United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended May 31, 2002 Commission File Number:0-24075
NBG RADIO NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0362102
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
520 SW Sixth Avenue, Suite 750
Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
(503) 802-4624
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
The registrant has one class of Common Stock with 14,585,651 shares
outstanding as of July 12, 2002.
Transitional Small Business Issuer Disclosure Format (check one):Yes [ ] No [X].
PART I - FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------
NBG RADIO NETWORK, INC.
BALANCE SHEETS
ASSETS
------
May 31 May 31 November 30
(Unaudited) (Unaudited) (Audited)
-------------------- ------------------ -------------------
2002 2001 2001
-------------------- ------------------ -------------------
CURRENT ASSETS
Cash and cash equivalents $ 136,026 $ 548,832 $ 321,402
Receivables:
Accounts receivable, net of allowance for
doubtful accounts of $60,000 in 2002
and in 2001 3,360,603 4,766,069 3,945,803
Unbilled receivable - 152,865 -
Note receivable - 167,200 -
Related-party receivables 229,354 5,790 219,354
Barter exchange receivables - 81,880 -
Sales representation agreements, net of
amortization 216,805 2,243,920 402,637
Prepaid expenses and other current assets 30,295 457,539 31,148
-------------------- ------------------ -------------------
Total current assets 3,973,083 8,424,095 4,920,344
-------------------- ------------------ -------------------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization 155,592 170,482 197,183
GOODWILL, net of amortization 2,496,881 903,203 2,911,187
INTANGIBLE ASSETS, net of amortization 669,561 160,243 957,093
OTHER ASSETS 122,500 - 137,500
-------------------- ------------------ -------------------
Total assets $ 7,417,617 $ 9,658,023 $ 9,123,307
==================== ================== ===================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES
Line of credit $ - $ 500,000 $ -
Accounts payable 1,526,286 536,490 1,438,382
Accrued liabilities 319,220 3,216 447,531
Barter exchange payables 19,243 - 29,339
Sales representation agreement liabilities 1,242,461 1,751,915 1,203,095
Current portion of long-term debt 600,000 - 300,000
-------------------- ------------------ -------------------
Total current liabilities 3,707,210 2,791,621 3,418,347
-------------------- ------------------ -------------------
LONG-TERM DEBT 3,844,167 - 3,929,167
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $.001 par value,
5,000,000 authorized and unissued - - -
Common stock, $.001 par value;
50,000,000 common shares
authorized 14,585,651, 14,321,651,
and 14,385,651 common shares
issued and outstanding at May 31,
2002, May 31, 2001, and November
30, 2001 respectively 14,586 14,326 14,386
Additional paid-in-capital 11,450,411 9,016,882 11,290,611
Retained deficit (11,379,495) (1,937,266) (9,306,807)
Stock subscription receivable (219,262) (227,540) (222,397)
-------------------- ------------------ -------------------
Total stockholders' (deficit) equity (133,760) 6,866,402 1,775,793
-------------------- ------------------ -------------------
Total liabilities and stockholders'
(deficit) equity $ 7,417,617 $ 9,658,023 $ 9,123,307
==================== ================== ===================
See Accompanying Notes
NBG RADIO NETWORK, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, 2002 and MAY 31, 2001 MAY 31, 2002 and MAY 31, 2001
(Unaudited) (Unaudited)
------------------------------------ ---------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUES
Advertising income $ 3,046,420 $ 3,322,821 $ 5,754,973 $ 6,149,719
Kiosk income 147,703 432,684 489,866 522,184
-------------- -------------- -------------- --------------
Total revenues 3,194,123 3,756,036 6,244,839 6,671,903
DIRECT COSTS 2,133,288 2,780,662 4,483,579 4,885,516
-------------- -------------- -------------- --------------
GROSS MARGIN 1,060,835 975,374 1,761,260 1,786,387
-------------- -------------- -------------- --------------
GENERAL AND ADMINISTRATIVE EXPENSES
Wages and employee benefits 518,219 921,620 1,015,614 1,547,228
Travel and entertainment 32,984 81,099 60,800 172,779
Consulting and professional 178,936 394,528 978,396 503,624
Advertising 7,197 9,198 22,314 23,107
Depreciation and amortization 381,622 107,648 763,244 215,164
Postage and printing 34,443 31,355 68,433 61,666
Rent 42,458 15,893 87,937 46,952
Office supplies 10,014 10,253 27,704 33,049
Telephone 19,972 27,965 32,891 52,864
Other expenses 50,864 34,909 131,763 127,735
-------------- -------------- -------------- --------------
Total general and
administrative expenses
1,276,709 1,634,468 3,189,096 2,804,846
-------------- -------------- -------------- --------------
Loss before provision for other expense
and provision for income taxes
(215,874) (659,094) (1,427,836) (1,018,459)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest income 480 - 2,055 4,118
Interest expense (326,700) (4,357) (642,359) (20,678)
