776 AM stations in the
United States.
To
maximize the advertising revenues of our stations, we seek to enhance the
quality of radio programs for listeners and the attractiveness of our radio
stations to advertisers in a given market. We also recruit top talent for
locally originated programming content that airs on each station, as well as
improve content utilizing our facilities on Music Row in Nashville, Tennessee.
Within each market, our stations are diversified in terms of format and target
audience enabling us to attract larger and broader listener audiences and
thereby a wider range of advertisers. This diversification, coupled with our
competitive advertising pricing, also has provided us with the ability to
compete successfully for advertising revenue against other radio, print and
television media competitors.
We
believe that we are in a position to generate revenue growth, increase audience
and revenue shares within our markets and, by capitalizing on economies of scale
and by competing against other media for incremental advertising revenue,
increase our operating income, growth rates and margins. Our markets are still
in the development stage with the potential for substantial growth as we
implement our operating strategy. We believe we have several significant
opportunities for growth within our current business model, including growth
through maturation of recently reformatted or re-branded stations, and through
investment in signal upgrades, which allow for a larger audience reach, for
stations that were already strong performers.
Operating
Strategy
Our operating strategy capitalizes
on the synergies we create between radio syndication and radio
station operations. We have the technology, talent, and facilities to
outsource content for radio stations. By utilizing this content, we
gain affiliates, increase Arbitron ratings for our affiliates and, therefore,
generate increased revenues in advertising sales. We maximize this
strength by utilizing a strategy of building radio content once, and re-selling
it to new markets over and over.
The strength of our radio operations
strategy lies in our ability to buy existing radio stations at prices below
market value. We utilize our extensive radio and management
background to successfully increase sales, reduce operating costs and increase
overall performance.
Acquisition
Strategy
Our
acquisition strategy has the following principal components:
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assemble
leading radio station clusters in small rural markets by taking advantage
of their size and fragmented nature of ownership;
and
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selectively
acquire leading stations where we believe we can cost-effectively achieve
a leading position in terms of signal coverage, revenue or audience share
and acquire under-performing stations where there is significant potential
to apply our management expertise to improve financial and operating
performance.
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Existing
Business Operations
All of
our current material business operations are conducted through our wholly-owned
subsidiaries, The Marketing Group, Inc., and Debut Broadcasting Mississippi,
Inc.
Existing
Radio Syndication Business
Our core business is the production and
distribution of syndicated radio programming to radio stations in the U.S. and
Canada. We have grown from a single radio program in 1999 to approximately 14
distinct programs and services currently offered to radio stations in the U.S.
and Canada. Our customer base of nearly 1,400 radio stations generates an
audience nearly 40 million listeners each week in the US. Our current
programming focuses on country, Christian, and urban formats. Our planned
expansion includes adult contemporary and rock formats.
5
Revenue is generated from advertising
and sponsorship sold in the syndicated radio programs, as well as
revenue-sharing agreements with radio station affiliates. Key advertising
relationships include Wal-Mart, Pfizer, GEICO Insurance, Johnson & Johnson,
General Mills, and Proctor & Gamble.
During the past decade, rapid
consolidation of the radio industry resulted from government de-regulation of
ownership limits. Companies that owned the maximum of 24 radio stations prior to
1996 are now free to own far more licenses. At the beginning of
2007, larger companies owned an average of 254 stations each and the
largest, Clear Channel Communications, owned over 1,100 stations (although it is
in the process of divesting stations in some smaller markets).
The
process of consolidation has dramatically reduced staffing levels. Most radio
stations now rely on automation systems and syndicated programming to fill
airtime. Management believes that the average number of
employees dedicated to each on-air radio signal in 1996 was eight; today, that
number is below three. We have exploited this need, providing radio stations
with daily features and hourly weekend programming.
We intend to continue our rapid
expansion of the programming and services we offer to radio stations, including
increased penetration of larger markets with long-form programming.
Specifically, we will focus on creating a new-generation of long-form, 24-hour
programming in the following formats:
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Country;
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Rock;
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Urban;
and
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Adult
Contemporary
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Relying
on our management’s experience with 24-hour programming, which has been
historically delivered via satellite to radio station affiliates, we now utilize
a more efficient delivery method facilitated by the Internet. The result is a
more “hands-off” operation on the radio station end of the service,
higher-quality, much greater flexibility, more localized programming for radio
station affiliates, and more reliable delivery (eliminating vulnerabilities in
the traditional satellite-delivery systems). During 2008, we
converted distribution of more than 90% of our programming to digital
delivery. We further expanded our program and service offerings to
include:
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24-hour weather and on-call
severe weather coverage; and
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Production music and station
imaging.
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In
addition, planned our expansion of program and service offerings
includes:
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Traffic and Billing
Services
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Weekday and weekend
personalities; and
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Format-specific news and sports
reporters.
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By
increasing the rate of the expansion of our programming and services even
further, we acquire a higher number of radio station affiliates and earn
increased ratings, which should translate into increased revenues.
Diversification
During
2007 we expanded our business plan to include the acquisition and management of
radio stations (“Properties”) in small to mid-sized radio markets in the United
States. Properties acquired by us will serve as flagships for the new 24-hour
programming and other programs and services provided by us. We
further anticipate that these acquisitions will also increase margins and cash
flow for the Properties and existing syndication operations as we leverage
unique synergies resulting from our existing lines of business. In furtherance
of this strategy, during March of 2008 we entered into a Local Marketing
Agreement (“LMA”) with Holladay Broadcasting of Louisiana for the radio
broadcast stations identified as WBBV FM 101.3 Mhz, and KLSM FM
104.9. During September of 2008 we purchased the assets
of WBBV FM 101.3 Mhz from Holladay Broadcasting of
Louisiana. Finally, during September of 2008 we entered into an LMA
with Grace Media Partners for the radio broadcast station WQBC AM
1420. We now own and operate eight broadcast radio stations
identified as WIQQ FM 102.3 MHz in Leland, Mississippi, WBAQ FM 97.9 MHz, WNIX
AM 1330 kHz in Greenville, Mississippi, and WNLA FM 105.5 MHz, WNLA AM 1380 kHz
in Indianola, Mississippi, KLSM 104.9 in Tallulah, Louisiana and WBBV FM 101.3
Mhz, and WQBC AM 1420. We will continue to review the potential of additional
acquisitions of radio stations in proximity to this area, although there is no
assurance that we will be able to consummate such acquisitions.
6
We believe that ownership of Properties
has the potential to increase our margins and cash flow. We are uniquely capable
of more cost-efficient operation of radio stations than other owners because of
our ability to generate the programming out of our existing syndication
operation in Nashville, overlay national advertising revenues and then localize
the content in each market. Further, this strategy blends elements of
the new and old economies to diversify risk in three key ways:
Technology. The
FCC approved digital radio (“HD Radio”) in March 2007. Similar to digital
television, HD Radio allows broadcasters to transmit two channels digitally
through the equivalent of one analog channel.
We
anticipate that the years 2009 through 2011 will show a rapid proliferation of
HD Radio. Many radio stations in the top 50 markets have already converted to
the new broadcast format, and major retailers, including Radio Shack, Best Buy
and Wal-Mart, carry the receivers, which already compete favorably with hardware
prices for satellite radio and should continue to drop. Major market
automotive companies such as Volvo will be offering their 2009 model vehicles
with HD Radio factory installed.
HD Radio
provides a wide range of new free listening options to consumers without the
monthly subscription charged by satellite radio. All existing FM license-holders
have the right to convert to HD Radio without further approval from the
FCC.
We are
seeking to promote the expansion of new technologies and adapt our platforms for
increased integration with devices like digital music players and mobile
phones. Independent reports from The New York Times and USA Today
report that traditional radio has gained strength with the consumers in their
late teens and early twenties with the advent of new devices that are FM
compatible.
The growth potential offered by the new
technologies of HD Radio, other digital music players, mobile phones and
webcasting into the future provide additional diversification
opportunities.
Diversification of Revenue Streams
and the Future Potential of New Technologies. While revenues
from syndication and radio station operations are both primarily derived from
advertising, budgets and clients are quite separate. By diversifying revenues to
include both national syndication revenues and local-market revenues, we are
less vulnerable to any potential changes in future market conditions than
companies that operate only radio stations.
Diversification of
Assets. Ownership of Properties also adds hard assets to our
balance sheet (such as licenses, real estate, towers, etc.) in addition to the
extensive intellectual assets we have in our content and brands.
Strategy
for Investing in Properties
Our
management and members of our Board of Directors have extensive experience in
the radio industry, ranging from programming, sales and management to
acquisitions and financing. That experience has been key to our success in
syndication and is the genesis of our unique and proprietary radio station
acquisition strategy.
Radio has typically provided a short
turnaround cycle and near-term horizon for return on investment for investors
who focus on strong operational fundamentals. As the largest radio companies in
the U.S. consolidate into the top 100 markets, prices in medium and small
markets have reached levels where management believes that stations are greatly
undervalued and attractive for investment when certain other conditions
exist.
The
largest radio companies (Clear Channel, Cumulus, Citadel, CBS, etc.) are
increasingly focused on larger markets because they have determined that they
find the greatest cost-efficiency there. We perceive that there is a virtual
absence of and need for a company with an effective strategy for medium and
small markets - a successful and repeatable business model for radio stations
that relies primarily on local, direct advertising revenues.
We intend
to create stockholder value by investing in medium and small-market radio
stations that we perceive are not taking advantage of modern operational
strategies designed to maximize revenue and minimize cost. It is our view that
many such stations are underperforming financially because of poor sales
strategies and inefficient costs of operation.
7
By
investing only in Properties that are under-performing, we hope to capture the
gap between low purchase prices (typically four times net revenue or seven times
broadcast cash flow) and the public market for healthy stations (estimated at
between nine to 15 times broadcast cash flow). A recent article in the trade
publication Inside
Radio showed the largest transactions in 2008 averaged as high as 22
times broadcast cash flow. Management believes the benchmark of nine to 15 times
multiple is holding up against market trends in small market radio. Management
has strong confidence in its strategy to selectively acquire Properties because
industry researchers like Kagan continue to report a robust flow of private
capital into both large and small acquisitions within the radio
industry.
In broad
terms, our investment criteria include:
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Consolidation. The opportunity to consolidate
multiple Properties in a single market is a key investment criteria
because it offers immediate cost savings.
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Dominance. The opportunity to own a
substantial majority of the Properties competing for advertising in a
single market (the maximum number allowed by FCC ownership limits or close
to it) is a key investment criteria for competitive reasons. Markets where
Clear Channel, Citadel, Cumulus, CBS or other major national competitors
are present will be avoided.
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Good
Infrastructure.
Radio stations that are broken, abused or neglected can be turned around
quickly with good management. Others that we determine are in particularly
poor physical condition will require too much time and resources to turn
around and, therefore, will not meet our acquisition
criteria.
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Demographics
and the Local Economy. High-priority acquisition
markets will have positive growth trends for population, retail sales and
other lifestyle and economic factors because the extent of the turnaround
can be more accurately projected on these
bases.
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Consummation
of our pending acquisitions and any acquisitions in the future are subject to
various conditions, such as compliance with FCC and regulatory requirements
which are discussed elsewhere in this report.
We cannot
be certain that any of these conditions will be satisfied. In addition, the FCC
has asserted the authority to review levels of local radio market concentration
as part of its acquisition approval process, even where proposed assignments
would comply with the numerical limits on local radio station ownership in the
FCC’s rules and the Communications Act.
Our
acquisition strategy involves numerous other risks, including risks associated
with:
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identifying
acquisition candidates and negotiating definitive purchase agreements on
satisfactory terms;
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integrating
operations and systems and managing a large and geographically diverse
group of stations; and
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diverting
our management’s attention from other business
concerns.
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435
We cannot
be certain that we will be able to successfully integrate our acquisitions or
manage the resulting business effectively, or that any acquisition will achieve
the benefits that we anticipate. In addition, we are not certain that we will be
able to acquire future properties at valuations as favorable as those of
previous acquisitions.
Sales
and Programming Strategies
Management’s
experience is that radio station turn-arounds are achieved most quickly with a
combination of revenue growth and cost-cutting. We believe that we have the
potential to accomplish both in some new, unique ways based on synergies with
our existing lines of business.
Our sales plan for our acquired
Properties is to expand revenue from a single source to three distinct revenue
streams:
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Local
Advertising. This is typically the existing revenue stream for any
acquisition. By utilizing tighter structure, ongoing training and new
technology (i.e. presentation and sales tracking software), we hope to
make account executives more effective. There can be no assurance that we
will be successful in achieving similar increases with Properties we
acquire.
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Event
& Promotion Revenues. It has been our management’s
experience that overall revenues have the potential to increase as much as
20 percent with the addition of event and promotion revenues. This also
has the effect of generating new revenues from non-traditional
advertisers, such as employers, professional services companies, and
smaller advertisers who are typically priced out of standard radio
advertising. There can be no assurance that we will be successful in
generating new event and promotion revenues.
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National
Advertising. Because
we have an existing national advertising sales plan, we anticipate that
any acquired Properties will immediately be able to access this new
revenue stream, increasing overall sales by 10-15 percent within 30 days.
There can be no assurance that we will be successful in implementing our
national advertising sales plan at Properties we
acquire.
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Our
programming plan for the acquired Properties has been centered around our
expansion into 24-hour syndicated music programming. Our existing syndication
operation in Nashville now provides the music, imaging and most of the air
talent. This has resulted in a more sophisticated radio station at a reduced
expense. Localized staffing at the radio station level now concentrates on
localization of the content (i.e. weather, news and information, promotions,
remotes and community events).
Taking advantage of the latest
technology, we anticipate that approximately 90 percent of each radio station
acquired can be programmed from a central studio location in Nashville. As a
result, the local staff in each market can concentrate on serving the local
audience by localizing the content, marketing the radio stations and generating
revenue through ad sales and promotional events. This represents a more
efficient use of resources and is more cost-efficient than current
practice.
The
Overall Impact of Our Acquisitions
We
anticipate that the impact on margins and cash flow will become even greater as
more acquisitions are made. Fixed costs of programming on a per station basis
continue to fall as the expense is distributed over a larger number of radio
stations, and new revenue streams - particularly “non-traditional” forms of
revenue - increase as the scale of our business increases. Also, as we acquire
additional radio stations, the impact on the existing syndication operation also
increases because of added revenue potential from the owned and operated radio
stations.
Members of management and the Board of
Directors have extensive networks of contacts within the radio industry that we
believe will generate a consistent and reliable flow of potential deals for
evaluation, as well as extensive experience in radio station operation,
acquisition and financing.
In June 2007, we completed the initial
two radio station acquisitions consisting of five radio stations in and around
Greenville, Mississippi, which we are assembling into a station cluster (the
“Greenville Cluster”).
The
Market:
|
Greenville,
Mississippi
|
|
Designated Marketing
Area(“DMA”):
|
Greenville-Greenwood,
Mississippi
|
|
Rank:
|
|
184
|
On June
7, 2007, we acquired two radio broadcast stations identified as WNLA FM 105.5
MHz and WNLA AM 1380 kHz in Indianola, Mississippi, from Shamrock Broadcasting,
Inc., including all of the facilities, equipment, licenses and intellectual
property necessary to operate these stations, in exchange for $300,000. In a
separate agreement, we purchased the accounts receivable of Shamrock
Broadcasting through issuance of a $10,134 promissory note payable in
installments made in each of three months following completion of the
transaction.
9
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 10,134 | ||
Land
|
14,500 | |||
Buildings
and structures
|
13,500 | |||
Equipment
|
30,000 | |||
FCC
licenses
|
237,000 | |||
Non-compete
agreement
|
5,000 | |||
Liabilities
assumed
|
(10,134 | ) | ||
Total
|
$ | 300,000 |
On June
19, 2007, we acquired three radio broadcast stations identified as WIQQ FM 102.3
MHz in Leland, Mississippi, WBAQ FM 97.9 MHz and WNIX AM 1330 kHz in Greenville,
Mississippi, from River Broadcasting Company, including all of the facilities,
equipment, licenses and intellectual property necessary to operate these
stations in exchange for $1,037,134. In September 2007, we identified a $14,280
liability that was not recorded as of the closing date of the transaction. This
was recorded as an adjustment to goodwill.
