United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended November 30, 2001 Commission File Number: 0-24075
NBG RADIO NETWORK, INC.
(Name of small business issuer in its charter)
Nevada 88-0362102
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $13,546,176.
Based on the closing sales price of the Common Stock on February 27, 2002,
the aggregate market value of the voting stock of registrant held by
non-affiliates was $8,623,604.
The registrant has one class of Common Stock with 14,385,651 shares
outstanding as of February 27, 2002.
Documents Incorporated By Reference: None
Transitional Small Business Issuer Disclosure Format (check one):
Yes [ ] No [X].
NBG RADIO NETWORK, INC.
TABLE OF CONTENTS
PAGE
PART I ............................................................................. 1
Item 1. Description of Business...................................................... 1
Item 2. Description of Property...................................................... 6
Item 3. Legal Proceedings............................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......................... 7
PART II ............................................................................. 8
Item 5. Market for Common Equity and Related Stockholder Matters .................... 8
Item 6. Management's Discussion and Analysis or Plan of Operation.................... 10
Item 7. Financial Statements......................................................... 16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 16
PART III ............................................................................. 17
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act....................................... 17
Item 10. Executive Compensation....................................................... 19
Item 11. Security Ownership of Certain Beneficial Owners and Management............... 23
Item 12. Certain Relationships and Related Transactions............................... 24
Item 13. Exhibits and Reports on Form 8-K............................................. 24
PART I
------
Item 1. Description of Business
--------------------------------
General
-------
Nostalgia Broadcasting Corporation was incorporated in March 1996 under the
laws of the State of Nevada. In January 1998, Nostalgia Broadcasting Corporation
changed its name to NBG Radio Network, Inc. (the "Company"). The Company's
principal executive offices are located at 520 SW 6th Ave., 7th Floor, Portland,
OR 97204, and its telephone number is (503) 802-4624.
On June 29, 2001 the Company acquired Glenn Fisher Entertainment
Corporation ("GFEC"). At the time of acquisition GFEC owned eight radio programs
and one radio prep service, a daily service providing content for radio
stations. GFEC provides the Company with long-form shows with affiliates in top
media markets. GFEC's prep service "Wireless Flash" is one of the leading prep
services in the country, and combined with the Company's current prep services
makes up one of the top prep networks available to advertisers.
The Company creates, produces, distributes and is a sales representative
for national radio programs and services. The Company offers radio programs to
the industry in exchange for commercial broadcast time, which the Company sells
to national advertisers. The Company started with two programs and 150 radio
station affiliates at its inception in 1996. It now has 30 programs and over
1,800 radio station affiliates. The group of radio stations who contract with
the Company to broadcast a particular program constitutes a radio network. The
Company derives a significant part of its revenue from selling the commercial
broadcast time on its radio networks to advertisers desiring national coverage.
The Company also derives a portion of its revenues from sales representation
agreements. These agreements allow the Company to sell network-advertising time
for third party program producers, who lack their own sales staff. The Company
generates revenue by keeping a commission on these sales. The Company was the
sales representation firm for GFEC. The acquisition of GFEC created significant
sales representation cost savings for the Company.
The radio industry is divided into three distinct segments: Local,
National, and Network. The Company operates in the Network segment. With just
over $18 billion spent on radio advertising in 2001, the approximate allocation
of advertising revenue per segment is as follows: Local - 77 percent, National -
18 percent, and Network - five percent. Local radio involves individual stations
in specific markets selling commercial time on their station; National radio
includes a cluster of stations owned by the same radio group selling commercial
time on numerous stations within the same region; and Network radio involves
producing and distributing radio programming, obtaining radio station clearance,
and selling the commercial inventory created in the programming that is
distributed to the cleared stations (affiliates). Network radio companies
perform all or a combination of those functions. As stated previously, NBG
currently performs all three functions - production, radio station clearance,
and advertising sales.