-------------- -------------- -------------- --------------
Total other income (expense) (326,220) (4,357) (640,304) (16,560)
-------------- -------------- -------------- --------------
Loss before provision for income taxes (542,094) (663,451) (2,068,140) (1,014,341)
Provision for income taxes 4,548 (125,000) 4,548 -
-------------- -------------- -------------- --------------
Net loss $ (546,642) $ (538,451) $ (2,072,688) $ (1,014,341)
============== ============== ============== ==============
Basic and diluted loss per share of
common stock $ (0.04) $ (0.04) $ (0.14) $ (0.08)
============== ============== ============== ==============
Weighted average number of shares
outstanding - basic and diluted
14,519,651 13,897,275 14,452,316 13,500,106
============== ============== ============== ==============
See Accompanying Notes
NBG RADIO NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Additional Stock
Paid-In Retained Subscription
Common Stock Capital Deficit Receivable Total
-------------------------- ------------ ------------ ------------- ----------
Shares Amount
----------- ----------
BALANCE, November 30, 2000
(audited) 12,321,831 $ 12,322 $ 6,795,719 $ (922,926) $ (14,113) $5,871,002
Issuance of common shares 1,351,920 1,352 1,800,568 - - 1,801,920
Exercise of options 577,900 578 312,458 - - 313,036
Issuance of common shares and
common share subscription
for services 134,000 134 231,866 - (228,000) 4,000
Services provided for payment
of subscribed shares - - - - 19,716 19,716
Allocated value of warrants
issued in debt financing - - 2,150,000 - - 2,150,000
Net loss for the year - - - (8,383,881) - (8,383,881)
----------- ---------- ------------ ------------ ------------- -----------
BALANCE November 30, 2001
(audited) 14,385,651 $ 14,386 $11,290,611 $(9,306,807) $ (222,397) $1,775,793
Issuance of common shares 200,000 200 159,800 - 160,000
Service provided for payment
of subscribed shares - - - - 3,135 3,135
Net loss for the period - - - (2,072,688) - (2,072,688)
----------- ---------- ------------ ------------ ------------- -----------
BALANCE May 31, 2002
(unaudited) 14,585,651 $ 14,586 $11,450,411 $(11,379,495) $ (219,262) $(133,760)
=========== ========== ============ ============ ============= ===========
See Accompanying Notes
NBG RADIO NETWORK, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31,
(Unaudited)
------------------------------------
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (2,072,688) $ (1,014,341)
Adjustments to reconcile net loss to cash from operating
activities:
Depreciation and amortization 763,244 215,164
Amortization of discount on long-term debt 215,000 -
Sales representation contract agreement amortization 185,832 946,083
Services provided in payment of subscribed shares 3,135 14,573
Changes in assets and liabilities:
Accounts receivable 585,200 (852,364)
Unbilled receivable - 42,874
Related party receivable (10,000) 76,452
Barter exchange receivable/payable (10,096) 1
Prepaid expenses and other current assets 853 (329,981)
Net change in programming contract liabilities 39,366 (1,287,812)
Accounts payable 87,904 (44,640)
Accrued liabilities (31,689) (160,696)
---------------- ----------------
Net cash from operating activities (180,561) (2,394,687)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (4,815) (6,266)
---------------- ----------------
Net cash from investing activities (4,815) (6,266)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 1,714,631
Stock options exercised - 280,531
Net advances on line of credit - 100,000
---------------- ----------------
Net cash from financing activities - 2,095,162
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (185,376) (305,791)
CASH, beginning of year 321,402 854,623
---------------- ----------------
CASH, end of year $ 136,026 $ 548,832
================ ================
NBG RADIO NETWORK, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31,
(Unaudited)
------------------------------------
2002 2001
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 642,359 $ 20,678
================ ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capitalization of programming contract assets and
recognition of related liabilities $ - $ 288,000
================ ================
Issuance of common stock in payment of accrued
expenses $ 160,000 $ -
================ ================
See Accompanying Notes
NOTE 1 - ORGANIZATION AND BUSINESS ACTIVITY
NBG Radio Network, Inc. ("NBG" or "the Company") was organized under the laws of
the State of Nevada on March 27, 1996, with the name of Nostalgia Broadcasting
Corporation. In January 1998, the stockholders approved the Company's name
change to NBG Radio Network, Inc. The Company creates, produces, distributes and
is a sales representative for national radio programs and offers other related
services to the radio industry. The Company offers radio programs to radio
stations in exchange for advertising time on those stations, which the Company
then sells to national advertisers.