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 37,134 | ||
Land
|
35,000 | |||
Buildings
and structures
|
50,000 | |||
Equipment
|
25,000 | |||
FCC
licenses
|
800,000 | |||
Non-compete
agreement
|
25,000 | |||
Goodwill
|
79,280 | |||
Liabilities
assumed
|
(14,280 | ) | ||
Total
|
$ | 1,037,134 |
On August
27, 2008, we acquired a radio broadcast station from Holladay Broadcasting of
Louisiana, LLC identified as WBBV FM 101.3 MHz in Vicksburg, Mississippi,
including all of the facilities, equipment, licenses and intellectual property
necessary to operate this station, in exchange for $180,022.
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 57,522 | ||
Land
|
0.00 | |||
Buildings
and structures
|
25,000 | |||
Equipment
|
10,000 | |||
FCC
licenses
|
472,500 | |||
Non-compete
agreement
|
35,000 | |||
Goodwill
|
380,000 | |||
Liabilities
assumed
|
(800,000 | ) | ||
Total
|
$ | 180,022 |
10
On March
16, 2008, we entered into a Local Marketing Agreement for a radio broadcast
station identified as KLSM FM 105.5 MHz in Tallulah, Louisiana with Holladay
Broadcasting Company, including all of the facilities, equipment, licenses and
intellectual property necessary to operate these stations. The
Company maintains the station including all revenues and
expenses. Holladay Broadcasting Company has retained ownership of all
assets and liabilities of the station as of March 16, 2008.
On August
15, 2008, we entered into a Local Marketing Agreement for a radio broadcast
station identified as WQBC AM 1420 Khz in Vicksburg, Mississippi with Grace
Media Company, including all of the facilities, equipment, licenses and
intellectual property necessary to operate these stations. The
Company maintains the station including all revenues and
expenses. Grace Media Company has retained ownership of all assets
and liabilities of the station as of August 22, 2008.
Negotiations
are ongoing with a additional potential sellers for stations within the market,
but there is no assurance that any additional acquisitions will be consummated
in the Greenville, Mississippi area.
Greenville,
Mississippi falls into the Greenville-Greenwood, Mississippi DMA, which is rated
by Arbitron. Although there is no rating book specifically prepared for
Greenville, Mississippi, we will have the option to make Greenville a rated
market by entering into a subscription agreement with Arbitron. However,
management does not currently believe that this would be
beneficial.
Vicksburg, Mississippi falls into the
Jackson, Mississippi DMA, which is rated by Arbitron. Although there
is no rating book specifically prepared for Vicksburg, Mississippi, we will have
the option to make Vicksburg a rated market by entering into a subscription
agreement with Arbitron. However, management does not currently
believe that this would be beneficial.
We selected these Properties for
investment for a number of reasons. First, they are in close proximity to each
other. Second, each of the three station groups and the stations
collectively have underperformed fiscally in recent years in terms of revenue
generation and operating income. The third factor in our
investment decisions were the communities in Mississippi, and the surrounding
area. An estimated 130,000 listeners live within the range of the stations of
the Greenville Cluster. An estimated 540,000 listeners live within
range of the stations of the Vicksburg Cluster, bringing our estimated listener
level to 670,000 for the Mississippi Super-Regional Cluster. A smaller market
would not be able to support the advertising necessary to make this a profitable
cluster, and a significantly larger market would likely already have station
clusters owned by competing groups, as opposed to fragmented station ownership
by individuals, making our entrance into the market significantly more
difficult.
The final factor in our decision to
invest in Mississippi is the fact that we are able to assemble enough Properties
to create a station cluster. By creating a station cluster, we expect to be able
to consolidate the operations of the stations and eliminate redundancies,
thereby cutting our per-station operational costs. A station cluster also allows
us to program multiple, advertiser-friendly formats to reach a cross-section of
key demographic and lifestyle groups within the community. By simultaneously
selling all the stations as a single offering to advertisers, we anticipate that
market share and overall revenues will increase.
In 2008, we achieved cost reductions
through centralization of redundant management and administrative
positions. We intend to achieve cost further reductions through the
elimination of redundant positions, consolidation of facilities and the use of
technology to reduce programming and technical expenses.
We expect to take an aggressive stance
on HD Radio as a content provider, and we plan to install HD transmitters as
revenue streams develop and as long as current sales trends for HD receivers
continue. When we are able to install HD transmitters, we will have at least
three additional terrestrial signals for delivery of content to
consumers.
While we
have successfully acquired six stations in our plan for creating the Mississippi
Super-Regional cluster, and management anticipates having the ability to
consummate additional acquisitions in the Mississippi area, there can be no
assurance that any additional acquisitions will be completed or that the
resulting station cluster will be profitable.
11
Acquisitions and
Dispositions
Pending
Acquisitions
During
2008, we signed letters of intent to purchase additional radio
broadcast stations. These markets complement the geography of our
existing radio stations and will create a Super-Regional Cluster™ resulting in
an anticipated reduction in operating costs of up to 17%
incrementally. We anticipate signing asset purchase agreements, and
filing for FCC license transfers for two of these stations during the
second quarter of 2009. We further anticipate entering into LMA
agreements with up to four additional stations during the second quarter of
2009. These acquisitions will represent overall growth in radio
operations of 80% in the first half of 2009.
Industry Overview
The
primary source of revenues for radio stations is the sale of advertising time to
local, regional and national spot advertisers and national network advertisers.
National spot advertisers assist advertisers in placing their advertisements in
a specific market. National network advertisers place advertisements on a
national network show and such advertisements will air in each market where the
network has an affiliate. During the past decade, local advertising revenue as a
percentage of total radio advertising revenue in a given market has ranged from
approximately 72% to 87% according to the RAB. The growth in total radio
advertising revenue tends to be fairly stable. With the exception of 1961, 1991,
2001, and 2008 when total radio advertising revenue fell by approximately 0.5%,
2.8%, 7.5%, and 2.1% respectively, advertising revenue has risen each year since
1960, according to the RAB.
Radio is
considered an efficient, cost-effective means of reaching specifically
identified demographic groups. Stations are typically classified by their on-air
format, such as rock, adult contemporary, urban, gospel and
news/talk. A station’s format and style of presentation enables it to target
specific segments of listeners sharing certain demographic features. By
capturing a specific share of a market’s radio listening audience, with
particular concentration in a targeted demographic, a station is able to market
its broadcasting time to advertisers seeking to reach a specific audience.
Advertisers and stations use data published by audience measuring services, such
as Arbitron, to estimate how many people within particular geographical markets
and demographics listen to specific stations.
Although
the number of advertisements broadcast during a given time period may vary, the
total number of advertisements broadcast on a particular station generally does
not vary significantly from year to year.
A
station’s local sales staff generates the majority of its local and regional
advertising sales through direct solicitations of local advertising agencies and
businesses. To generate national advertising sales, a station usually will
engage a firm that specializes in soliciting radio-advertising sales on a
national level. National sales advertising is derived principally from
advertising agencies located outside the station’s market and receive sales
agents receive commissions based on the revenue from the advertising they
obtain.
Our
stations compete for advertising revenue with other terrestrial-based radio
stations in the market (including low power FM radio stations that are required
to operate on a noncommercial basis) as well as other media, including
newspapers, broadcast television, cable television, magazines, direct mail,
coupons and outdoor advertising. In addition, the radio broadcasting
industry is subject to competition from services that use new media technologies
that are being developed or have already been introduced, such as the Internet
and satellite-based digital radio services. Such services reach nationwide and
regional audiences with multi-channel, multi-format, digital radio services that
have a sound quality equivalent to that of compact discs. Competition among
terrestrial-based radio stations has also been heightened by the introduction of
terrestrial digital audio broadcasting (i.e., digital audio broadcasting
delivered through earth-based equipment rather than satellites). The FCC
currently allows terrestrial radio stations like ours to commence the use of
digital technology through a “hybrid” antenna that carries both the pre-existing
analog signal and the new digital signal. We have the opportunity to upgrade our
existing antennas to utilize this new technology. The FCC is
conducting a proceeding that could result in a radio station’s use of two
antennas: one for the analog signal and one for the digital
signal.
Advertising
Revenue
Our revenue
is generated from the sale of national advertising for broadcast within our
syndicated programming and on our affiliate networks. We also
generate revenue through local, regional, and national advertising on our radio
stations. During 2008, approximately 69% of our net revenue was
generated from the sale of national advertising. Additional broadcasting revenue
is generated from the sale of local, regional and national advertising for
broadcast on our stations. The major categories of our advertisers
include:
• automotive
dealers;
• amusement
and recreation;
• healthcare
services;
• banking
and mortgage;
12
• arts
and entertainment; and
• furniture
and home furnishings.
Each
super-regional cluster’s™ sales staff solicits advertising either
directly from the local advertiser or indirectly through an advertising agency.
We employ a tiered commission structure based on collections with a 120-day
eligibility time frame. Consistent with our operating strategy of reducing
overhead by utilizing the cluster, each member of our sales force works for all
of our stations within their cluster. This allows for greater
opportunity for cross-selling to garner more market share across all consumer
groups. We believe that we can outperform the traditional growth
rates of our markets by (1) expanding our base of advertisers,
(2) training newly hired sales people and (3) providing a higher level
of service to our existing customer base. This requires a strong team ethic with
assistance from station managers, office managers and corporate support staff.
We support our strategy of building local direct accounts by employing personnel
for each of our markets to produce custom commercials that respond to the needs
of our advertisers. In addition, in-house production provides advertisers
greater flexibility in changing their commercial messages with minimal
lead-time.
Our
national sales are made by Dial Global, a firm specializing in radio advertising
sales on the national level, in exchange for a commission that is based on our
net revenue from the advertising obtained. Regional sales, which we define as
sales in regions surrounding our markets to buyers that advertise in our
markets, are generally made by our local sales staff and market managers.
Whereas we seek to grow our local sales through larger and more customer-focused
sales staffs, we seek to grow our national and regional sales by offering to key
national and regional advertisers groups of stations within specific markets and
regions that make our stations more attractive. Many of these large advertisers
have previously been reluctant to advertise in these markets because of the
logistics involved in buying advertising from individual stations. Certain of
our stations had no national representation before we acquired
them.
The
number of advertisements that can be broadcast without jeopardizing listening
levels and the resulting ratings are limited in part by the format of a
particular station. We estimate the optimal number of advertisements available
for sale depending on the programming format of a particular station. Each of
our stations has a general target level of on-air inventory that it makes
available for advertising. This target level of inventory for sale may be
different at different times of the day but tends to remain stable over time.
Our stations strive to maximize revenue by managing their on-air inventory of
advertising time and adjusting prices up or down based on supply and demand. We
seek to broaden our base of advertisers in each of our markets by providing a
wide array of audience demographic segments across our cluster of stations,
thereby providing each of our potential advertisers with an effective means of
reaching a targeted demographic group. Our selling and pricing activity is based
on demand for our radio stations’ on-air inventory and, in general, we respond
to this demand by varying prices rather than by varying our target inventory
level for a particular station. Most changes in revenue are explained by some
combination of demand-driven pricing changes and changes in inventory
utilization rather than by changes in the available inventory. Advertising rates
charged by radio stations, which are generally highest during morning and
afternoon commuting hours, are based primarily on:
|
•
|
a
station’s share of audiences generally, and in the demographic groups
targeted by advertisers (as measured by ratings surveys);
and
|
|
•
|
the
supply of and demand for radio advertising time generally and for time
targeted at particular demographic
groups.
|
A
station’s listenership is reflected in ratings surveys that estimate the number
of listeners tuned to the station and the time they spend listening. Each
station’s ratings are used by its advertisers and advertising representatives to
consider advertising with the station and are used by us to chart audience
growth, set advertising rates and adjust programming. The radio broadcast
industry’s principal ratings service is Arbitron, which publishes periodic
ratings surveys for significant domestic radio markets. These surveys are our
primary source of ratings data. We utilize data from Arbitron to analyze
ratings within our markets and in the markets of potential
acquisitions.
The
success of each of our radio stations, within our station cluster, is primarily
dependent upon its share of the overall advertising revenue within the market.
Although we believe that each of our stations can compete effectively in its
market, we cannot guarantee that our stations can maintain or increase their
current audience ratings or market share. In addition to competition from other
radio stations and other media, shifts in population, demographics, audience
tastes and other factors beyond our control could cause us to lose our audience
ratings or market share. Our advertising revenue may suffer if any of our
stations cannot maintain its audience ratings or market
share.
13
During 2008, Dial Global, one of our
customers, accounted for 69% of our consolidated net revenue. The
loss of this customer could have a material adverse effect on our operations and
financial condition.
Competition
The radio
broadcasting industry is very competitive. The success of each of our stations
depends largely upon its audience ratings and its share of the overall
advertising revenue within its market. Our audience ratings and advertising
revenue are subject to change, and any adverse change in a particular market
affecting advertising expenditures or any adverse change in the relative market
share of the stations located in a particular market could have a material
adverse effect on the revenue of our radio stations located in that market.
There can be no assurance that any one or all of our stations will be able to
maintain or increase current audience ratings or advertising revenue market
share.
Our
stations compete for listeners and advertising revenues directly with other
radio stations within their respective markets, as well as with other
advertising media such as newspapers, magazines, cable and broadcast television,
outdoor advertising, satellite radio, the Internet and direct mail. In addition,
many of our stations compete with groups of two or more radio stations operated
by a single operator in the same market.
Radio
stations compete for listeners primarily on the basis of program content that
appeals to a particular demographic group. By building a strong brand identity
with a targeted listener base consisting of specific demographic groups in each
of our markets, we are able to attract advertisers seeking to reach those
listeners. Companies that operate radio stations must be alert to the
possibility of another station changing its format to compete directly for
listeners and advertisers. Another station’s decision to convert to a format
similar to that of one of our radio stations in the same geographic area or to
launch an aggressive promotional campaign may result in lower ratings and
advertising revenue, increased promotion and other expenses and, consequently,
lower our operating income.
Factors
that are material to a radio station’s competitive position include station
brand identity and loyalty, management experience, the station’s local audience
rank in its market, transmitter power and location, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other radio stations and other advertising media in the market area. We attempt
to improve our competitive position in each market by extensively researching
and improving our stations’ programming, by implementing advertising campaigns
aimed at the demographic groups for which our stations program and by managing
our sales efforts to attract a larger share of advertising dollars for each
station individually. However, we compete with some organizations that have
substantially greater financial or other resources than we do.
Audience
ratings and market shares fluctuate, and any adverse change in a particular
market could have a material adverse effect on the revenue of stations located
in that market. While we already compete with other stations with comparable
programming formats in many of our markets, any one of our stations could suffer
a reduction in ratings or revenue and could require increased promotion and
other expenses, and, consequently, could have a lower operating income,
if:
|
•
|
another
radio station in the market was to convert its programming format to a
format similar to our station or launch aggressive promotional
campaigns;
|
|
•
|
a
new station were to adopt a competitive
format; or
|
|
•
|
an
existing competitor was to strengthen its
operations.
|
In 1996,
changes in federal law and FCC rules dramatically increased the number of radio
stations a single party can own and operate in a local market. Our management
continues to believe that companies that elect to take advantage of those
changes by forming groups of commonly owned stations or joint arrangements such
as LMAs in a particular market may have lower operating costs and may be able to
offer advertisers in those markets more attractive rates and services. Although
we currently operate multiple stations in one market, and intend to pursue the
creation of additional multiple station groups in this particular market, our
competitors include other parties who own and operate as many or more stations
than we do in other markets. We may also compete with those other parties or
broadcast groups for the purchase of additional stations in those markets or new
markets. Some of those other parties and groups are owned or operated by
companies that have substantially greater financial or other resources than we
do. In addition, increased consolidation in our target markets may result
in greater competition for acquisition properties and a corresponding increase
in purchase prices we pay for these properties.