All three functions require expertise. Producing quality programming requires an
ability to find, develop, acquire, and market top-notch talent. Radio stations
attempt to develop formats, such as news/talk, music, or other types of
entertainment programming in order to appeal to a target listening audience that
will attract local, regional, and national advertisers to their station.
However, due to consolidation in the industry, most radio stations do not have
the creative and financial resources to produce nationally accepted
1
programming. As a result, radio stations look to syndicators, such as the
Company, to enhance their existing local programming. Radio station clearance
requires an ability to market programs in such a fashion that radio stations
choose to air the programs. This is referred to as affiliate clearance. The
acquisition of GFEC improves these services for the Company. GFEC's affiliate
clearance expertise provides the Company with the ability to clear radio
programs in top media markets. These programs are provided to radio stations on
a barter basis, not sold for cash, in exchange for commercial broadcast
inventory on that station. The Company has an in house advertising sales staff
that sells the available commercial broadcast inventory to advertisers requiring
national coverage. The commercial broadcast time may vary from market to market
within a specified time period depending on the requirements of the particular
radio station. The advertising rates are based upon audience ratings for the
specific demographic the advertiser is trying to reach. These ratings are
determined by Arbitron Research Company, which periodically measures the
percentage of the radio audience in a market area listening to a specific radio
station during a specific time period. Selling the commercial inventory within
the programming requires the ability to work with and negotiate with advertising
agencies that place buys for their clients desiring national coverage.
The Company currently produces 30 network programs and services targeting
the most popular radio formats; including Adult Contemporary, Contemporary Hit
Radio, Country, News/Talk, Oldies, Rhythmic, Sports, and Urban. The Company
produces both short form and long form programs. Short form features, such as
TEEIN' IT UP WITH PETER JACOBSEN and FASTBREAK WITH STEVE "SNAPPER" JONES, are
daily two to three minute vignettes. Long form programs, such as HOLLYWOOD
HAMILTON'S WEEKEND TOP 30 and LOVE SOUP WITH DR. LORI are programs that range
from one to four hours in length. The Company offers these programs to radio
stations in exchange for advertising time. The Company combines the advertising
time from these radio stations to form networks. The Company sells the
commercial broadcast time inside of these networks to advertisers desiring
national coverage.
Beginning with radio syndication, the Company's primary goal is to enhance
the value of its current network. In order to do this, the Company will increase
its marketing efforts to radio stations across the United States. The marketing
efforts will focus primarily on the top 50 media markets. By increasing its
network presence in the top 50 media markets, the Company will be able to charge
a higher spot rate for its advertising time. The spot rate is the price a
national advertiser pays per commercial aired on the Company's network. The
Company currently has a network of over 1,800 radio station affiliates, and with
over 10,000 radio stations in the United States, the Company anticipates
significantly expanding its network. However, there can be no assurance that the
Company will be able to expand its operations.
Radio stations rely on network radio programming and distributors, such as
the Company, to provide national quality programming and other services to
enhance their existing programming and ratings. Limited financial and creative
resources, among other matters, typically prevent most radio stations from
producing their own national quality programming. The Company intends to focus
its programming growth on long form daily programs. The Company has developed a
niche in short form and long form weekly programming, and by developing more
daily long form programming, the Company will acquire more broadcast commercial
inventory to sell on its network. A typical short form program will have 10 to
20 commercials available for sale each week while a typical long form weekly
program has 12 to 48 commercials per week. A typical long form daily program has
60 to 240 commercials available for sale every week, significantly increasing
the Company's inventory. The Company intends to offer additional
2
programming over the next twelve months through internal development as well as
the acquisition of businesses or assets that complement the Company's
operations.
The creation of a radio network allows the Company to sell the acquired
commercial broadcast inventory to advertisers desiring national coverage. Rates
for the sale of network advertising are established on the basis of audience
delivery or ratings and the demographic composition of the listening audience.