In June 2001, NBG Radio Network, Inc., completed the acquisition of Glenn Fisher
Entertainment Corporation ("GFEC") (see Note 5), which became a wholly-owned
subsidiary of the Company involved in the creation, production, and distribution
of national radio programs. The Company also owns and operates NBG Solutions,
Inc. a wholly owned subsidiary involved in providing design, installation, and
support for interactive kiosks. All significant inter-company accounts and
transactions have been eliminated in the preparation of the consolidated
financial statements.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The interim consolidated financial statements include the accounts of NBG Radio
Network, Inc. and its wholly owned subsidiaries, NBG Solutions, Inc., and GFEC,
after elimination of inter-company transactions and balances.
The interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The financial
information included in this interim report has been prepared by management
without audit by independent public accountants. The Company's annual report
contains audited financial statements. In the opinion of management, all
adjustments, including normal recurring accruals necessary for fair presentation
of results of operations for the interim periods included herein have been made.
The results of operations for the six months ended May 31, 2002 are not
necessarily indicative of results to be anticipated for the year ending November
30, 2002.
NOTE 3 - REVENUE RECOGNITION
The Company recognizes revenues from the sale of advertising after the
commercial advertisements are broadcast. This is generally billed monthly. If
the Company is required to guarantee a certain rating as a condition of the
sale, then revenue is not recognized until the advertisement is broadcast and
the Company has confirmed it delivered the required rating. Revenues recognized
from the design, installation, and support for interactive kiosks produced
through NBG Solutions, Inc., are recognized when the product is delivered or
services performed.
NOTE 4 - LOSS PER COMMON SHARE
Basic and diluted loss per common share is calculated by dividing net loss by
the weighted average basic and diluted shares outstanding, respectively.
NOTE 5 - ACQUISITION OF GLENN FISHER ENTERTAINMENT CORPORATION
On June 29, 2001, the Company acquired all of the common stock of GFEC for
$5,280,425 and, as of the date of the acquisition, GFEC became a wholly owned
subsidiary of the Company.
The acquisition was accounted for as a purchase. Accordingly, the excess of the
fair value of assets acquired over liabilities assumed was recognized as
goodwill, and is being amortized over its expected useful life of five years. In
addition, identifiable intangible assets (sales representation contract rights)
have been recognized and will be amortized over the lives of the underlying
assets, which have a weighted average life of 2.5 years. The following
summarizes the fair value of the assets acquired and liabilities assumed in the
Company's purchase of GFEC.
Goodwill $ 4,332,443
Identifiable intangibles (sales representation contract rights) 1,518,688
Assets acquired 733,287
Liabilities assumed (764,239)
Non-refunded prepayments on contracts with GFEC terminated at acquisition (539,754)
----------------
Total cash paid for GFEC $ 5,280,425
================
Prior to the acquisition transaction, NBG and GFEC entered into a number of
joint business transactions. In its transactions with NBG, GFEC sold to NBG its
rights to employment and syndication agreements with radio program personalities
or producers pursuant to sales representation agreements. The sales
representation agreements were recorded by GFEC as contracts receivable and
deferred revenues when the determinable amount of noncancellable agreements were
identified. In its transactions with GFEC, NBG recognized its liabilities to
GFEC in accordance with the acquired sales representation agreements. The costs
of the sales representation agreements were deferred by NBG until such time that
they were matched with related programming revenues.
At the time of acquisition, the contracts receivable and deferred revenue
balances recognized by GFEC and the unamortized sales representation agreement
costs of $1,653,228 and contract liabilities of $1,113,474 recognized by the
Company were eliminated for consolidation purposes, resulting in the recognition
of an additional $539,754 in goodwill. Accordingly, the total amount of goodwill
recognized by the Company in its acquisition of GFEC was $4,332,443.