14
A radio station’s competitive position
can be enhanced by a variety of factors, including changes in the station’s
format and an upgrade of the station’s authorized power. However, the
competitive position of existing radio stations is protected to some extent by
certain regulatory barriers to new entrants. The operation of a radio broadcast
station requires an FCC license, and the number of radio stations that an entity
can operate in a given market is limited. Under FCC rules that became effective
in 2004, the number of radio stations that a party can own in a particular
market is dictated largely by whether the station is in a defined “Arbitron
Metro” (a designation designed by a private party for use in advertising
matters) and, if so, the number of stations included in that Arbitron Metro. In
those markets that are not in an Arbitron Metro, the number of stations a party
can own in the particular market is dictated by the number of AM and FM signals
that together comprise that FCC-defined radio market. For a discussion of FCC
regulation (including recent changes), see “— Federal Regulation of Radio
Broadcasting.”
The FCC
has authorized two companies, XM Radio and Sirius Satellite Radio, which
merged in 2008, to provide a digital audio programming service by satellite to
nationwide audiences with a multi-channel, multi-format and with sound quality
equivalent to that of compact discs. The FCC has also authorized FM terrestrial
stations like ours to use a hybrid antenna to deliver both the current
analog radio signal and a new digital signal. The FCC is also exploring the
possibility of allowing AM stations to deliver both analog and digital
signals.
In some
cases, our ability to compete will be dependent on our acquisition of new
technologies and our provision of new services, and we cannot assure you that we
will have the resources to acquire those new technologies or provide those new
services, in other cases, the introduction of new technologies and services
could increase competition and have an adverse effect on our revenue. Recent new
media technologies and services include the following:
|
•
|
audio
programming by cable television systems, direct broadcast satellite
systems, Internet content providers (both landline and wireless),
Internet-based audio radio services, satellite delivered digital audio
radio service and other digital audio broadcast
formats;
|
|
•
|
HD
Radiotm
digital radio, which could provide multi-channel, multi-format digital
radio services in the same bandwidth currently occupied by traditional AM
and FM radio services; and
|
|
•
|
low
power FM radio, which could result in additional FM radio broadcast
stations in markets where we have
stations.
|
We also
cannot assure you that we will continue to have the resources to acquire other
new technologies or to introduce new services that could compete with other new
technologies. We cannot predict how existing or new sources of competition will
affect the revenues generated by our stations. The radio broadcasting industry
historically has grown despite the introduction of new technologies for the
delivery of entertainment and information, such as television broadcasting,
cable television, audio tapes and compact discs. A growing population and
greater availability of radios, particularly car and portable radios, have
contributed to this growth. There can be no assurance, however, that the
development or introduction in the future of any new media technology will not
have an adverse effect on the radio broadcasting industry in general or our
stations in particular.
We cannot predict what
other matters might be considered in the future by the FCC or Congress with
respect to radio broadcasting, nor can we assess in advance what impact, if any,
the implementation of any of these proposals or changes might have on our
business.
Employees
At
December 31, 2008, we employed approximately 29 people, of which,
21were employed full-time. None of our employees are covered by collective
bargaining agreements, and we consider our relations with our employees to be
satisfactory.
Our
strategic plan includes employment of a regional market manager for each radio
market in which we own and will own or operate stations. A regional market
manager is responsible for all employees of the market and for managing all
aspects of the radio operations. We currently employ one regional
market manager for our market. The loss of our regional market
manager could result in a short-term loss of performance in our market, but we
do not believe that any such loss would have a material adverse effect on our
financial condition or results of operations, taken as a
whole.
15
Our
business is managed by a small number of key management and operating personnel,
and our loss of one or more of these individuals could have a material adverse
effect on our business. We believe that our future success will depend in large
part on our ability to attract and retain highly skilled and qualified personnel
and to expand, train and manage our employee base.
Federal Regulation of Radio
Broadcasting
General. The
ownership, operation and sale of radio broadcast stations, including those
licensed to us, are subject to the jurisdiction of the FCC, which acts under
authority derived from the Communications Act of 1934, as amended (the
“Communications Act”). The Telecommunications Act of 1996 (the “Telecom Act”)
amended the Communications Act and directed the FCC to change certain of its
broadcast rules. Among its other regulatory responsibilities, the FCC issues
permits and licenses to construct and operate radio stations; assigns broadcast
frequencies; determines whether to approve changes in ownership or control of
station licenses; regulates transmission equipment, operating power, and other
technical parameters of stations; adopts and implements regulations and policies
that directly or indirectly affect the ownership, operation and employment
practices of stations; regulates the content of some forms of radio broadcast
programming; and has the authority under the Communications Act to impose
penalties for violations of its rules.
The
following is a brief summary of certain provisions of the Communications Act,
the Telecom Act and related FCC rules and policies (collectively, the
“Communications Laws”). This description does not purport to be comprehensive,
and reference should be made to the Communications Laws, public notices and
decisions issued by the FCC for further information concerning the nature and
extent of federal regulation of radio broadcast stations. Failure to observe the
provisions of the Communications Laws can result in the imposition of various
sanctions, including monetary forfeitures and the grant of a “short-term” (less
than the maximum term) license renewal. For particularly egregious violations,
the FCC may deny a station’s license renewal application, revoke a station’s
license or deny applications in which an applicant seeks to acquire additional
broadcast properties.
License Grant and
Renewal. Radio broadcast licenses are generally granted and
renewed for maximum terms of eight years. Licenses are renewed by filing an
application with the FCC. Petitions to deny license renewal applications may be
filed by interested parties, including members of the public. We are not
currently aware of any facts that would prevent the renewal of our licenses to
operate our radio stations, although there can be no assurance that each of our
licenses will be renewed for a full term without adverse
conditions.
Although the vast majority of FCC
radio station licenses are routinely renewed, we cannot assure you that the FCC
will grant our existing or future renewal applications or that the renewals will
not include conditions out of the ordinary course. The non-renewal or renewal
with conditions, of one or more of our licenses could have a material adverse
effect on us.
The
acquisition of a radio station requires the prior approval of the FCC. To obtain
that approval, we would have to file a transfer of control or assignment
application with the FCC. The Communications Act and FCC rules allow members of
the public and other interested parties to file petitions to deny or other
objections to the FCC grant of any transfer or assignment application. The FCC
could rely on those objections or its own initiative to deny a transfer or
assignment application or to require changes in the transaction as a condition
to having the application granted. The FCC could also change its existing rules
and policies to reduce the number of stations that we would be permitted to
acquire in some markets. For these and other reasons, there can be no assurance
that the FCC will approve potential future acquisitions that we deem material to
our business.
Service Areas. The
area served by AM stations is determined by a combination of frequency,
transmitter power, antenna orientation, and soil conductivity. To determine the
effective service area of an AM station, the station’s power, operating
frequency, antenna patterns and its day/night operating modes are required. The
area served by an FM station is determined by a combination of transmitter power
and antenna height, with stations divided into classes according to these
technical parameters.
Class C
FM stations operate with the equivalent of 100 kilowatts of effective radiated
power (“ERP”) at an antenna height of up to 1,968 feet above average
terrain. They are the most powerful FM stations, providing service to a large
area, typically covering one or more counties within a state. Class B FM
stations operate with the equivalent of 50 kilowatts ERP at an antenna height of
up to 492 feet above average terrain. Class B FM stations typically
serve large metropolitan areas as well as their associated suburbs. Class A
FM stations operate with the equivalent of 6 kilowatts ERP at an antenna height
of up to 328 feet above average terrain, and generally serve smaller cities
and towns or suburbs of larger cities.
16
The
minimum and maximum facilities requirements for an FM station are determined by
its class. FM class designations depend upon the geographic zone in which the
transmitter of the FM station is located. In general, commercial FM stations are
classified as follows, in order of increasing power and antenna height:
Class A, B1, C3, B, C2, C1, C0, and C.
The
following table sets forth the market, call letters, FCC license classification,
antenna elevation above average terrain (for FM stations only), power and
frequency of all of our owned stations as of February 28,
2008.
Market
|
Stations
|
City of
License
|
Frequency
|
Expiration Date of
License
|
FCC
Class
|
Height
Above
Average
Terrain (in
feet)
|
Power
(in
Watts)
|
||||||||
Mississippi
Delta
|
WNLA
FM
|
Indianola,
MS
|
105.5
|
June
1, 2012
|
A
|
190
|
4400
|
||||||||
WBAQ
FM
|
Greenville,
MS
|
97.9
|
June
1, 2012
|
C2
|
502
|
48000
|
|||||||||
WIQQ
FM
|
Leland,
MS
|
102.3
|
June
1, 2012
|
A
|
446
|
1650
|
|||||||||
WNLA
AM
|
Indianola,
MS
|
1380
|
June
1, 2012
|
D
|
AM
|
500
|
|||||||||
WNIX
AM
|
Greenville,
MS
|
1330
|
June
1, 2012
|
B
|
AM
|
1000
|
|||||||||
Vicksburg
Area
|
WBBV
FM
|
Vicksburg,
MS
|
101.3
|
June
1, 2012
|
C3
|
FM
|
13000
|
||||||||
KLSM
FM
|
Tallulah,
LA
|
104.9
|
June
1, 2012
|
C3
|
FM
|
3000
|
|||||||||
WQBC
AM
|
Vicksburg,
MS
|
1420
|
June
1, 2012
|
B
|
AM
|
1000
|
Regulatory
Approvals. The Communications Laws prohibit the assignment or
transfer of control of a broadcast license without the prior approval of the
FCC. In determining whether to grant an application for assignment or transfer
of control of a broadcast license, the Communications Act requires the FCC to
find that the assignment or transfer would serve the public interest. The FCC
considers a number of factors in making this determination, including
(1) compliance with various rules limiting common ownership of media
properties, (2) the financial and “character” qualifications of the
assignee or transferee (including those parties holding an “attributable”
interest in the assignee or transferee), (3) compliance with the
Communications Act’s foreign ownership restrictions, and (4) compliance
with other Communications Laws, including those related to programming and
filing requirements.
We must
also comply with the extensive FCC regulations and policies in the ownership and
operation of our radio stations. FCC regulations limit the number of radio
stations that a licensee can own in a market, which could restrict our ability
to acquire radio stations that would be material to our financial performance in
a particular market or overall.
The FCC
also requires radio stations to comply with certain technical requirements to
limit interference between two or more radio stations. Despite those
limitations, a dispute could arise regarding whether another station
is improperly interfering with the operation of one of our stations or
another radio licensee could complain to the FCC that one our stations is
improperly interfering with that licensee’s station. There can be no assurance
as to how the FCC might resolve that dispute. These FCC regulations and others
may change over time, and we cannot assure you that those changes would not have
a material adverse effect on us.
FCC
regulations prohibit the broadcast of “obscene” material at any time, and
“indecent” material between the hours of 6:00 a.m. and 10:00 p.m. The
FCC has recently increased its enforcement efforts with respect to these
regulations. Further, Congress has introduced legislation that would
substantially increase the penalties for broadcasting indecent programming and
potentially subject broadcasters to license revocation, renewal or qualification
proceedings in the event that they broadcast indecent material. We may in the
future become subject to inquiries or proceedings related to our stations’
broadcast of allegedly indecent or obscene material. To the extent that such an
inquiry or proceeding results in the imposition of fines, a settlement with the
FCC, revocation of any of our station licenses or denials of license renewal
applications, our results of operation and business could be materially
adversely affected.
17
Ownership
Matters. The Communications Act restricts us from having more
than one-fourth of our capital stock owned or voted by non-U.S. persons,
foreign governments or non-U.S. corporations. We are required to take
appropriate steps to monitor the citizenship of our stockholders, such as
through representative samplings on a periodic basis, to provide a reasonable
basis for certifying compliance with the foreign ownership restrictions of the
Communications Act.
The
Communications Laws also generally restrict (1) the number of radio
stations one person or entity may own, operate or control in a local market,
(2) the common ownership, operation or control of radio broadcast stations
and television broadcast stations serving the same local market, and
(3) the common ownership, operation or control of a radio broadcast station
and a daily newspaper serving the same local market.
None of
these multiple and cross ownership rules requires any change in our current
ownership of radio broadcast stations or precludes consummation of our pending
acquisitions. The Communications Laws will limit the number of additional
stations that we may acquire in the future in our existing market as well as new
markets.
Because
of these multiple and cross ownership rules, a purchaser of our voting stock who
acquires an “attributable” interest in us (as discussed below) may violate the
Communications Laws if such purchaser also has an attributable interest in other
radio or television stations, or in daily newspapers, depending on the number
and location of those radio or television stations or daily newspapers. Such a
purchaser also may be restricted in the companies in which it may invest to the
extent that those investments give rise to an attributable interest. If one of
our attributable stockholders violates any of these ownership rules, we may be
unable to obtain from the FCC one or more authorizations needed to conduct our
radio station business and may be unable to obtain FCC consents for certain
future acquisitions.
The FCC
generally applies its television/radio/newspaper cross-ownership rules and its
broadcast multiple ownership rules by considering the “attributable” or
cognizable, interests held by a person or entity. With some exceptions, a person
or entity will be deemed to hold an attributable interest in a radio station,
television station or daily newspaper if the person or entity serves as an
officer, director, partner, stockholder, member or, in certain cases, a debt
holder of a company that owns that station or newspaper. Whether that interest
is attributable and thus subject to the FCC’s multiple ownership rules is
determined by the FCC’s attribution rules. If an interest is attributable, the
FCC treats the person or entity who holds that interest as the “owner” of the
radio station, television station or daily newspaper in question, and that
interest thus counts against the person in determining compliance with the FCC’s
ownership rules.
With
respect to a corporation, officers, directors and persons or entities that
directly or indirectly hold 5% or more of the corporation’s voting stock (20% or
more of such stock in the case of insurance companies, investment companies,
bank trust departments and certain other “passive investors” that hold such
stock for investment purposes only) generally they are attributed with ownership
of the radio stations, television stations and daily newspapers owned by the
corporation. As discussed below, participation in an LMA also may result in an
attributable interest. See “— Local Marketing
Agreements.”
With
respect to a partnership (or limited liability company), the interest of a
general partner is attributable, as is the interest of any limited partner (or
limited liability company member) who is “materially involved” in the
media-related activities of the partnership (or limited liability company). The
following interests generally are not attributable: (1) debt instruments,
non-voting stock, options and warrants for voting stock, partnership interests,
or membership interests that have not yet been exercised; (2) limited
partnership or limited liability company interests where (a) the limited
partner or member is not “materially involved” in the media-related activities
of the partnership or limited liability company, and (b) the limited
partnership agreement or limited liability company agreement expressly
“insulates” the limited partner or member from such material involvement by
inclusion of provisions specified by the FCC; and (3) holders of less than
5% of an entity’s voting stock. Non-voting equity and debt interests which, in
the aggregate, constitute more than 33% of a station’s “enterprise value,” which
consists of the total equity and debt capitalization, are considered
attributable in certain circumstances.
Programming and
Operation. The Communications Act requires broadcasters to
serve the “public interest.” Broadcasters are required to present programming
that is responsive to community problems, needs and interests and to maintain
certain records demonstrating such responsiveness. Complaints from listeners
concerning a station’s programming may be filed at any time and will be
considered by the FCC both at the time they are filed and in connection with a
licensee’s renewal application. Stations also must follow various FCC rules that
regulate, among other things, political advertising, the broadcast of obscene or
indecent programming, sponsorship identification, the broadcast of contests and
lotteries, and technical operations (including limits on radio frequency
radiation). Failure to observe these or other rules and policies can result in
the imposition of various sanctions, including monetary forfeitures, the grant
of a “short-term” (less than the maximum term) license renewal or, for
particularly egregious violations, the denial of a license renewal application
or the revocation of a station license.
18
Local Marketing
Agreements. We have issued letters of intent to manage
certain future stations in our market through an LMA. In a typical
LMA, the licensee of a station makes available, for a fee, airtime on its
station to a party which supplies programming to be broadcast during that
airtime, and collects revenues from advertising aired during such programming.
LMAs are subject to compliance with the antitrust laws and the Communications
Laws, including the requirement that the licensee must maintain independent
control over the station including matters f personnel and programming. The FCC
has held that such agreements do not violate the Communications Laws as long as
the licensee of the station receiving programming from another station maintains
ultimate responsibility for, and control over, station operations and otherwise
ensures compliance with the Communications Laws.