Thus, if the Company increases its coverage in the Top 50 media markets as
previously discussed, it will be able to charge more for broadcast commercial
time on the network. In addition, by expanding its programming lineup, there
will also be more commercial broadcast inventory available for sale by the
Company.
The Company sells commercial broadcast time by guaranteeing certain
ratings and demographics. There can be no assurance that the guarantee will be
achieved. If the radio network on which the commercial broadcast time is sold
does not achieve the guarantee, the Company may be obligated to offer the
advertiser additional advertising time on the same radio network or on an
alternate radio network. These "make goods" or "bonus spots" are the predominant
means whereby the Company satisfies such obligations to advertisers.
Alternatively, the Company could be obligated to refund or credit a portion of
the advertising revenue derived from such sales. Historically, the Company has
not had to refund any cash received as revenues.
According to the National Association of Broadcasters ("NAB") there are
approximately 10,000 commercial radio stations in the United States. The Company
currently has broadcast commercial time on over 1,800 of these radio stations.
Radio is one of the most cost effective forms of advertising given its wide
reach and low cost in comparison to print and television media. Radio
advertising is attractive to advertisers for a variety of reasons: short lead
time between commercial production and broadcast time, low cost of commercial
production, and, most importantly, the fact that most radio listening occurs
away from home, closer to the point of purchase.
The Company's wholly-owned subsidiary, NBG Solutions, Inc. ("NBG
Solutions"), offers flexible and customizable kiosk platform solutions to a
broad range of customers. NBG Solutions specializes in consulting, system
design, software development, system integration, installation, and ongoing
support of interactive kiosks. A kiosk, on a stand alone or connected basis
(through the Internet or phone lines), allows sponsors and advertisers to cost
effectively distribute timely information and can facilitate direct interaction
with consumers including E-commerce through credit or smart cards. NBG Solutions
has developed its own custom kiosk software, KiNet(TM). The General Services
Administration has utilized NBG Solutions' kiosk software for nearly three years
in locations across the country. The kiosks and software have been installed in
federal buildings, malls, libraries and other public locations in an effort to
deliver popular government services to citizens while creating a bridge over the
"digital divide."
3
New Products
------------
Love SOUP
---------
Love Soup is an innovative new advice show dealing with the topics of love
and relationships. The daily three-hour program features Dr. Lori, a licensed
clinical psychologist, offering listeners positive yet realistic advice without
being judgmental or preachy. The show is hip and contemporary, and moves along
quickly thanks to Dr. Lori's refreshingly natural gift of conversation. Since
its debut in September 2001, the hot new talk show can be heard in markets
including San Francisco, Phoenix, Denver, Pittsburgh, Orlando, St. Louis,
Portland, OR, and San Diego; all of these in the top 25 media markets.
Love Soup's host, Dr. Lori Pollick, opened a private practice in La Jolla,
CA in 1985 after receiving a doctorate in clinical psychology from USIU. She was
born in New York and grew up in Los Angeles, where she earned her bachelors
degree magna cum laude and masters degree with highest honors in the field of
kinesiology from UCLA.
The Dave Koz radio show
-----------------------
The Dave Koz Radio Show is a two-hour weekend radio program showcasing the
best in smooth jazz with special guest interviews and weekly features. The show,
in its sixth year of syndication, is hosted by Capitol recording artist Dave Koz
and was previously distributed by Premiere Radio Networks. The Dave Koz Radio
Show can currently be heard on over 100 stations nationwide, including WQCD/New
York, KTWV/Los Angeles, WNUA/Chicago, WJJZ/Philadelphia, KKSF/San Francisco, and
KOAI/Dallas; all in the top ten media markets.