As part of the acquisition by NBG, Glenn Fisher, the former president and sole
shareholder of GFEC, entered into a three-year consulting agreement with NBG.
Terms of the consulting agreement provided for monthly payments of $16,667 to
Mr. Fisher for the three-year period covered by the agreement. The Company and
Mr. Fisher agreed to terminate Mr. Fisher's consulting agreement on June 1,
2002.
The following pro forma condensed financial information has been prepared using
the purchase method of accounting and is based on the historical financial
statements of the Company and GFEC assuming the acquisition had been concluded
at the beginning of the periods presented. The pro forma condensed financial
information combines GFEC's statements of operations for the six months ended
June 30, 2001, with the statement of operations of the Company for the six
months ended May 31, 2001, and GFEC's year ended December 31, 2001 with the
statement of operations of the Company for the year ended November 30, 2001.
Certain amounts in the historical financial statements of GFEC have been
reclassified and adjusted to conform with the
Company's historical financial presentation. All inter-company transactions have
been eliminated.
Six Months Ended May 31, Years Ended November 30,
---------------------------------------- ------------------------------------------
2001 2001 2001 2001
Historical Pro Forma Historical Pro Forma
----------------- -------------------- -------------------- -------------------
Revenues $ 6,671,903 $ 6,696,128 $ 13,546,176 $ 13,570,401
Net loss $ (1,014,341) $ (2,665,103) $ (8,383,881) $ (10,469,355)
Net loss per share
(diluted) $ (0.08) $ (0.20) $ (0.60) $ (0.75)
----------------- -------------------- -------------------- -------------------
NOTE 6 -- ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. However, the Company incurred
significant losses in 2001, the first two quarters of 2002, and had incurred
additional losses in other years since its inception in 1996 such that, as of
May 31, 2002, the Company had recorded an accumulated deficit of $11,379,495.
Furthermore, the Company is subject to several restrictive borrowing covenants,
which are contained in its Credit Facility Agreement with MCG Finance
Corporation ("MCG") dated June 29, 2001. If it is unable to meet the borrowing
covenants on the predetermined measurement dates, repayment of the Company's
outstanding indebtedness to MCG may be accelerated and the Company may be unable
to meet the accelerated repayment requirements.
In addition to the benefit that a national economic recovery will have in
improving its sales revenues, the Company is seeking to increase income and cash
flow by also increasing sales to existing customers and through sales and
marketing efforts to new customers. In addition, the Company has successfully
negotiated with selected creditors more favorable repayment terms that will
assist in maintaining appropriate levels of cash flow to sustain operating
activities.
However, the Company's ability to operate as a going concern is dependent on its
ability to regain and sustain profitable operations; to comply with existing
debt covenants; and, to generate sufficient cash flow from operations to meet it
obligations as they become payable. Although no assurances can be given,
management believes that the Company will be able to continue operations into
the future. Accordingly, no adjustment has been made to the accompanying
consolidated financial statements in anticipation of the Company not being able
to continue as a going concern.
Item 2. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------
Forward Looking Statements
--------------------------
The information set forth below relating to matters that are not
historical facts are "forward looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934 and involve risks and uncertainties
which could cause actual results to differ materially from those contained in
such forward looking statements. Such risks and uncertainties include, but are
not limited to, the following:
o A decline in national and regional advertising
o Preference by customers of other forms of advertising such as newspapers
and magazines, outdoor advertising, network radio advertising, yellow page
directories and point of sale advertising
o Loss of executive management personnel
o Ability to maintain and establish new relations with radio stations to air
its programs
o Ability to maintain relationships with program hosts and ability to attract
new program hosts
o Ability to predict public taste with respect to entertainment programs
Three Months and Six Months Ended May 31, 2002 and 2001
-------------------------------------------------------
Reference is made to Item 6, "Management's Discussion and Analysis or Plan
of Operation" included in the Company's annual report on Form 10-KSB for the
year ended November 30, 2001, as amended, on file with the Securities and
Exchange Commission. The following discussion and analysis pertains to the
Company's results of operations for the three and six month periods ended May
31, 2002, compared to the results of operations for the three and six month
periods ended May 31, 2001, and to changes in the Company's financial condition
from November 30, 2001 to May 31, 2002.