A station
that brokers more than 15% of the weekly programming hours on another station in
its market will be considered to have an attributable ownership interest in the
brokered station for purposes of the FCC’s ownership rules. As a result, a radio
station may not enter into an LMA that allows it to program more than 15% of the
weekly programming hours of another station in the same market that it could not
own under the FCC’s multiple ownership rules.
Available
Information
Our
Internet site address is www.debutbroadcasting.com. On our site, we have
made available, free of charge, our most recent annual report on Form 10-K
and our proxy statement. We also provide a link to an independent third-party
Internet site, which makes available, free of charge, our other filings with the
SEC, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Item 2. Properties
The types
of properties required to support each of our operations include offices,
studios, transmitter sites and antenna sites. Our station’s studios are housed
with offices in the station’s community of license or largest nearby community.
We operate three radio stations from our building in Greenville, Mississippi,
and two radio stations from our building in Indianola, Mississippi, and three
radio station from our building in Vicksburg,
Mississippi. The transmitter sites and antenna sites are
generally located so as to provide maximum market coverage.
At
December 31, 2008, we owned studio facilities in two cities within our
Mississippi Delta market, and we owned transmitter and antenna sites in the
same markets. We lease additional studio and office facilities in
Greenville, Mississippi, and Vicksburg, MS. In addition, we lease corporate
office space and multi-media production space in Nashville, Tennessee. We do not
anticipate any difficulties in renewing any facility leases or in leasing
alternative or additional space, if required. We own or lease substantially all
of our other equipment, consisting principally of transmitting antennas,
transmitters, studio equipment and general office equipment.
No single
property is material to our operations. We believe that the properties which we
own are generally in good condition and suitable for our
operations. In 2008 we sought upgraded facility space and relocated
our operational offices in Greenville, MS.
Item 3. Legal
Proceedings
As of
March 31, 2008 we are involved in a legal proceeding pertaining to a former
employee in our Greenville Mississippi market. We are defending
ourselves vigorously and do not anticipate any liability resulting from this
case. Should we be found at fault in this case, our liability shall
be limited to $23,000. As of January 31, 2009 funds for
this potential liability have been placed in escrow with the Circuit Court in
Greenville, MS pending the outcome of this case.
As of
December 31, 2008 we were involved in a legal proceeding with Delta Plaza
Associates in Greenville, Mississippi regarding breach of
contract. We appeared in the Circuit Court in Greenville, MS on March
24, 2009 and were found to have no fault or liability in this
case.
Should
any other legal matters occur, we believe that it would be handled and
defended in the ordinary course of business.
19
Item 4.
|
Submission
of Matters To a Vote of Security
Holders
|
During
the fourth quarter of 2008, there were no matters submitted to a vote of
security holders.
PART II
Item 5
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market Information For Common
Stock
Shares of
our common stock, par value $0.003 per share, have been quoted on the Over
The Counter Bulletin Board (OTCBB) under the symbol “DBTB” since the reverse
merger on May 17, 2007.
The table
below sets forth, for the calendar quarters indicated, the high and low closing
sales prices of our common stock on the OTCBB, as reported in
published financial sources. Because our common stock was not
publicly traded until June 4, 2007, no information is available prior to that
date.
Year
|
High
|
Low
|
||||||
2007
|
||||||||
Second
Quarter
|
$
|
2.45
|
$
|
0.28
|
||||
Third
Quarter
|
$
|
1.90
|
$
|
0.56
|
||||
Fourth
Quarter
|
$
|
1.10
|
$
|
0.40
|
||||
2008
|
||||||||
First
Quarter
|
$
|
1.25
|
$
|
0.51
|
||||
Second
Quarter
|
$
|
1.05
|
$
|
0.27
|
||||
Third
Quarter
|
$
|
0.30
|
$
|
0.14
|
||||
Fourth
Quarter
|
$
|
0.27
|
$
|
0.06
|
Holders
As of
December 31, 2008, there were 109 holders of record of our
common stock.
Dividends
We have
not declared or paid any cash dividends on our common stock since our inception
and do not currently anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain future earnings for use in our
business.
Sales
of Unregistered Securities
On May
17, 2007, we completed a private placement of 6,430,316 shares of our common
stock at $0.50 per share. 430,316 shares were sold to existing
shareholders in exchange for conversion of their notes to the Predecessor
Company. The remaining 6,000,000 shares were sold to a number of
investors with no prior relationship to the company. No
underwriters were involved in this sale of securities. We issued the shares of
common stock to the investors in exchange for a combination of cash and debt
reduction. The transaction was recorded net of financing costs of $23,503. We
used the net proceeds from the private offering for the acquisition of Shamrock
Broadcasting and River Broadcasting Group.
On June
18, 2008, we issued to Wolcott Squared a warrant to purchase 18,408 shares of
our common stock at an exercise price of $0.3925 per share, with an expiration
date of December 17, 2017. The consideration received for this warrant was
services rendered in December of 2007 valued at $7,225.
20
On June
18, 2008, we issued to Wolcott Squared a warrant to purchase 22,279 shares of
our common stock at an exercise price of $0.51 per share with an expiration date
of January 31, 2018. The consideration received for this warrant was
services rendered in January of 2008 valued at $11,362.
On June
18, 2008, we issued to Wolcott Squared a warrant to purchase 5,686 shares of our
common stock at an exercise price of $0.51 per share with an expiration date of
February 29, 2018. The consideration received for this warrant was services
rendered in February of 2008 valued at $2,899.
On June
30, 2008, we issued to Politis Communications a warrant to purchase 10,254
shares of our common stock at an exercise price of $0.01 per share, with an
expiration date of June 29, 2018. The consideration received for this
warrant was services rendered by Politis Communications.
On
September 22, 2008, we issued to Stephen Ross, a third party, a
warrant to purchase 18,000 shares of Company common stock at an exercise price
of $0.50 per share, with an expiration date of January 31, 2011. The
consideration we received for this warrant was legal services rendered by
Stephen Ross, Esq,
On
September 22, 2008, we issued to Stephen Ross, a third party, a
warrant to purchase 27,000 shares of Company common stock at an exercise price
of $0.50 per share, with an expiration date of September 30, 2011. The
consideration we received for this warrant was legal services rendered by
Stephen Ross, Esq,
On
September 30, 2008, we issued to Politis Communications a warrant to
purchase 5,495 shares of Company common stock at an exercise price of $0.01 per
share, with an expiration date of September 29, 2018. The
consideration received for this warrant was public relations services rendered
by Politis Communications.
On
December 31, 2008, we issued to Stephen Ross, a third party, a
warrant to purchase 27,000 shares of Company common stock at an exercise price
of $0.50 per share, with an expiration date of December 31, 2011. The
consideration we received for this warrant was legal services rendered by
Stephen Ross, Esq,
On
December 31, 2008, we issued to Politis Communications a warrant to
purchase 5,495 shares of Company common stock at an exercise price of $0.01 per
share, with an expiration date December 31, 2018. The consideration
received for this warrant was public relations services rendered by Politis
Communications.
We
revalue warrants quarterly utilizing the Black-Scholes method.
All of
these warrants were issued in reliance upon the exemption from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation
D promulgated thereunder relating to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required.
On
December 5, 2008, Politis Communications exercised a warrant to purchase 8,500
shares of our common stock at $0.01 per share. The shares were
authorized by Politis Communications as compensatory gifts to a number of
employees of Politis Communications. No underwriters were involved in
this warrant exercise. The underlying shares are restricted and carry
piggy-back registration rights.
On
December 5, 2008, we issued a stock certificate to Mohammed Rahman for 22,026
shares of our common stock at $0.07 per share. We issued the shares
of common stock to Mohammed Rahman in exchange for services
rendered. No underwriters were involved in this sale of
securities. Outside of the existing vendor client relationship the
investor has no prior relationship to the company. The underlying
shares are restricted and carry piggy-back registration rights.
On
December 3, 2008, we issued a stock certificate to Sariah Hopkins for 42,000
shares of our common stock at $0.07 per share. We issued the shares
of common stock to Sariah Hopkins as a compensatory bonus for services rendered
in the role of Chief Financial Officer. The underlying shares are
restricted and carry piggy-back registration rights.
21
We issued
the above-described shares of our common stock in reliance upon the exemption
from the registration requirements of the Securities Act of 1933, as amended, as
set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D
promulgated thereunder relating to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was required. The
purchasers represented to us that they were accredited investors as defined in
Rule 501(a) of the Securities Act and that the securities issued pursuant
thereto were being acquired for investment purposes. The sales of these
securities were made without general solicitation or advertising.
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following Management’s Discussion and Analysis is intended to provide the reader
with an overall understanding of our financial condition, changes in financial
condition, results of operations, cash flows, sources and uses of cash,
contractual obligations and financial position. This section also includes
general information about our business and a discussion of our management’s
analysis of certain trends, risks and opportunities in our industry. We also
provide a discussion of accounting policies that require critical judgments and
estimates. You should read the following information in conjunction with our
consolidated financial statements and notes to our consolidated financial
statements beginning on page F-1 in this Annual Report on Form 10-K
.
Forward-Looking
Statements
Certain
statements contained in this report may not be based on historical facts and are
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,”
“may,” “might,” “will,” “intend,” “could,” “would” or “plan,” or future or
conditional verb tenses, and variations or negatives of such terms.
These
forward-looking statements include, without limitation, those relating to our
strategic focus on small markets in the southeastern U.S., sources of
competition, the impact of new media technology on competition, our ability to
outperform traditional growth rates of our markets, changes in audience ratings
or market share, requirements of or changes in governmental regulations,
employment of a regional market manager, renewal of our licenses, our ability to
obtain FCC authorizations, the condition of our properties, legal proceedings,
payment of dividends, operating results, completion of the spin-off of MSI, the
separate operation of MSI, expansions into different programming formats, the
number of employees dedicated to radio programs, the expansion of our
programming and services, our creation of 24-hour programming in certain
formats, our ability to identify and consummate potential acquisitions, pending
acquisitions, cost-efficient operation of radio stations, the proliferation of
HD Radio, the prices for HD Radio receivers, investing in undervalued and
under-performing radio stations, our investment in medium- and small-market
radio stations, market trends in purchase prices for radio stations, our
investment criteria, our ability to accomplish revenue growth and cost-cutting,
our ability to generate new event and promotion revenues, the implementation of
our national advertising sales plan at radio stations we acquire, our ability to
leverage or acquire technology, the impact of future acquisition on our margins
and cash flow, our network of contacts within the radio industry, the rating of
the Greenville, Mississippi market, the creation of station clusters or entering
LMAs and their impact on market share and revenues, the seasonality of our
operations and revenues, our ability to achieve cost reductions, our need for
additional capital, our ability to raise capital through debt and equity
financing, the availability of additional capital resources, the terms of any
financing that we may obtain, the incurrence of accounting and legal fees in
connection with acquisitions, critical accounting policies, related party
transactions and our issuance of warrants.
22
We
caution you not to place undue reliance on the forward-looking statements
contained in this report, in that actual results could differ materially from
those indicated in such forward-looking statements as a result of a variety of
factors. These factors include, but are not limited to, our ability to provide
and market competitive services and products, our ability to diversify revenue,
our ability to attract, train and retain qualified personnel, our ability to
operate and integrate new technology, changes in consumer preferences, changes
in our operating or expansion strategy, changes in economic conditions,
fluctuations in prevailing interest rates, our ability to identify and
effectively integrate potential acquisitions, FCC and government approval of
potential acquisitions, our inability to renew one or more of our broadcast
licenses, our ability to manage growth and effectively serve an expanding
customer and market base, geographic concentrations of our assets and
susceptibility to economic downturns in that area, availability of and costs
associated with maintaining and/or obtaining adequate and timely sources of
capital and liquidity, our ability to compete with other companies that produce
and distribute syndicated radio programs and/or own radio stations, shifts in
population and other demographics, changes in governmental regulations, laws and
regulations as they affect companies that produce and distribute syndicated
radio programs and/or own radio stations, industry conditions, the popularity of
radio as a broadcasting and advertising medium, cancellation, disruptions
or postponements of advertising schedules in response to national or world
events, our lack of control over MSI, possible adverse rulings, judgments,
settlements and other outcomes of pending or threatened litigation, other
factors generally understood to affect the financial condition or results of
companies that produce and distribute syndicated radio programs and/or own radio
stations and other factors detailed from time to time in our press releases and
filings with the Securities and Exchange Commission. We undertake no obligation
to update these forward-looking statements to reflect events or circumstances
that occur after the date of this report.
Overview of 2008
The
advertising environment for 2008 was slightly below that of 2007. The
RAB has reported that radio revenue growth for 2008 was down approximately 2.1%
from the prior year due to concerns of economic recession in both local and
national markets. Our small-market focus insulates us from the larger
issued of economic recession, and allows us to capitalize on growth in local and
non-spot revenue as we participate as active members in the communities in which
we operate. For 2008, our revenue performance outpaced the industry
with total net revenues increasing 6.56% in radio operations.
Our
management team remains focused on our strategy of pursuing growth through
acquisition. However, acquisitions are closely evaluated to ensure that they
will generate stockholder value and our management is committed to completing
only those acquisitions that we believe will increase our share
price.
Results
of Operations
Analysis of Consolidated Statements
of Operations. The following analysis of selected data from
our consolidated statements of operations should be referred to while reading
the results of operations discussion that follows (dollar in
thousands):
Year Ended
December 31,
|
Percent Change
|
|||||||||||
2008
|
2007
|
2008 vs. 2007
|
||||||||||
Net
Revenues
|
$ | 2,648 | $ | 2,970 | (11 | %) | ||||||
Operating
expenses excluding depreciation, amortization and merger related
expenses
|
2,185 | 3,600 | (41 | %) | ||||||||
Depreciation
and amortization
|
147 | 78 | 88 | % | ||||||||
Merger
related expenses
|
11 | 397 | (97 | %) | ||||||||
Corporate
general and administrative expenses
|
890 | 514 | 73 | % | ||||||||
Impairment
charge
|
— | — | ** | |||||||||
Operating
income (loss)
|
(585 | ) | (1,619 | ) | (64 | %) | ||||||
Net
interest expense
|
(217 | ) | (77 | ) | 182 | % | ||||||
Total
non-operating expense, net
|
(219 | ) | (77 | ) | 184 | % | ||||||
Net
income (loss)
|
(805 | ) | (1,696 | ) | (53 | %) | ||||||
Net
income (loss) attributable to common stockholders
|
$ | (805 | ) | $ | (1,696 | ) | ** |
** Calculation
is not meaningful.
23
Financial
Condition
Cash and Cash
Equivalents. Cash and cash equivalents increased 584% to
$59,143 at December 31, 2008 from approximately $8,640 at December 31, 2007.
This increase was primarily a result of increased revenues related to our 2008
acquisitions and growth in the syndication network.
Accounts Receivable. Accounts
receivable, less allowance for doubtful accounts, increased 69% to approximately
$1,096,316 at December 31, 2007 from approximately $650,580 at December 31,
2007. This increase was primarily a result of our 2008 acquisition
of WBBV FM. Additionally, we have realized growth in
affiliate relations subscriptions for our syndication services.
Prepaid Expenses. Prepaid
expenses and other current assets, including security deposits, increased to
approximately $47,642 at December 31, 2008 from $45,720 at December 31, 2007.
This increase was primarily a result of timing differences in recognition of
expense.
Property and Equipment. Net
property and equipment increased 38% to approximately $756,762 at December 31,
2008 from approximately $548,700 at December 31, 2007. This increase
was primarily a result of purchasing and acquiring property and equipment
required for the operation of WBBV FM in Vicksburg, Mississippi.
Intangible Assets. Intangible
assets, net of amortization, increased to $1,536,761at December 31, 2008 from
$1,100,000 at December 31, 2007. This increase was primarily a result of
purchasing and acquiring property and equipment required for the operation of
WBBV FM in Vicksburg, Mississippi.
As of
December 31, 2008, approximately 49.2% of our total assets consisted of
intangible assets, such as radio broadcast licenses and goodwill, the value of
which depends significantly upon the operational results of our business. We
could not operate the radio stations without the related FCC license for each
station. FCC licenses are renewed every eight years; consequently, we
continually monitor the activities of our stations to ensure they comply with
all regulatory requirements. We expect that all licenses will
continue to be renewed in the future.