Host Dave Koz has become a smooth jazz phenomenon since his self titled
smash hit debut album was released in 1990. His 2000 gold-certified release The
Dance remained on Billboard's Contemporary Jazz chart for over 100 weeks. His
recent Christmas album earned him a 2002 Grammy nomination for Best Pop
Instrumental Album. Dave can also be heard weekdays from 6:00am - 9:00am on KTWV
94.7 "The Wave"/Los Angeles, where he hosts "Dave Koz In The Morning."
wireless Flash
--------------
Wireless Flash provides exclusive off-edge pop culture news and
entertainment content to more than 800 broadcast outlets, newspapers and
websites worldwide. Founded in 1980, Wireless Flash is one of the largest pop
culture news agencies in the world. The daily service is currently distributed
to over 160 stations, along with television networks and national programs
including Jay Leno's Tonight Show, The David Letterman Show, and Comedy Central.
Wireless Flash has clearances in all top 20 media markets and in 46 of the top
50 media markets. Wireless Flash was acquired through the GFEC acquisition.
The Bo Reynolds Show
--------------------
The Bo Reynolds Show is a five-hour live show that is broadcast to over 50
affiliates on Saturday nights from 7pm-12midnight ET. Hosted by Bo Reynolds, the
program features nonstop hot country music combined with numerous listener phone
calls. Bo keeps the show moving with parody songs, mega-mixes, and games that
offer cash and prizes. The Bo Reynolds Show can be heard in markets including
Boston,
4
Washington D.C., Denver, Portland, OR, and Charlotte. The Bo Reynolds Show was
acquired through the GFEC acquisition.
THE NEXT CHAPTER WITH SWAY & KING TECH
--------------------------------------
The Next Chapter is an extension of the popular hip-hop radio program The
Wake Up Show. Founded in 1990, The Wake Up Show pioneered the movement in radio
towards rhythmic and urban formats, with huge followings in San Francisco, Los
Angeles, Chicago, and Philadelphia. The Next Chapter retains popular hosts Sway
and King Tech while giving the show a fresh new feel for the year 2002 and
beyond. Top hip-hop, rap, and urban hits just climbing up the hottest charts are
showcased, along with world-renowned mixes from legendary DJs across the
country.
Hosts Sway and King Tech have deep roots in the music industry. They have
released two albums together, and Sway is currently the host of MTV's popular
live one-hour hip-hop show Direct Effect. He also owns a hip-hop clothing
company called Temple Effectives, and a management company, Bolo Entertainment,
which is handling a lineup of new and emerging talent.
Competition
-----------
Competition for radio advertising is very intense. The industry is made up
of a variety of competitive forces, including: (1) ownership groups, which own
blocks of radio stations across the industry; (2) syndicators, like the Company,
that offer programming and marketing services to radio stations; and, (3)
independent producers and distributors that offer programs or services to radio
stations. Several of the Company's syndicating competitors are also associated
with major radio station group owners. In addition, many of these competitors
have recognized brand names and will pay compensation to radio stations to
broadcast their network commercials. The Company's largest competitors that are
associated with an ownership group are Premiere Radio Network (subsidiary of
Clear Channel Communications), Westwood One (subsidiary of Viacom), and ABC
Radio Network (subsidiary of Disney). The Company estimates that these
competitors account for approximately 83% of all network radio advertising
dollars spent each year. The Company is the third largest independent syndicator
(based on revenues) and the sixth largest syndicator overall. The principal
competitive factors in the radio industry are the quality and creativity of
programming and the ability to provide advertisers with a cost-effective method
of reaching the target demographic. In this respect, the Company has positioned
itself by entering into agreements with top entertainment and sports stars like
Hollywood Hamilton, Dave Koz, Snoop Dogg, Peter Jacobsen, Steve Jones, Dr. Lori,
Bo Reynolds, and Sway & King Tech. The Company's principal operating strategy is
to continue to provide high quality programming in the most popular formats.