REVENUES. Total revenues for the three months ended May 31, 2002 were
$3,194,123 compared to revenues of $3,756,036 for the same period in 2001,
representing a decrease of $561,913, or 15%. For the six months ended May 31,
2002, total revenues were $6,244,839 representing a decrease of $427,064, or 6%
compared to the same period in 2001. Revenues generated from the sale of
advertising time related to radio programs produced by the Company were
$3,204,902 for the six-month period ending May 31, 2002. Revenues generated from
the sale of advertising related to sales representation contracts were
$2,550,071 for the six months ending May 31, 2002. The Company's decline in
revenue resulted from three factors. First, advertising rates have fallen
significantly in 2002 compared to the rates seen in the first and second
quarters in 2001. Second, in 2001 the Company cancelled three programs that
failed to maintain adequate ratings. In 2002, the Company has not developed or
otherwise acquired new programs to fill the inventory lost as a result of the
cancellation of these programs. As a result, the Company had less inventory
available for sale in 2002 compared to 2001. Finally, the Company's kiosk
subsidiary's total sales decreased from $432,684 for the three months ended May
31, 2001 to $147,703 for the three months ended May 31, 2002. The main reason
for this was the lack of development of new clients and a reduction in orders
from current clients.
DIRECT COSTS. Direct costs for the three months ended May 31, 2002 and
2001 were $2,133,288 and $2,780,662, respectively, representing a decrease of
$647,374, or 23%. For the six months ended May 31, 2002 direct costs decreased
$401,937, or 8% compared to the same
period last year. Several factors contributed to the reduction in the Company's
direct costs. First, most of the Company's agreements with its hosts and program
producers are structured to compensate the host or producers based on a
percentage of revenue generated from the respective program. As the Company's
revenues declined as a result of the drop in advertising rates, so did its
obligations to compensate its hosts and producers. Second, the Company
renegotiated the contracts with several of its hosts and producers to reflect
the depressed economic conditions in the radio industry. In most cases, these
hosts or producers agreed to switch from a guaranteed payment to a payment based
on a percentage of the program's revenues. Third, in response to the economic
conditions in the industry, the Company cut its program productions costs on the
programs that it produces internally. The combination of these factors have
allowed the Company to control its costs in declining economic conditions.
GROSS MARGIN. Gross margin for the three months ended May 31, 2002 was
$1,060,835, an increase of $85,461, or 9%, compared to the same period 2001. For
the six months ended May 31, 2002 gross margin decreased $25,127, or 1% compared
to the same period last year. The Company's gross margin was hurt by the
difficult economic conditions in the radio industry. Advertising rates have
fallen significantly since last year. The Company was able to offset much of the
decrease in advertising rates by renegotiating its contracts with its program
hosts and producers. The renegotiated contracts have significantly reduced the
amount of guaranteed payments by the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended May 31, 2002 was $1,276,709, representing a decrease
of $357,759, or 22% over the same period in 2001. The decrease resulted from:
(1) a reduction in staff size,
(2) pay cuts for all remaining employees,
(3) reductions in the budgets for travel and entertainment, and
(4) a reduction in the Company's investor relations campaign.
A portion of these savings were offset by an increase in depreciation and
amortization expenses resulting from amortization of assets acquired in the GFEC
acquisition. For the six months ended May 31, 2002 general and administrative
expenses were $3,189,096 representing an increase of $384,250, or 13%. The
increase resulted from fees paid to the Company's lender which were recorded in
the first quarter of the 2002 fiscal year and increased depreciation and
amortization expenses. The lender fees included a $200,000 amendment fee charged
to amend the covenants in the Company's Credit Facility Agreement and a $400,000
advisory fee paid to the Company's lender. Depreciation and amortization expense
increased $548,080 primarily due to an increase in amortization expense from the
acquisition of GFEC on June 29, 2001.
OTHER INCOME (EXPENSES). In the three months ending on May 30, 2002, the
Company included $326,220 in other expenses, which were primarily a result of
interest payments made to the Company's lender under its Credit Facility
Agreement.
INCOME TAXES. In the second quarter of 2002, the Company paid $4,548 in
estimated taxes due resulting from the GFEC acquisition in 2001. For the same
period in 2001 the Company received a refund of $125,000.