Goodwill. Goodwill
increased to approximately $459,280 at December 31, 2008 from $79,280 at
December 31, 2007. This increase was primarily a result of the
purchase of WBBV FM in Vicksburg, Mississippi.
Accounts Payable and Accrued
Expenses. Accounts payable and accrued expenses increased 4% to
approximately $980,670 at December 31, 2008 from approximately $665,670 at
December 31, 2007. This increase was primarily a result of expansion of the
scope of business during 2007.
Short-term Debt. Short-term
debt increased 536% to approximately $1,524,311 at December 31, 2008 from
approximately $239,290 at December 31, 2007. This increase was primarily a
result of the issuance and utilization of a $500,000 line of credit
from SunTrust bank for the acquisition of WBBV FM, and the issuance and
utilization of a $750,000 bridge loan from Remington Capital Partners to fund
operational costs during 2008.
Long-term Debt. Long-term
debt increased 159% to approximately $1,353,545 at December 31, 2008 from
approximately $522,210 at December 31, 2007. This increase was primarily a
result of the $800,000 owner financing agreement between Holladay
Broadcasting of Louisiana and Debut Broadcasting Corporation for the acquisition
of WBBV FM.
Notes Payable. Notes payable
increased to approximately $91,091 at December 31, 2008 from $69,180 at December
31, 2007. This increase was primarily a result of the financed purchase
of vehicles to be used for radio broadcast operations in the
Greenville and Vicksburg Mississippi super-regional cluster.
Leases Payable. Leases
payable decreased to approximately $5,381 at December 31, 2008 from $9,970 at
December 31, 2007. This decrease was a result of contractual payments made on a
lease purchase agreement for studio equipment for our studios located on Music
Row.
24
Our
management’s discussion and analysis of results of operations for the years
ended December 31, 2008 and 2007 have been presented on a historical
basis.
Net Revenues. Net
revenues for the 12 months ended December 31, 2008 decreased $321,000 to
$2.65 million, a 12% decrease from the same period in 2007, primarily as a
result of slow downs in national advertising on the syndicated network in direct
response to large-scale economic conditions.
Radio
Broadcast net revenue for the 12 months ended December 31, 2008 was
$1,202,012. On a same-station basis, broadcast radio net revenues for
the 6 months ended December 31, 2008 increased approximately
$214,478 to $467,557, an increase of 85% from the same period in 2007, due to
management and sales strategies.
Corporate, General and
Administrative Expenses. Corporate operating expenses for the
12 months ended December 31, 2007 have increased over the comparative
period in 2007 due primarily to increased personnel costs and, an increase in
professional fees related to company growth.
Depreciation and
Amortization. Depreciation and amortization increased
approximately $69,307, or 89%, to $147,297 for the year ended
December 31, 2008 compared to approximately $77,990 for the year ended
December 31, 2007. This increase is primarily a result of
increases in property and equipment purchases during 2008.
LMA
Fees. LMA fees were $44,500 in 2008. We did not
incur any LMA fees for the year ended December 31, 2007. We
project further utilization of LMA transactions in 2009 associated with
acquisitions in the Mississippi region.
Impairment
Charge. SFAS No. 142 requires us to review the
recorded values of our FCC broadcast licenses and goodwill for impairment on an
annual basis. We completed our annual evaluation during the first quarter of
2009 and were not required to record any impairment to broadcast licenses and
goodwill for the year ended December 31, 2008.
The fair
market values of our broadcast licenses and reporting units were determined
primarily by using a discounted cash flows approach. We also utilized a market
value approach, which included applying current acquisition multiples to
broadcast cash flows, in order to validate our results.
Net Interest Expense. Interest
expense, net of interest income, increased by $140,675, or 182%, to
approximately $217,675 for the year ended December 31, 2008 compared to
$77,000 for the year ended December 31, 2006. This increase was primarily
due to utilization of a $750,000 bridge loan from Remington Capital Partners to
fund operating expenses, and the $500,000 line of credit from SunTrust bank
which was utilized to facilitate the purchase of WBBV FM in Vicksburg,
Mississippi.
Operating Income (loss.) As a
result of factors described above, operating income increased by $1.01 million
or 74%, to ($585,581) for the year ended December 31, 2008 compared to
approximately ($1.6) million for the year ended December 31,
2007.
Seasonality
We expect that our operations and
revenues will be seasonal in nature, with generally lower revenue generated in
the first quarter of the year, and generally higher revenue generated in the
second and fourth quarters of the year. The seasonality of our
business reflects the relationship between advertising purchases on the these
formats with the retail cycle. This seasonality causes, and will
likely continue to cause a variation in our quarterly operating
results. Such variations could have an effect on the timing of our
cash flows.
Liquidity
and Capital Resources
Our principal need for funds has been
to fund the acquisition of radio stations, expenses association with our
station, corporate operations, capital expenditures, interest and debt service
payments. The following table summarizes our historical funding needs
for the years ended December 31, 2008 and 2007.
25
2008
|
2007
|
|||||
(Dollars
in Thousands)
|
||||||
Aquisitions
and purchase of intangible assets
|
980.02
|
$
|
1,337.13
|
|||
Capital
expenditures
|
244.78
|
260.47
|
||||
Repayments
of bank borrowings
|
68.13
|
68.58
|
||||
Interest
payments
|
241.98
|
99.14
|
||||
In 2008 financing was
difficult to procure in both the debt and equity markets. Our
existing debt financing resulted in significant interest expense. The
media industry has experienced a tumultuous year, resulting in the radio station
operation industry being viewed as a high risk industry in the financial
markets. Many of the large corporations in this industry have faced
company wide restructuring, and pondered bankruptcy. These events and
uncertainties are creating a trend of tightened liquidity and limited capital
resources.
National
advertising revenues decreased 2.1% year over year from 2007 to
2008. Overall national revenues are expected to continue to decline
in 2009. Analysts are projecting a decline of as much as 10% year
over year from 2008 to 2009 before a market recovery is seen. The
last time revenue trended in this pattern was in 2001, and a full recovery was
not realized in the national market until mid-2003. Further limiting
capital resources, advertisers are implementing policies that elongate the
collection cycle. Anheuser Busch, a large national advertiser has
implemented a policy of withholding media payments until they have aged 120
days. This publicly announced policy is expected to affect the
payment patterns of most, if not all, larger advertisers.
In
the short term, our principal future need for funds will include the funding of
station operating expenses, corporate general and administrative expenses, and
interest and debt service payments. If we are unable to fund these
short term requirements through existing cash flows, we will be forced to
eliminate costs through measures such as payroll reductions, staffing
eliminations, and other human resources measures. Staffing
reductions will increase our risk of business failure as we will no longer be
able to provide the level of customer service to our affiliates and advertisers
that is usual and customary.
Many of
our debts mature in 2009. If we are unable to agree on terms for
renewal with our debtors, we may incur increased legal fees and court costs, as
we will be unable to satisfy our debt agreements. If we are unable to
support our administrative overhead and debt agreements, we may be forced to
liquidate certain operational areas of the business to support our financial
obligations.
Our principal sources of funds for
these requirements have been cash flows from financing activities, such as the
proceeds from borrowing under credit facilities. We do not believe
that our presently projected cash flow from operations and present financing
arrangements, including availability under our existing credit facilities, will
be sufficient to meet our future capital needs, including operations and debt
service for the next 12 months. We are actively engaged in
implementation of additional funding sources through debt and equity options
available to us. Further, our ability to obtain additional equity or
debt financing is subject to market conditions and operating
performance. As such, there can be no assurance that we will be able
to obtain such financing at terms, and on the timetable, that may be necessary
to meet our capital needs.
Our acquisitions are entirely
underwritten by our ability to go into the debt or equity markets to continually
raise capital at reasonable prices to support our present and future
acquisitions. Any substantial market downturns that
effectively close those avenues would severely restrict our ability to grow
and execute a major portion of our business model going forward, and could
adversely impact our viability as a company.
We
and our wholly owned subsidiaries may be able to incur additional indebtedness
in the future, subject to the restrictions contained in our credit facilities.
If new indebtedness is added to our current debt levels, the related risks that
we now face could intensify.
We will
require additional capital to provide working capital and to execute on our plan
to grow through the acquisition of Properties and radio station clusters. We do
not currently have sufficient capital to make additional acquisitions. We intend
to raise additional capital over the next 12 months through additional equity
offerings.
We have
made our initial radio station acquisitions without taking on any additional
debt financing. However, debt financing may be advisable and attractive as we
contemplate future additional acquisitions. Although we are and will be unable
to predict the precise terms of any financing until the time that such financing
is actually obtained, it is likely that any such financing will fit within the
following parameters:
|
·
|
None
of the indebtedness to which the Properties would be subject will be
recourse to the shareholders, although some or all of the indebtedness may
be recourse to us. However, each obligation will be secured by a first
lien and/or second lien security interest in the financed
Property. It is probable that all of our Properties will be
subject to substantial security
interests.
|
26
|
·
|
We expect any indebtedness will
be first repaid with the operating revenues of the Properties. Operating
revenues will first be applied to the payment of interest, principal
amortization (if any), and principal on primary indebtedness. Next,
operating revenues will be applied to interest on and principal of any
subordinate financing.
|
|
·
|
Each of these financing
arrangements may be subject to acceleration in the event of default,
including non-payment, insolvency or the sale of a Property. Upon an
acceleration, if we are unable to effect an immediate refinancing, we may
lose one or more of our Properties by
foreclosure.
|
|
·
|
There
can be no assurances that additional capital will be available on the
terms acceptable us. While financing may
initially be available only on a Property by Property basis, we may
eventually seek to refinance all of our Properties in one non-recourse
loan which would, in all likelihood, be secured by all of our
Properties.
|
In
connection with acquisitions, dispositions and financing, we will incur
appropriate accounting and legal fees.
Cash
Flows from Operating Activities
2008
|
2007
|
|||||||
Dollars
in Thousands
|
||||||||
Net
cash provided by operating activities
|
$ | (785.2 | ) | (1,417.7 | ) |
Net cash
provided by operating activities increased by approximately $632,500 for the
year ended December 31, 2008 compared to the year ended December 31,
2007. The increase in cash flows is partially attributed to reduction
in general and administrative operating costs.
Cash
Flows from Investing Activites
2008
|
2007
|
|||||||
Dollars
in Thousands
|
||||||||
Net
cash used in investing activities
|
$
|
1,224.8
|
$
|
1597.6
|
Net cash used in investing activities
decreased $372,799 to $1,224,810 for the year ended December 31, 2008 compared
to the year ended December 31, 2007. This decrease is due to
acquisitions and the purchase of intangible assets. During
2007, we completed the acquisition of broadcast licenses, and funded these
acquisitions entirely in cash. For the year ended December 31, 2007,
we invested approximately $1.3 million in station acquisitions, and the purchase
of certain broadcast licenses in the Greenville, Mississippi
market. In September of 2008 we completed the acquisition of the
broadcast license of WBBV FM in Vicksburg, Mississippi.
Cash
Flows from Financing Activities
2008
|
2007
|
|||||||
Dollars
in Thousands
|
||||||||
Net
cash provided by (used in) financing activities
|
$
|
2,060.5
|
$
|
2,937.9
|
For the year ended December 31, 2008
net cash provided by financing activities decreased by approximately $877,400
compared to the year ended December 31, 2007, primarily due to the private
placement of our common stock in 2007.
27
Sources of Liquidity.
Currently, our primary source of liquidity is cash flows provided by our
operations. We will require additional capital to execute our plan,
to grow through the acquisition of radio stations and radio station clusters, as
well as for working capital requirements. Our current cash flows from
operations are not sufficient to meet our working capital requirements over the
next 12 months. We do not presently have sufficient capital to make
additional acquisitions. In March of 2009, we received a non-binding
letter of intent from SunTrust Bank for a $2.6 million debt facility that would
refinance all existing debt, fund future acquisitions, and provide working
capital. Our Board of Directors is currently reviewing the associated
terms and conditions of this letter.
Anticipated
Financing As of December 31, 2008, our long-term debt, including the
current portion, was approximately
$1,450,018. Our
credit facilities have interest and principal repayment obligations that are
substantial in amount.
Our
substantial indebtedness could have important consequences,
including:
|
•
|
requiring
a substantial portion of cash flow from operations to be dedicated to the
payment of principal and interest on our indebtedness, therefore reducing
our ability to use our cash flow to fund our operations, capital
expenditures and future business
opportunities;
|
|
•
|
exposing
us to the risk of increased interest rates as certain of our borrowings
are at variable rates of interest;
|
|
•
|
increasing
our vulnerability to general economic downturns and adverse industry
conditions;
|
|
•
|
limiting
our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions and general
corporate or other purposes;
|
|
•
|
limiting
our ability to adjust to changing market conditions and placing us at a
disadvantage compared to our competitors who have less
debt: and
|
|
•
|
restricting
us from making strategic
acquisitions.
|
Critical Accounting Policies and
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
our management evaluates these estimates, including those related to bad
debts, intangible assets, income taxes, restructuring and contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
We
recognize revenue from the sale of commercial broadcast time to advertisers when
the commercials are broadcast, subject to meeting certain conditions such as
persuasive evidence that an arrangement exists and collection is reasonably
assured. These criteria are generally met at the time an advertisement is
broadcast. We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We determine the
allowance based on historical write-off experience and trends. We review our
allowance for doubtful accounts monthly. Past due balances over 120 days
are reviewed individually for collectability. All other balances are reviewed
and evaluated on a pooled basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Although our management believes that the
allowance for doubtful accounts is our best estimate of the amount of
probable credit losses, if the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
28
We have
significant intangible assets recorded in our accounts. These intangible assets
are comprised primarily of broadcast licenses and goodwill acquired through the
acquisition of radio stations. SFAS No. 142, “Goodwill and other
Intangible Assets”, requires that the carrying
value of our goodwill and certain intangible assets be reviewed at least
annually for impairment and charged to results of operations in the periods in
which the recorded value of those assets is more than their fair market
value. The fair market value of our broadcast licenses and reporting units,
for purposes of our annual impairment tests, was derived primarily by using a
discounted cash flows approach. The fair market values derived include
assumptions that contain a variety of variables. These variables are based on
industry data, historical experience and estimates of future performance and
include, but are not limited to, revenue and expense growth rates for each radio
market, revenue and expense growth rates for our stations in each market,
overall discount rates based on our weighted average cost of capital and
acquisition multiples. The assumptions used in estimating the fair market value
of goodwill are based on currently available data and our management’s best
estimates and, accordingly, a change in market conditions or other factors could
have a significant effect on the estimated value. A significant future decrease
in the fair market value of broadcast licenses or goodwill in a market could
result in impairment charges.
Off-Balance Sheet
Arrangements
We did
not have any off-balance sheet arrangements as of December 31,
2007.
Accounting
Pronouncements
See
Note 11 in the accompanying notes to the audited financial
statements.
Item 8. Financial
Statements and Supplementary Data.
The
information in response to this item is included in our consolidated financial
statements, together with the report thereon of Maddox, Unger, Silberstein,
PLLC, beginning on page F-1 of this Annual Report on Form 10-K, which
follows the signature page hereto.
Item 9A(T). Controls
and Procedures
Evaluation of Disclosure
Controls and Procedures.
The
Company, with the participation of its management, including the Company’s Chief
Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of its disclosure
controls and procedures (as defined in Rules 13a-15 and 15d-15 under the
Exchange Act) as of the end of the
period covered by this annual report on Form 10-K.
Our
management is also responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
Our
internal control over financial reporting includes those policies and procedures
that:
Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
29
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and
That our
receipts and expenditures are being made only in accordance with authorizations
of the Company's management and directors; and
Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
As
required by Rule 13a-15 of the Securities Exchange Act of 1934, our principal
executive officer and principal financial officer evaluated our company's
disclosure controls and procedures (as defined in Rules 13a-15(e) of the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that as of the end of the period covered by this
report, these disclosure controls and procedures were not effective to ensure
that the information required to be disclosed by our company in reports it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities Exchange Commission and to ensure that such information is
accumulated and communicated to our company's management, including our
principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure. The conclusion that our disclosure
controls and procedures were not effective was due to the presence of the
following material weaknesses in internal control over financial reporting which
are indicative of many small companies with small staff: inadequate segregation
of duties and effective risk assessment. Management anticipates that
such disclosure controls and procedures will not be effective until the material
weaknesses are remediated.
As of
December 31, 2009 management has determined that our internal controls over
financial reporting were not effective.
We plan
to take steps to enhance and improve the design of our internal controls over
financial reporting. During the period covered by this annual
report on Form 10-K, we have not been able to remediate the material weaknesses
identified above. To remediate such weaknesses, we plan to implement the
following changes during our fiscal year ending December 31, 2009: appoint
additional qualified personnel to address inadequate segregation of duties and
ineffective risk management. The remediation effort set out
above are in process, and we are actively seeking qualified personnel to appoint
to our staff.
Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues, if any, within our
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake.
Changes in Internal
Controls.
There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that has materially affected or is reasonably
likely to materially affect our internal controls.
30
Item 9B.
|
Other
Information.
|
None.
PART III
Item 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
information required by this item with respect to our directors, compliance with
Section 16(a) of the Exchange Act and our code of ethics is incorporated by
reference to the information set forth under the captions “Proposal 1 – Election
of Directors,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Code of Ethics,” “Corporate Governance – Selection of
Director Candidates” and Corporate Governance – Committees of the Board of
Directors – Audit Committee” in our definitive proxy statement for the 2009
Annual Meeting of Stockholders.
The
following table sets forth certain information with respect to our executive
officers as of March 31, 2009:
Name
|
Age
|
Position(s)
|
|
Steven
Ludwig
|
39
|
Chief
Executive Officer
|
|
Robert
Marquitz
|
61
|
President
and Chairman of the Board
|
|
Sariah
Hopkins
|
31
|
Chief
Financial Officer
|
Robert Marquitz is a director
as well as our Chairman. His career has been solidly based in
broadcasting. In the 1980’s and 1990’s, he served as Corporate Vice
President of one of the nation’s most admired broadcasting companies, Malrite
Communications Group. At Malrite, Mr. Marquitz was responsible for
all aspects of operations, programming, research and marketing of the company’s
16 major market radio stations. In 1998, Mr. Marquitz co-founded The
Marketing Group, Inc., a wholly owned subsidiary of Debut
Broadcasting Corporation, Inc., with Steven Ludwig, and has served as
our President since that time. In 2003, Mr. Marquitz launched Direct
Connection, a Christian program modeled after New Music Nashville, which
currently has nearly 150 affiliates. Mr. Marquitz is Anderson
Merchandiser Inc.’s official music/radio consultant and is deeply involved on a
day-to-day basis with leaders of the record and radio
business.
Steven Ludwig is our Chief
Executive Officer and a director. Mr. Ludwig has worked in radio and
interactive marketing for 15 years. In 1998, Mr. Ludwig co-founded
The Marketing Group, Inc. with Mr. Marquitz and has worked as Executive Vice
President and Chief Executive Officer of the company since its
inception. Mr. Ludwig coordinates all sales and business development
efforts, as well as day-to-day implementation of our business
plan. He also works with the staff to develop and implement
operational strategies with feedback from clients. Mr. Ludwig
graduated with honors from Valparaiso University with a B.S. degree in business
in 1992.
Sariah Hopkins is our Chief
Financial Officer. Ms. Hopkins has over 10 years of
financial experience in media, entertainment and advertising. In
2007, she joined Debut Broadcasting in the role of
Controller. She previously served as a member of the financial
management team of publicly traded Gannet Publications, serving as
Manager of Financial Planning and Analysis. From 2004 to 2006 Ms.
Hopkins served as Controller to Marketshare, a privately held marketing and
advertising firm headquartered in Michigan. Ms. Hopkins had
additionally held a financial position with Bortz Entertainment Group from 2001
to 2004, and has prior financial experience with a leveraged SBIC venture
capital firm and a regional National Public Radio affiliate in the Great Plains
region. Ms. Hopkins holds a BA in Music Business, Magna Cum Laude
from Columbia College, an MBA Finance, Summa Cum Laude from Baker College, as
well as an MBA Accounting, Summa Cum Laude from Baker College.
31
The
following table sets forth certain information with respect to our significant
employees as of February 28, 2008:
Name
|
Age
|
Position(s)
|
|
Steven
Shelton
|
51
|
Greenville
Mississippi Super-Regional Cluster General
Manager
|
Steven J. Shelton serves as
General Manager of Debut Broadcasting Mississippi. His career has been built
around executive sales management. Mr. Shelton’s radio industry experience
started in the 1970's, working as an announcer/music director and production
director before entering the executive sales management phase of his career. In
1988, he formed STG, Inc., which quickly became one of the
Southeast’s leading semi conductor/electro-mechanical representative firms.
In 1998 he formed STG Media LLC and served as President and managing
partner of three stations in Huntsville, Alabama, and one FM in Birmingham,
Alabama. STG Media became one of the most successful radio companies in
Alabama and was sold in May of 2006.
Item 11.
|
Executive
Compensation
|
The
following table sets forth certain information concerning compensation paid or
accrued by the Company for the last year with respect to the Company’s “Named
Executive Officers” – the Chief Executive Officer and the two most highly
compensated executive officers whose total compensation for 2007 and 2008
exceeded $100,000:
Name and Principal
Position
|
Year(1)
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan
Compensation
|
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
|
Total
|
|||||||||||||||||||||||||
Steven
Ludwig
|
2008
|
$ | 93,779 | $ | –– | $ | –– | $ | –– | $ | –– | $ | –– | $ | 9,880 | (2) | $ | 103,659 | ||||||||||||||||
Chief
Executive Officer
|
||||||||||||||||||||||||||||||||||
Steven
Ludwig
|
2007
|
$ | 104,750 | $ | –– | $ | –– | $ | –– | $ | –– | $ | –– | $ | 4,170 | (2) | $ | 108.920 | ||||||||||||||||
Chief
Executive Officer
|
||||||||||||||||||||||||||||||||||
Sariah
Hopkins
|
2008
|
$ | 102,763 | $ | –– | $ | –– | $ | –– | $ | –– | $ | –– | $ | — | $ | 102,763 | |||||||||||||||||
Chief
Financial Officer
|
(1) In
accordance with SEC transition rules, this table reflects compensation for the
most recently completed last two fiscal years for individuals who were Named
Executive Officers during such year.
(2) Reflects
matching contributions paid by the company for simple IRA investment and
automobile allowances.
Sariah Hopkins accepted the promotion to Chief
Financial Officer in May of 2008. In 2007, Shannon Farrington served
in the role of Chief Financial Officer. Ms. Farrington’s compensation
did not exceed $100,000 in 2007. Robert Marquitz serves as Chairman
of the Board of Directors and Chief Operating Officer. In Lieu of
current economic conditions, Mr. Marquitz has taken a reduced salary in both
2007 and 2008 respectively.
32
As of
December 31, 2008, The Company did not have any written employment agreements or
change in control arrangements with any of the Named Executive Officers. All
payments for Ms. Farrington’s services as Chief Financial Officer during 2007
were billed by and made payable to W Squared.
Each of
the named executive officers has full eligibility to participate in all company
benefit plans, including a simple IRA retirement plan. Other than the
simple IRA, no other tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans are available to the names executives.
The
Compensation Committee of the Board of Directors of the Company implemented
written employment agreements with each of the Named Executive Officers on May
23, 2009. Effective with these employment agreements, the Named
Executive Officers are eligible for a severance of 36 months base compensation
at the compensation level in effect at the time of separation following, or in
connection with the termination (except in the case of failure to perform job
duties, gross negligence, fraud, or other causable termination) of a named
executive officer, or a change in control of the smaller reporting company or a
change in the named executive officer's responsibilities following a change in
control, with respect to each named executive officer. The company
may require the executive to place up to 30% of their salary in excess of
$104,000 per year in a deferred compensation account to be held as a retirement
fund for the Named Executive, or his heirs. Should the Named Executive
voluntarily resign or be terminated for a defined cause at any point prior to
the defined retirement age of 65 years old, the Named Executive shall
voluntarily surrender the deferred compensation account, as well as any unvested
stock options.
2008 Outstanding Equity
Awards at Fiscal Year-End
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
OPTION
AWARDS
|
STOCK
AWARDS
|
Name
(a)
|
Number
of
Securities
Underlying
Unexercised
options
(#) (b)
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(c)
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
|
Option
Exercise
Price
($)
(e)
|
Option
Expiration
Date
($)
(f)
|
Number
of
Shares
or
Units of
Stock
that
have
not
Vested
(#)
(g)
|
Market
Value of
Shares
of
Units of
Stock
that
Have
not
Vested
($)
(h)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that
have not
Vested
(#)
(i)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of
Unearned
Shares,
Units
or other
Rights
that
have not
Vested
($)
(j)
|
||||||||||||||||||||||||
Sariah
Hopkins
|
18,000 | $ | 1.02 |
1/2/2018
|
18,000 | $ | 900.00 | ||||||||||||||||||||||||||
Frank
Woods
|
18,000 | $ | 1.02 |
01/2/2018
|
18,000 | $ | 900.00 |
33
At the
end of 2008, Sariah Hopkins and Frank Woods each held an unexercised option to
purchase 18,000 shares of common stock of the company. As
of December 31, 2008 the shares had not vested. The option
to purchase carries a strike price of $1.02 per share.
Compensation Committee
Report
NONE.
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this item with respect to the security ownership of our
management and certain beneficial owners is incorporated by reference to the
information set forth under the caption “Security Ownership of Certain
Beneficial Owners and Management” in our definitive proxy statement for the 2009
Annual Meeting of Stockholders. The required information regarding
securities authorized for issuance under our executive compensation plans is
incorporated by reference to the information set forth under the caption
“Proposal 3 – Approval and Adoption of Debut Broadcasting Corporation, Inc 2007
Stock Incentive Plan – Equity Compensation Information” in our definitive proxy
statement for the 2008 Annual Meeting of Stockholders.
Item 13.
|
Certain
Relationships and Related Transactions, and Director Independence.
|
The
information required by this item is incorporated by reference to the
information set forth under the caption “Certain Relationships and Related
Transactions” and “Corporate Governance – Director Independence” in our
definitive proxy statement for the 2009 Annual Meeting of
Stockholders.
Item 14.
|
Principal
Accountant Fees and Services.
|
The
information required by this item is incorporated by reference to the
information set forth under the caption “Proposal 2 – Ratification of
Appointment of Independent Registered Public Accounting Firm – Independent
Auditor Fees” in our definitive proxy statement for the 2008 Annual Meeting of
Stockholders.
PART IV
Item 15. Exhibits
and Financial Statement Schedules
Financial
Statements. The financial statements and financial statement
schedule listed in the Index to Consolidated Financial Statements appearing on
page F-1 of this annual report on Form 10-K are filed as a part of
this report. All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted either because they are not required under the related instructions or
because they are not applicable.
34
3.1
|
Articles
of Incorporation of Debut Broadcasting Corporation., as
amended.
|
|
3.2
|
Bylaws.
|
|
10.1
|
Promissory
Note, dated as of January 25, 2008 between Debut Broadcasting and
Remington Partners, the lenders thereto (incorporated herein by reference
to exhibit 10.1 of our Current Report on Form 8-K, filed on January
25, 2008).
|
|
10.2
|
Warrant,
dated January 21, 2008, between Debut Broadcasting Corporation, Inc and
Remington Partners, Inc (incorporated herein by reference to exhibit 10.2
to our Current Report on form 8-K, filed on January 25,
2008).
|
|
10.3
|
Impact
Network Affiliate agreement, dated November 7, 2007, between Debut
Broadcasting Corporation, Inc. and GAP Broadcasting (incorporated by
reference to exhibit 10.3 to our Current Report on Form 8-K, filed on
November 19, 2007).
|
|
10.4
|
Letter
Agreement, dated August 15, 2007, between The Marketing Group, Inc and
Regions Bank (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K, filed on August 29, 2007).
|
|
10.5
|
Debut
Broadcasting Corporation, Inc., 2007 Employee Stock Incentive
Plan.
|
|
21.0
|
Subsidiaries
of Debut Broadcasting Corporation, Inc.
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14 or 15a-14, as
pursuant to Section 302 of the Sarbanes Oxley Act of
2002
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Rule 13a-14 or 15a-14, as
pursuant to Section 302 of the Sarbanes Oxley Act of
2002
|
|
32.1
|
Certification
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 22nd day of February
22, 2010.
Debut
Broadcasting Corporation, Inc
a
By
|
/s/ SARIAH
HOPKINS
|
|
Sariah
Hopkins
|
||
Executive
Vice President,
|
||
and
Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ RONALD
E. HEINEMAN
|
Chief
Executive Officer and Director,
(Principal
Executive Officer)
|
February
22, 2010
|
||
Ronaled
E. Heineman
|
||||
/s/ SARIAH
HOPKINS
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
February
22, 2010
|
||
Sariah
Hopkins
|
||||
/s/ Robert
Marquitz
|
President,
Chairman,
Executive
Vice President, and
Director
|
February
22, 2010
|
||
Robert
Marquitz
|
||||
/s/ HARRY
LYLES
|
Director
|
February
22, 2010
|
||
HARRY
LYLES
|
||||
/s/ Alan
HIRSCH
|
Director
|
February
22, 2010
|
||
Alan
Hirsch
|
35
Index to Exhibits
3.1
|
Amended
and Restated Articles of Incorporation.
|
|
3.2
|
Amended
and Restated Bylaws (incorporated herein by reference to exhibit 3.3 of
our Registration Statement on Form SB-2, Registration No. 333-107300,
filed on July 24, 2003).
|
|
10.1
|
Promissory
Note, dated as of January 25, 2008, between Debut Broadcasting
Corporation, Inc. and Remington Partners, Inc., (incorporated herein by
reference to exhibit 10.1 of our Current Report on Form 8-K, filed on
January 25, 2008).
|
|
10.2
|
Warrant,
dated January 21, 2008, between Debut Broadcasting Corporation, Inc. and
Remington Partners, Inc. (incorporated herein by reference to exhibit 10.2
to our Current Report on form 8-K, filed on January 25,
2008).
|
|
10.3
|
Impact
Network Affiliate agreement, dated November 7, 2007, between Debut
Broadcasting Corporation, Inc. and GAP Broadcasting (incorporated herein
by reference to exhibit 10.1 to our Current Report on Form 8-K, filed on
November 19, 2007).
|
|
10.4
|
Letter
Agreement, dated August 15, 2007, between The Marketing Group, Inc. and
Regions Bank (incorporated herein by reference to exhibit 10.1 to our
Current Report on Form 8-K, filed on August 29, 2007).
|
|
10.5
|
Letter
Agreement, dated August 22, 2008 between Debut Broadcasting Mississippi,
Inc and SunTrust Bank (incorporated herein by reference to exhibit 10.1 to
our Current Report on Form 8-K, filed on August 25,
2008).
|
|
10.6
|
Asset
Purchase Agreement, dated March 16, 2008 between Debut Broadcasting and
Holladay Broadcasting of Louisiana (incorporated herein by reference to
exhibit to our Current Report on Form 8-K filed on August 16,
2008).
|
|
21
|
Subsidiaries
of Debut Broadcasting Corporation, Inc.
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14 or 15a-14, as
pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Rule 13a-14 or 15a-14, as
pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
32.1
|
Certification
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
36
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
1 | |||
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
2 | |||
Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007
|
3 | |||
Consolidated
Statement of Stockholders’ Equity (Deficit) as of December 31,
2008
|
4 | |||
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
|
5 | |||
Notes
to Consolidated Financial Statements
|
6 – 16 |
Maddox Ungar Silberstein, PLLC
CPAs and Business
Advisors
|
Phone
(248) 203-0080
Fax (248)
281-0940
30600
Telegraph Road, Suite 2175
Bingham
Farms, MI 48025-4586
www.maddoxungar.com
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Debut
Broadcasting, Inc.