NET LOSS AND EARNINGS PER SHARE. Net loss for the three months ended May
31, 2002 was $546,642, or $.04 per share. Net loss for the three months ended
May 31, 2001 was $538,451, or $.04 per share. For the six months ended May 31,
2002 and May 31, 2001, net loss was $2,072,688 and $1,014,341 respectively. The
loss for 2002 was due to the reduction of advertising rates arising from the
current economic conditions, to the increase in non-recurring consulting and
professional fees of $600,000, and to $548,080 in depreciation and amortization
expense primarily due to the increase in amortization from the acquisition of
GFEC on June 29, 2001.
Basic and dilutive earnings per share are based upon a weighted average of
14,452,316 and 13,500,106 shares outstanding on May 31, 2002 and May 31, 2001,
respectively.
Liquidity and Capital Resources
-------------------------------
Historically, the Company has financed its cash flow requirements through
cash flows generated from operations and financing activities. The Company's
working capital at May 31, 2002 was $265,873 compared to $5.63 million at May
31, 2001. The decrease in working capital was due to:
(1) the elimination of sales representation contracts as a result of the
GFEC acquisition on June 29, 2001,
(2) the reduction of accounts receivable due to lower advertising rates,
and
(3) an increase in accounts payable, and the debt the Company incurred
to finance the GFEC acquisition.
The Company has renegotiated the payment terms with several of its vendors
allowing for repayment of its accounts over the course of the next twelve months
with little or no interest. In addition, $600,000 or 39% of the Company's
accounts payable are attributable to the lender's amendment fee and advisory
fee. These fees become payable if the Company closes a corporate development or
financing transaction, such as a merger or acquisition, before November 30,
2002. If the Company does not close on such a transaction before November 30,
2002, then the Company is required to make a payment to its lender equal to the
lesser of 25% of (1) the amount of the fees, or (2) its excess cash flow for the
trailing twelve-month period ending November 30, 2002. If the Company does not
generate sufficient cash flows to pay the lender the entire amount of fees owed,
then the remaining balance of the fees owed will be added to the outstanding
principal balance of the Company's credit facility.
In January 2001 the Company completed a private placement of 547,000 units
at $1.00 per unit. Each unit consisted of one share of common stock and one
warrant to purchase one share of common stock, exercisable immediately. The
warrants are exercisable for $1.50 and expire on January 19, 2003. The Company
received proceeds of $547,000 from the private placement.
In March of 2001, the Company completed another private placement of
204,920 units at $1.00 per unit. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock, exercisable
beginning September 5, 2001. The warrants are exercisable for $1.50 and expire
on March 5, 2003. The Company received proceeds of $204,920 from the private
placement.
In March of 2001, the Company completed another private placement of
600,000 units at $1.75 per unit. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock exercisable
immediately. The warrants are exercisable for $2.00 and expire on March 31,
2003. The Company received $1,050,000 from the private placement.
On June 29, 2001, the Company acquired GFEC for approximately $5.3
million in cash. The acquisition was financed through a $6.2 million credit
facility with MCG Finance Corporation ("MCG"). The credit facility was amended
on February 28, 2002 and subsequently on July 19, 2002. The surplus funds from
the credit facility were used to retire the Company's $500,000 line of credit
with Western Bank, pay various fees and costs associated with the acquisition,
and increase the Company's working capital. The credit facility is secured by
all of the Company's assets, including its intellectual property and the stock
of its subsidiaries. The credit facility is structured to allow for the
possibility of an additional $10 million in future financing. The interest rate
on the amounts outstanding under the credit facility is comprised of two parts;
a deferred fixed rate of 3.0% and a variable rate. On May 31, 2002, the variable
interest rate equaled 10.03% per annum. The variable portion of the interest
rate is due quarterly while the deferred fixed portion is due upon the
termination of the credit facility. The credit facility terminates in June 2006
unless prepaid earlier by the Company.
The terms of the credit facility require the Company to comply with
several affirmative and negative covenants. These covenants include interest
coverage ratios, total charge coverage ratios, cash flow leverage ratios,
maximum programming obligations and affiliate stations expenses, minimum
adjusted operating cash flow, maximum capital expenditures, restrictions on the
issuance of equity instruments or additional indebtedness, as well as other
elements. These covenants are typically measured on a quarterly basis. On May
31, 2002, the Company failed to meet the minimum adjusted operating cash flow
covenant and the minimum adjusted operating cash flow covenant. MCG waived these
covenant violations and modified one of the Company's future covenant
requirements without charge (except for a $500 documentation fee) in an
agreement dated July 19, 2002. Accordingly, because a waiver has been obtained
for existing covenant violations and management's analysis indicates the Company
should be in compliance at future measurement dates, the long-term portion of
the Company's credit facility remains classified as long-term in the Company's
consolidated balance sheets dated May 31, 2002. If the Company is not able to
meet the future covenants on the predetermined measurement dates, the lender may
refuse to grant a waiver and could accelerate the entire balance of the credit
facility.