Nashville,
Tennessee
We have
audited the accompanying consolidated balance sheets of Debut Broadcasting
Corporation, Inc., a Nevada Corporation, as of December 31, 2008 and 2007, and
the related consolidated statements of operations, stockholders’ equity
(deficit), and cash flows for the years then ended. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Debut Broadcasting Corporation,
Inc., as of December 31, 2008 and 2007 and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has incurred losses from operations and is in
need of additional capital to grow its operations so that it can become
profitable. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans with
regard to these matters are described in Note 12. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Maddox
Ungar Silberstein, PLLC
|
Bingham
Farms, Michigan
March 26,
2009
F-1
DEBUT
BROADCASTING CORPORATION, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
|
2008
|
2007
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 59,143 | $ | 8,643 | ||||
Accounts
receivable, net
|
1,096,316 | 650,580 | ||||||
Stock
warrant receivable
|
85 | 0 | ||||||
Prepaid
expenses
|
47,644 | 45,388 | ||||||
Unexercised
stock warrants
|
454,658 | 0 | ||||||
Total
Current Assets
|
1,657,846 | 704,611 | ||||||
Property
and Equipment, Net
|
749,415 | 541,159 | ||||||
Other
Assets
|
||||||||
Deposits
|
3,928 | 336 | ||||||
Goodwill
|
459,280 | 79,280 | ||||||
FCC
licenses
|
1,509,500 | 1,037,000 | ||||||
Non-compete
agreement, net
|
23,333 | 13,924 | ||||||
Total
Other Assets
|
1,996,041 | 1,130,540 | ||||||
TOTAL
ASSETS
|
$ | 4,403,302 | $ | 2,376,310 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 530,792 | $ | 339,734 | ||||
Accrued
payroll, expenses and taxes
|
449,881 | 339,442 | ||||||
Notes
payable to stockholders
|
750,000 | 0 | ||||||
Lines
of credit
|
774,212 | 239,297 | ||||||
Current
portion of long – term debt
|
108,443 | 85,600 | ||||||
Unrecognized
stock warrant loss
|
485,523 | 0 | ||||||
Total
Current Liabilities
|
3,098,851 | 1,004,073 | ||||||
Long
– Term Liabilities
|
||||||||
Leases
payable
|
5,381 | 9,976 | ||||||
Long
– term debt
|
1,336,194 | 591,398 | ||||||
Total
Long – Term Liabilities
|
1,341,575 | 601,374 | ||||||
TOTAL
LIABILITIES
|
4,440,426 | 1,605,447 | ||||||
STOCKHOLDERS’
EQUITY (DEFICIT)
|
||||||||
Capital
stock
|
30,601 | 30,383 | ||||||
Paid
in capital
|
3,166,621 | 3,162,272 | ||||||
Accumulated
deficit
|
(3,234,346 | ) | (2,421,792 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
(37,124 | ) | 770,863 | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$ | 4,403,302 | $ | 2,376,310 |
The
accompanying notes are an integral part of the financial
statements.
F-2
DEBUT
BROADCASTING CORPORATION, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
GROSS
REVENUES
|
$ | 6,313,496 | $ | 2,970,965 | ||||
OPERATING
EXPENSES
|
6,906,425 | 4,590,171 | ||||||
OPERATING
LOSS
|
(592,929 | ) | (1,619,206 | ) | ||||
OTHER
INCOME (EXPENSE)
|
(219,625 | ) | (77,287 | ) | ||||
NET
LOSS
|
$ | (812,554 | ) | $ | (1,696,493 | ) | ||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
19,799,725 | 19,794,360 | ||||||
NET
LOSS PER SHARE
|
$ | (0.041 | ) | $ | (0.09 | ) |
The
accompanying notes are an integral part of the financial
statements.
F-3
DEBUT
BROADCASTING CORPORATION, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
AS
OF DECEMBER 31, 2008
Common
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Paid in Capital
|
Deficit
|
Total
|
||||||||||||||||
Beginning
Balance, January 1, 2007
|
5,000 | $ | 1,000 | $ | 0 | $ | (725,299 | ) | $ | (724,299 | ) | |||||||||
Recapitalization
|
10,000,000 | 1,000 | - | - | 1,000 | |||||||||||||||
(5,000 | ) | (1,000 | ) | - | - | (1,000 | ) | |||||||||||||
Private
Placement
|
6,000,000 | 18,000 | 2,958,498 | - | 2,976,498 | |||||||||||||||
Shareholder
Note Conversion
|
430,316 | 1,291 | 213,866 | - | 215,157 | |||||||||||||||
Debenture
Conversion
|
3,000,000 | 9,000 | 91,000 | - | 100,000 | |||||||||||||||
Existing
CNT
|
364,044 | 1,092 | (1,092 | ) | - | 0 | ||||||||||||||
MSI
Debentures
|
(100,000 | ) | (100,000 | ) | ||||||||||||||||
Net
Loss for the Year Ended December 31, 2007
|
- | - | - | (1,696,493 | ) | (1,696,493 | ) | |||||||||||||
Ending
Balance, December 31, 2007
|
19,794,360 | 30,383 | 3,162,272 | (2,421,792 | ) | 770,863 | ||||||||||||||
Exercise
of stock warrants
|
8,500 | 26 | 59 | - | 85 | |||||||||||||||
Stock
issued for services
|
22,026 | 66 | 1,476 | - | 1,542 | |||||||||||||||
Stock
issued as compensation
|
42,000 | 126 | 2,814 | - | 2,940 | |||||||||||||||
Net
Loss for the Year Ended December 31, 2008
|
- | - | - | (812,554 | ) | (812,554 | ) | |||||||||||||
Ending
Balance, December 31, 2008
|
19,866,886 | $ | 30,601 | $ | 3,166,621 | $ | (3,234,346 | ) | $ | (37,124 | ) |
The
accompanying notes are an integral part of the financial
statements.
F-4
DEBUT
BROADCASTING CORPORATION, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
2008
|
2007
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss for the period
|
$ | (812,554 | ) | $ | (1,696,493 | ) | ||
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
||||||||
Depreciation
and amortization expense
|
154,571 | 77,991 | ||||||
Stock
issued as compensation
|
2,940 | 0 | ||||||
Stock
issued for services
|
1,542 | 0 | ||||||
Unexercised
stock warrant expense
|
30,865 | 0 | ||||||
Changes
in Assets and Liabilities
|
||||||||
(Increase)
in accounts receivable
|
(388,214 | ) | (201,245 | ) | ||||
(Increase)
in other current assets
|
(2,341 | ) | (45,723 | ) | ||||
(Increase)
in deposits
|
(3,592 | ) | 0 | |||||
Increase
in accounts payable
|
191,058 | 172,686 | ||||||
Increase
in accrued payroll, expenses and taxes
|
110,439 | 275,007 | ||||||
Net
Cash Used in Operating Activities
|
(715,286 | ) | (1,417,777 | ) | ||||
Cash
Flows from Investing Activities:
|
||||||||
Acquisition
of property and equipment
|
(302,236 | ) | (260,475 | ) | ||||
Acquisition
of Shamrock Broadcasting
|
0 | (300,000 | ) | |||||
Acquisition
of River Broadcasting
|
0 | (1,037,134 | ) | |||||
Cash
payment for Holladay Broadcasting – WBBV Vicksburg station
acquisition
|
(180,022 | ) | 0 | |||||
Net
Cash Used in Investing Activities
|
(480,258 | ) | (1,597,609 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||
Net
Proceeds from private placement of common stock
|
0 | 2,976,497 | ||||||
Exercise
of stock warrant
|
85 | 0 | ||||||
Proceeds
from stockholder notes
|
750,000 | 0 | ||||||
Proceeds
from short – term debt
|
35,000 | 30,000 | ||||||
Proceeds
from long – term debt
|
565,106 | 0 | ||||||
Repayment
of short – term debt
|
0 | (11,212 | ) | |||||
Repayment
of long – term liabilities
|
(102,147 | ) | (57,368 | ) | ||||
Net
Cash Provided by Financing Activities
|
1,248,044 | 2,937,917 | ||||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
50,500 | (77,469 | ) | |||||
Cash
and Cash Equivalents – Beginning
|
8,643 | 86,112 | ||||||
Cash
and Cash Equivalents – Ending
|
$ | 59,143 | $ | 8,643 | ||||
Supplemental
Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | 217,675 | $ | 77,000 | ||||
Cash
paid for income taxes
|
$ | 800 | $ | 0 | ||||
Supplemental
Cash Flow Information for Non-Cash Transactions
|
||||||||
Holladay
Broadcasting – WBBV Vicksburg station acquisition
|
$ | (980,022 | ) | $ | 0 | |||
Seller
financing of station acquisition
|
$ | 800,000 | $ | 0 |
The
accompanying notes are an integral part of the financial
statements.
F-5
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
1.
Organization
Debut
Broadcasting Corporation, Inc. (the “Company”) is located in Nashville,
Tennessee and conducts business from its principal executive office at 1209
16th
Avenue South, Nashville, Tennessee 37212. The Company produces and
distributes syndicated radio programs to radio stations across the United States
and Canada. In addition, the Company owns and operates five radio
stations in Mississippi.
The
Company maintains radio syndication in Nashville and produces and distributes 14
radio programs, which are broadcast over approximately 1,400 radio station
affiliates. These radio programs have an estimated 40 million U.S.
listeners per week. In addition to its syndication services, the Company owns
and operates a multi-media studio with audio, video and on-line content
production capabilities. This facility is located on Music Row in
Nashville, Tennessee. The Company also provides marketing, consulting
and media buying (advertising) for its radio broadcast station customers in the
United States.
On May
17, 2007, the Company consummated a reverse merger with California News Tech, a
public company that was organized in Nevada. Media Sentiment, Inc.
(“MSI”), a wholly-owned subsidiary of California News Tech, held all of the
assets and operations of California News Tech at the date of the merger (see
Note 3 – Business Combinations). Pursuant to a Post-Merger Operating
Agreement, dated as of May 17, 2007, MSI and the Company agreed to operate as
separate businesses after the reverse merger, with neither entity exercising
control over the assets or operations of the other.
On June
27, 2007, MSI filed a registration statement with the SEC with respect to the
issued and outstanding shares of common stock of MSI for the purpose of
completing a spin-off of MSI by transferring all of the shares of common stock
of MSI to shareholders of record of California News Tech as of April 20, 2007.
The spin-off of MSI was completed in August 2008.
2.
Summary of Significant Accounting Policies
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company, and its subsidiaries. All material Intercompany accounts and
transactions have been eliminated.
These
results exclude the assets, liabilities and operations of MSI, a wholly-owned
subsidiary that the Company does not control and expects to spin off during the
first quarter of 2008 (See Note 3 - Business Combinations).
Accounts
Receivable
We use
the allowance method for determining the collectability of our accounts
receivable. The allowance method recognizes bad debt expense
following a review of the individual accounts outstanding in light of the
surrounding facts. Accounts receivable are reported at their
outstanding unpaid principal balances reduced by an allowance for doubtful
accounts based on historical bad debts, factors related to specific customers’
ability to pay and economic trends. We write off accounts receivable
against the allowance when a balance is determined to be
uncollectible. Accounts receivable on the consolidated balance sheet
is stated net of our allowance for doubtful accounts.
F-6
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
2.
Summary of Significant Accounting Policies (continued)
Property and
equipment
Property
and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of the assets. Building
improvements are amortized using the straight-line method over the term of the
lease or the useful life of the improvements, whichever is shorter. Accelerated
depreciation methods are generally used for income tax
purposes. Repairs and maintenance costs are charged directly to
expense as incurred.
Property
and equipment consists of the following at December 31:
Estimated
Useful Life
|
2008
|
2007
|
||||||||
Land
|
$ | 49,500 | $ | 49,500 | ||||||
Buildings
and building improvements
|
5-10
years
|
137,460 | 71,810 | |||||||
Towers
and studio equipment
|
5-30
years
|
372,714 | 314,666 | |||||||
Furniture,
fixtures and equipment
|
3-7
years
|
270,972 | 150,515 | |||||||
Automotive
|
3-5
years
|
194,938 | 101,858 | |||||||
Total
Property and equipment
|
1,025,584 | 688,349 | ||||||||
Less:
Accumulated depreciation
|
(276,169 | ) | (147,190 | ) | ||||||
Property
and equipment, net
|
$ | 749,415 | $ | 541,159 |
Depreciation
expense was $128,979 and $61,916 for the years ended December 31, 2008 and 2007,
respectively.
Goodwill
and Intangible Assets
Goodwill
Goodwill
is the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations accounted for under the purchase method
as described in SFAS No. 142, Goodwill and Other Intangible
Assets. We do not amortize goodwill but test it for impairment
annually, or when indications of potential impairment arise.
We
recognize fair values utilizing widely accepted valuation techniques, including
discounted cash flows and market multiple analyses. During the fourth
quarter of 2008 and 2007, we completed our annual impairment testing of our
goodwill using these valuation techniques, and determined there was no
impairment.
FCC
Licenses
FCC
Licenses is an indefinite lived asset. We do not amortize FCC
Licenses but test it for impairment annually, and have determined that there was
no impairment.
Other
Intangibles
Other
intangibles represent non-compete agreements with the sellers of the Shamrock
Broadcasting and River Broadcasting. The non-compete agreements are
amortized straight-line over the term of the non-compete agreement.
Amortization
expense was $25,592 and $16,075 for the years ended December 31, 2008 and 2007,
respectively.
F-7
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
2.
Summary of Significant Accounting Policies (continued)
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes,” which requires an asset and liability approach for financial accounting
and reporting of income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to
reverse. Current income taxes are based on the respective periods’
taxable loss for federal and state income tax reporting purposes. See
Note 9, Provision for Income Taxes, for additional information related to the
provision for income taxes.
Use of
Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States (GAAP), we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. Actual results could differ materially from our
estimates.
Revenue and Cost
Recognition
The
Company recognizes its advertising and programming revenues when the Company’s
radio shows air on its contracted radio station
affiliates. Generally, the Company is paid by a national advertising
agency, which sells the commercial time provided by the affiliate.
As the
Company earns its revenue from the national advertising agency, it also
recognizes any amounts due to the individual shows, which are based on the
audience level generated by the specific program. Expenses are
accrued at the time the shows are run.
Consulting
projects are generally negotiated at a fixed price per project; however, if the
Company utilizes its advertising capacity as part of the consulting project, it
will charge the consulting client in the same manner as the affiliated stations
described more fully above. Consulting fee income is recognized as
time is incurred under the terms of the contract.
Advertising
The
Company expenses advertising costs as they are incurred. Total advertising costs
of $180,455 and $16,370 are included in the financial statements for the years
ended December 31, 2008 and 2007, respectively.
Net Loss Per
Share
We
present basic loss per share on the face of the consolidated statements of
operations. As provided by SFAS No. 128, Earnings Per Share, basic
loss per share is calculated as income available to common stockholders divided
by the weighted average number of shares outstanding during the
period. As of December 31, 2007, the Company had no stock options or
securities convertible into any form of equity outstanding; therefore, no
diluted loss per share is shown.
All
shares of common stock and prices have been restated in the accompanying
consolidated financial statements and notes to give effect to the reverse merger
of the Company with California News Tech. Therefore, the calculation
of loss per share is equal to the number of shares of common stock outstanding
assuming the reverse merger was completed on January 1, 2006.
F-8
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
2.
Summary of Significant Accounting Policies (continued)
Reclassifications
To
maintain consistency and comparability, certain amounts from prior years have
been reclassified and combined, where appropriate, to conform to the
current-year financial statement presentation.
New Accounting
Pronouncements
The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”), on May 17,
2007. This interpretation increases the relevancy and comparability
of financial reporting by clarifying the way companies account for uncertainty
in income taxes. FIN 48 prescribes a consistent recognition threshold
and measurement attribute, as well as clear criteria for subsequently
recognizing, derecognizing and measuring such tax positions for financial
statement purposes. The interpretation also requires expanded
disclosure with respect to the uncertainty in income taxes.
3. Business
Combinations
California
News Tech
On May
17, 2007, the Company entered into an Agreement and Plan of Merger with
California News Tech. The merger was accounted for as a reverse
merger using the purchase method of accounting. Accordingly, the
acquisition has been treated as an acquisition of California News Tech by the
Company. MSI held all of the assets and operations of California News
Tech at the date of the merger.
As part
of the reverse merger, each share of common stock of Debut Broadcasting, Inc., a
Tennessee Corporation formerly known as the Marketing Group (“Debut
Broadcasting”), issued and outstanding immediately prior to the closing of the
merger was converted into the right to receive one share of common stock. As a
result, the shareholders of Debut Broadcasting received 10,000,000 newly issued
shares of common stock.
Also as
part of the reverse merger, the Company issued 6,430,316 shares of Company
common stock to investors as a result of closing a private offering that was
exempt from registration under Rule 506 of Regulation D of the Securities Act of
1933. The shares were issued for a combination of cash and debt
reduction.
On June
27, 2007, MSI filed a registration statement with the Securities and Exchange
Commission with the respect to the issued and outstanding shares of common stock
of MSI for the purpose of completing a spin-off of MSI by transferring all of
the shares of common stock of MSI to shareholders of record of California News
Tech as of April 20, 2007. We anticipate completing the spin-off of MSI during
the first quarter of 2008.
As part
of the reverse merger, the Company also entered into a Post-Merger Operating
Agreement in which the Company and MSI agreed to operate their respective
businesses separately and the Company, specifically agreed that it would not
interfere in any manner with the operations of MSI, have any rights to use,
acquire or otherwise operate any of the assets or intellectual property of MSI
or create any liabilities for which MSI would be obligated. In
addition, MSI agreed that it would not interfere in any manner with the
operations of the Company, have any rights to use, acquire or otherwise operate
any of the assets or intellectual property of the Company or create any
liabilities for which the Company would be obligated
F-9
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
3. Business
Combinations (continued)
California
News Tech (continued)
Moreover,
as part of this Post-Merger Operating Agreement, the Company agreed that if for
any reason California News Tech is unable to register the MSI shares, that the
Company would sell its MSI shares to the Company’s former president and
director, Marian Munz, for $1.00. As a consequence, MSI has and will continue to
operate completely separate from the Company effective as of the date of the
reverse merger.
In
addition, at the time of the reverse merger, the Company was released from
certain liabilities to its former president and director, Mr. Munz, and his
spouse; however, these liabilities continued as the sole responsibility of MSI
in the form of two separate convertible promissory notes. These notes
remain outstanding but, if converted under their terms into shares of MSI common
stock, would represent over an 80% interest and full voting control over
MSI.
As a
result, the Company considers MSI a non-controlled subsidiary and has not
included any operating results, cash flow analysis or assets and liabilities of
MSI in its consolidated financial statements.
The
Company reported the details of the Agreement and Plan of Merger and the related
transactions on a Form 8-K filed May 22, 2007.
Shamrock Broadcasting,
Inc.
On June
7, 2007, the Company acquired two radio broadcast stations identified as WNLA FM
105.5 MHz and WNLA AM 1380 kHz in Indianola, Mississippi, from Shamrock
Broadcasting, Inc., including all of the facilities, equipment, licenses and
intellectual property necessary to operate these stations, in exchange for
$300,000. In a separate agreement, the Company purchased the accounts
receivable of Shamrock Broadcasting through issuance of a $10,134 promissory
note payable in equal instalments made in each of three months following
completion of the transaction.
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 10,134 | ||
Land
|
14,500 | |||
Buildings
and structures
|
13,500 | |||
Equipment
|
30,000 | |||
FCC
licenses
|
237,000 | |||
Non-compete
agreement
|
5,000 | |||
Liabilities
assumed
|
(10,134 | ) | ||
Total
|
$ | 300,000 |
F-10
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
3. Business
Combinations (continued)
River Broadcasting
Company
On June
19, 2007, the Company acquired three radio broadcast stations identified as WIQQ
FM 102.3 MHz in Leland, MS, WBAQ FM 97.9 MHz and WNIX AM 1330 kHz in Greenville,
MS, from River Broadcasting Company, including all of the facilities, equipment,
licenses and intellectual property necessary to operate these stations, in
exchange for $1,037,134. In September 2007, the Company identified a
$14,280 liability that was not recorded as of the closing date of the
transaction. This was recorded as an adjustment to
goodwill.
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 37,134 | ||
Land
|
35,000 | |||
Buildings
and structures
|
50,000 | |||
Equipment
|
25,000 | |||
FCC
licenses
|
800,000 | |||
Non-compete
agreement
|
25,000 | |||
Goodwill
|
79,280 | |||
Liabilities
assumed
|
(14,280 | ) | ||
Total
|
$ | 1,037,134 |
The
Company reported our acquisition of these five radio stations on a Form 8-K
filed June 22, 2007.
Holladay Broadcasting
Company – WBBV Vicksburg
On August
31, 2008, Debut Broadcasting Mississippi, Inc., a wholly-owned subsidiary of
Debut Broadcasting Corporation, Inc., acquired assets comprising of a radio
broadcast station identified as WBBV FM 101.1 MHz in Vicksburg, Mississippi from
Holladay Broadcasting Company of Louisiana, LLC, including all of the
facilities, equipment, licenses and intellectual property necessary to operate
this station in exchange for a total purchase price of $980,022.
In
connection with completion of the acquisition of assets comprising the Radio
Station from HBC, on August 31, 2008, Debut Broadcasting Mississippi, Inc.
issued a Promissory Note Holladay Broadcasting of Louisiana, LLC in the
aggregate principal amount of $800,000.
The
purchase price was allocated as follows:
Description
|
Amount
|
|||
Accounts
receivable
|
$ | 57,522 | ||
Buildings
and structures
|
25,000 | |||
Equipment
|
10,000 | |||
FCC
licenses
|
472,500 | |||
Non-compete
agreement
|
35,000 | |||
Goodwill
|
380,000 | |||
Total
|
$ | 980,022 |
The
company reported our acquisition of this radio station on a Form 8-K filed
September 1, 2008.
F-11
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
4. Other
Current Liabilities
At
December 31, 2008 and 2007, the following amounts were included in other current
liabilities in the consolidated balance sheets:
2008
|
2007
|
|||||||
Accrued
compensation
|
$ | 45,895 | $ | 42,909 | ||||
Accrued
401K contributions
|
14,863 | 9,805 | ||||||
Accrued
other expenses
|
82,571 | 14,788 | ||||||
Accrued
producer sharing payouts
|
306,552 | 271,940 | ||||||
Total
|
$ | 449,881 | $ | 339,442 |
5. Lines
of Credit
On May 3,
2002 and amended on April 26, 2004, the Company entered into an unsecured
promissory note establishing a revolving line of credit with the Bank of America
for $75,000. The note requires monthly interest payments and the
interest rate is based on the bank’s prime, which was 5.5% at December 31, 2008.
The note matures on May 3, 2009. The balance of the line of credit at
both December 31, 2008 and 2007 was $75,000.
The
Company signed a promissory note and established a revolving line of credit on
February 27, 2004 for $200,000 with Regions Bank to refinance existing debt. The
note matures on June 30, 2009, and requires monthly interest payments accruing
at an initial rate of 7.58% and a current rate of 4.4712% at December 31, 2008.
The rate is subject to monthly changes based on an independent index plus
2.25%.
The note
is secured by personal guarantee of certain officers of the Company and all
inventory, chattel paper, accounts, equipment and general intangibles existing
or purchased by the wholly-owned subsidiary entity, The Marketing Group, after
the signing of the related agreement. The principal balance at December 31, 2008
and 2007 was $169,568 and $164,297, respectively.
The
Company signed a promissory note and established a revolving line of credit on
August 22, 2008 for $500,000 with SunTrust Bank to facilitate the acquisition of
WBBV. The note matures on August 22, 2009 and requires monthly
interest payment accruing at an initial rate of 6.0% and a current rate of 4.25%
at December 31, 2008. The rate is subject to monthly changes based on an
independent index plus 1.00%
The note
is secured by personal guarantee of certain officers of the Company and all
inventory, chattel paper, accounts, equipment and general intangibles existing
or purchased by the wholly-owned subsidiary entity, Debut Broadcasting
Mississippi, after the signing of the related agreement. The
principal balance at December 31, 2008 and 2007 was $499,914 and $0
respectively.
F-12
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
6. Long
Term Debt
Regions Bank
Loan
On August
15, 2006, the Company signed a promissory note with Regions Bank for $300,000
with an initial interest rate of 7.58% and a current rate of 3.445% as of
December 31, 2008. The loan is secured by all inventory, chattel paper,
accounts, equipment and general intangibles of the Company. The loan
matures August 30, 2011 and is payable in monthly instalments of $6,058,
including variable interest at 2.25% points per annum over the London Interbank
Offered Rate for the applicable index period.
Total
interest expense on the Regions Bank loan for the years ended December 31, 2008
and 2007 was $12,098 and $20,217, respectively. The balance of
the loan at December 31, 2008 was $199,297, of which $57,076 is classified as
current portion of long-term debt. The balance of the loan at
December 31, 2007 was $231,802, of which $57,076 is classified as current
portion of long-term debt.
Citadel Communications
Loan
On August
28, 2002, the Company signed an unsecured promissory note with Citadel
Communications for $430,415. The loan has no maturity date and
accrues interest at a rate of 12%. The note was amended in April,
2003 requiring interest only payments indefinitely. Total interest
expense on the Citadel Communications loan for the years ended December 31, 2008
and 2007 was $41,712 and $41,712, respectively. The balance of the
loan at both December 31, 2008 and 2007 was $347,491.
Vehicle
Loans
On August
28, 2007 the Company signed a direct purchase money loan and security agreement
with DaimlerChrysler for the purchase of two vehicles for $50,068 with an
effective interest rate of 7.3%. The corresponding promissory note is to be paid
over a five-year period with a monthly payment of $1,011.
On
September 25, 2007, the Company signed a retail instalment sale contract with
GMAC for the purchase of two vehicles for $47,498 with an effective interest
rate of 5.0%. The corresponding promissory note is to be paid over a
three-year period with a monthly payment of $1,424. The purchased vehicles will
be used in conjunction with the radio broadcast operations.
On May 1,
2008, the Company signed a retail instalment sale contract with Daimler Chrysler
Financial Services for the purchase of a vehicle for $23,137 with an effective
interest rate of 7.49%. The corresponding promissory note is to be
paid over a five-year period with a monthly payment of $463. The
purchased vehicle is used in conjunction with the radio broadcast
operations.
On May
15, 2008, the Company signed a retail instalment sale contract with Daimler
Chrysler Financial Services for the purchase of a vehicle for $19,303 with an
effective interest rate of 11.25%. The corresponding promissory note
is to be paid over a five-year period with a monthly payment of
$367. The purchased vehicle is used in conjunction with the radio
broadcast operations.
On May
30, 2008, the Company signed a retail instalment sale contract with GMAC for the
purchase of a vehicle for $25,256 with an effective interest rate of
9.5%. The corresponding promissory note is to be paid over a
five-year period with a monthly payment of $530. The purchased
vehicle is used in conjunction with the radio broadcast
operations.
F-13
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
6. Long
Term Debt (continued)
Vehicle Loans
(continued)
Total
interest expense on the vehicle loans for the years ended December 31, 2008, and
2007 was $10,529 and $1,355, respectively. The principal balance of
the vehicle loans as of December 31, 2008 and 2007 was $136,157 and $93,040,
respectively. At December 31, 2008, $45,065 was classified as the
current portion.
Capital
Lease
On
December 5 2007, the Company entered into a capital lease arrangement with
National City Media Finance to acquire studio equipment for $15,009 with a fixed
interest rate of 7.5%. The lease term is for three years with monthly payments
of $464 with a $1 buyout option at the end of the lease term.
Total
interest expense on studio equipment for the years ended December 31, 2008 and
2007 $660 and $94, respectively. The principal balance of the capital lease as
of December 31, 2008 and 2007 was $10,375 and $14,636,
respectively. At December 31, 2008 and 2007, $4,994 and $4,663 was
classified as the current portion of the lease, respectively.
Long-Term
Debt Commitments
Future
minimum cash debt commitments under all non-cancellable leases in effect at
December 31, 2008 were as follows:
Lease
Commitments
|
||||
2009
|
$ | 148,847 | ||
2010
|
106,236 | |||
2011
|
71,304 | |||
2012
|
23,256 | |||
2013
|
6,141 | |||
Total
|
$ | 355,784 |
7. Shareholders’
Equity
In
connection with the reverse merger on May 17, 2007, all shares of common stock
of Debut Broadcasting (as hereinafter defined) outstanding prior to the merger
were exchanged for 10,000,000 shares of Company common stock (See Note 3.
Business Combinations).
In
addition, in connection with the reverse merger, the Company completed a private
placement of 6,000,000 shares of Company common stock at $0.50 per
share. The transaction was recorded net of financing costs of
$23,503.
Finally,
in connection with the reverse merger, the Company converted notes payable to
shareholders in the amount of $215,158 into 430,316 shares of Company common
stock at $0.50 per share.
The
pre-merger shareholders of the Company maintained 364,044 shares of Company
common stock.
On May
21, 2007, $100,000 of convertible debentures issued on May 15, 2007 were
converted into 3,000,000 shares of Company common stock.
F-14
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
8. Provision
for Income Taxes
The tax
effect of significant temporary differences representing future tax assets and
future tax liabilities has been fully offset by a valuation
allowance. The Company has determined that realization is uncertain
and, therefore, a valuation allowance has been recorded against this future
income tax asset.
9.
Related Parties
The
Company leases a vehicle from an entity owned by an officer for $691 per month
and accordingly is included in the operating lease commitments. (See Note 10
pertaining to operating leases in Commitments and Contingencies). Management
believes the lease is similar to that of an arms length transaction. Total lease
expense for the corresponding vehicle for the years ended December 31, 2008 and
2007 was $8,292 and $5,058, respectively.
During
July 2005, the Company entered into a lease agreement for office space with a
company owned by an officer.
Management
believes that the arrangement is similar to that of an arms length transaction.
For the years ended December 31, 2008 and 2007, the Company incurred
corresponding rental expense of $21,600 and $21,600, respectively. As
of December 31, 2008, this agreement was continuing on a month to month basis.
Notification of termination of this agreement was provided to the officer with
an effective date of January 31, 2009.
The
Company provides services to an entity owned and operated by an officer. The
Company has also entered into an agreement under which the same stockholder
provides radio show content to the Company. The terms of these arrangements
generally reflect those negotiated with independent content providers and
therefore, management believes that it acquires this content on terms and rates
similar to that of an arms length transaction. For the years ended December 31,
2008 and 2007, the Company recognized revenues from related parties of
$211,645 and $343,411, respectively. For the years ended December 31, 2008
and 2007, the Company incurred expenses of $180,697 and $299,979 to the same
related party.
The
Company also provides media buying services on behalf of an entity owned by an
officer. The Company records both the revenue and corresponding expenses related
to these media buying services. Management believes that the arrangement is
similar to that of an arms length transaction. For the years ended December 31,
2008 and 2007, the Company recognized $303,837 and $407,129, respectively in
corresponding media buying revenue and incurred related media buying expenses of
$190,451 and $371,129 for the same periods.
10.
Commitments and Contingencies
Significant
Customers
As of
December 31, 2008 and 2007, one customer represented 69% and 66% of our accounts
receivable as reflected on the consolidated balance sheet.
During
2008 and 2007, one customer accounted for 69% and 66% of our net revenue as
reflected on the consolidated statement of operations.
F-15
DEBUT
BROADCASTING CORPORATION, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
10.
Commitments and Contingencies (continued)
Operating
Leases
Future
minimum cash lease commitments under all non-cancellable leases in effect at
December 31, 2008 were as follows:
Lease
Commitments
|
||||
2009
|
$ | 75,592 | ||
2010
|
51,858 | |||
2011
|
29,592 | |||
2012
|
9,851 | |||
2013
|
0 | |||
Total
|
$ | 166,893 |
11. Subsequent
Events
The
Company is currently seeking financing to acquire additional radio stations in
the Southeast United States through asset purchases and/or time brokerage
agreements.
The
company has a non-binding commitment letter for a $2.6 million debt facility
from SunTrust Bank that would facilitate the consolidation of debt and fund
acquisitions. The company is currently reviewing the terms with the board of
directors.
On March
24, 2009 the company appeared in the Circuit Court of Washington County,
Mississippi to defend themselves against the allegations raised in Delta Plaza
LLC vs. Debut Broadcasting Mississippi asserting an alleged breach of
contract. The court found this case in favor of Debut Broadcasting
Mississippi, and the case was closed without creating any liability or penalty
to the company.