In addition to the financial covenants, the credit facility also places
restrictions on the Company's ability to issue equity instruments, pay
dividends, repurchase its stock, and incur indebtedness. The terms of an Option
and Warrant Agreement between the Company and MCG provide MCG with certain
antidilution provisions, which may further complicate the Company's ability to
issue additional equity securities in the future.
As part of the consideration for the credit facility, the Company
issued an option to acquire warrants to purchase shares of common stock to MCG.
To exercise the option to acquire warrants, MCG must agree to forgo collection
of one-half of the fixed portion of the interest rate. The option is exercisable
immediately and will expire upon the termination of the credit facility. If the
option to acquire warrants is exercised, MCG will receive warrants to acquire
4,850,235 shares of the Company's common stock. The warrants provide that
4,084,408 of these common shares may be acquired at an exercise price of $1.20
per share and the remaining 765,827 common shares may be acquired at an exercise
price of $3.00 per share. The warrants become immediately exercisable and will
expire on June 30, 2011.
Despite the unfavorable operating results for 2001 and the first two
quarters of 2002, management believes that its operating cash flows will be
sufficient to meet its prospective needs for working capital for the next twelve
months. However, if the Company does not perform as management expects, then it
may become necessary to seek additional or alternative sources of financing.
There is no assurance that the Company will be able to locate a source of
financing willing to offer terms satisfactory to the Company. In addition, the
Company's indebtedness presents other risks to investors, including the
possibility that the Company may be unable to generate cash sufficient to make
the principal and interest payments when due or comply with financial covenants.
Should the Company fail to make such a payment or fail to comply with the
financial covenants, then the entire balance of the Company's credit facility
may become due and immediately payable. These actions would likely have a
material adverse effect on the Company.
Recently Issued Accounting Standards
------------------------------------
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company's management does not expect that the application of the
provisions of this statement will have a material impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies the
accounting for the impairment of long-lived assets and for long-lived assets to
be disposed of, including the disposal of business segments and major lines of
business. SFAS No. 144 will be effective for the Company in the first quarter of
the fiscal year end November 30, 2002. The Company's management does not expect
that the application of the provisions of this statement will have a material
impact on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 will be effective for the
Company in the first quarter of 2002. The Company's management does not expect
that the application of the provisions of this statement will have a material
impact on the Company's consolidated financial statements.
In July 2001, the FASB also issued SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." These
standards change the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to cease amortizing goodwill and certain intangible assets
with an indefinite useful life created by business combinations accounted for
using the purchase method of accounting. Instead, goodwill and intangible assets
deemed to have an indefinite useful life will be subject to an annual review for
impairment. Implementation of SFAS No. 141 had no
effect on the Company's 2001 and 2000 consolidated financial statements. The new
standards of SFAS No. 142 will be effective for the Company in the first quarter
of the fiscal year ending November 30, 2003.
On December 1, 2002, the Company will no longer amortize goodwill.
Based on the current recorded balance of goodwill, this accounting change will
reduce annual amortization expense by approximately $829,000. The impact of
ceasing to record goodwill amortization will be an increase in the Company's
annual net income, after taxes, of approximately $557,000.
Goodwill will, however, be subject to an annual review for impairment
upon adoption of SFAS No. 142. The Company is in the process of determining
whether any such impairment would be required upon adoption of the new
accounting standard. If the Company concludes that a charge for goodwill
impairment is necessary, such a charge would be reported as a cumulative effect
of an accounting change.
PART II - OTHER INFORMATION
---------------------------
Item 1. Exhibits and Reports on Form 8-K
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(a) The following exhibit is attached:
10.1 Waiver and Amendment Number Two to Credit Facility Agreement
dated July 19, 2002.
(b) No reports on form 8-K were required to be filed during the quarter
ended May 31, 2002.
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NBG RADIO NETWORK, INC.,
a Nevada corporation
Date: July 19, 2002 By: /s/ John J. Brumfield
------------------------------------------
John J. Brumfield, Chief Financial Officer
Vice President, Finance
(Principal Financial and Accounting Officer)