Satellite radio can also be considered a competitor of the Company. There
are two radio satellite companies, XM Satellite Radio (XM) and Sirius Satellite
Radio (Sirius). XM, based in Washington, D.C., debuted its service in two
markets in late September 2001, and within six weeks was national. XM offers 100
channels, and commercials are heard on 66 of those channels. Sirius, based in
New York, began offering service in four markets on February 14, 2002, with a
second phase covering four more markets in April/May, and the rest of the
country covered in stages during the second half of the year. Sirius will also
offer 100 channels, with 40 airing commercials.
Government Regulation
---------------------
5
Radio broadcasting and station ownership are regulated by the Federal
Communication Commission ("FCC"). The Company, as a producer and distributor of
radio programs, is generally not subject to regulation by the FCC. The FCC
regulates the radio stations that air the Company's programs. The radio station
affiliates are ultimately responsible for what material is broadcast on their
airwaves.
Significant Customers
---------------------
The Company's customers are located throughout the United States. Each of
three customers represented 10% or more of the Company's revenue during 2001.
Dial Communications accounted for $5.4 million, or 40.0% of the Company's
revenues, Mindshare, Inc (formerly Ogilvy & Mather) accounted for $5.3 million,
or 39.3% of the Company's revenues, and Horizon Communications accounted for
$1.3 million, or 9.6% of the Company's revenues. While these customers represent
a significant portion of the Company's revenues, they account for hundreds of
different products that are advertised on the Company's network. A loss of any
one of these products would not materially affect the Company; however, a loss
of one of these customers could have a material adverse effect on the financial
condition and the results of operations of the Company.
Employees
---------
As of February 27, 2002, the Company had 29 full time employees and 34
total employees. In addition, the Company maintains continuing relationships
with over 30 independent hosts, writers, and producers. The Company is not party
to any collective bargaining agreements. The Company believes its relationship
with its employees and independent contractors is good.
Item 2. Description of Property
--------------------------------
The Company leases approximately 7,435 square feet of office space in
Portland, Oregon in which its corporate headquarters, programming and
subsidiaries are located. The lease expires on November 30, 2008 and the annual
base rent is approximately $115,242. The Company also has a small sales office
in New York and Los Angeles. NBG Solutions, Inc. leases 24,255 square feet of
assembly and warehouse space in Tualatin, Oregon. The lease expires in May 2002
and the monthly rent is approximately $4,850.
Item 3. Legal Proceedings
--------------------------
From time to time, the Company may be party to various legal actions and
complaints arising in the ordinary course of business. On January 27, 2000, a
lawsuit was commenced in the state of Oregon (Multnomah County Circuit Court) by
IBTEX, A.G., a Liberian Corporation, against Terry L. Neal, Graham H. Norris,
Donovan C. Snyder and the Company alleging unlawful sale of a franchise and
securities and fraud relating to certain settlement and license agreements
between IBTEX, A.G. and ITEX Corporation in the amount of $2,000,000 and
alleging the Company breached an oral contract to perform under a settlement
agreement in the amount of $800,000. After the Company moved against the
complaint, the court dismissed the lawsuit; however, on November 14, 2000,
IBTEX, A.G. filed an amended complaint in the same court alleging essentially
the same claims against the same parties as the January 27, 2000, complaint. On
February 15, 2002, a global settlement was reached and a formal settlement was
executed resolving the entire action as to the Company. Pursuant to the
settlement, the Company is not
6
required to pay any monetary compensation to any other party. However, the
Company agreed to provide certain network advertising services over a three-year
period for IBTEX, A.G. and Martin Kagan.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
During the fourth quarter of 2001, no matters were submitted to a vote of
security holders.
7
PART II
-------
Item 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
The Company's Common Stock has been quoted on the OTC Bulletin Board
since January 23, 1998. Prior to that there was no market for the Common Stock.
The following table sets forth the range of high and low bid prices of the
Company's Common Stock for the quarters indicated through the fourth quarter of
2001:
Calendar Year High Bid Low Bid
2000:
First quarter $ 3 7/32 $ 1 3/8
Second quarter 2 1/2 1 3/16
Third quarter 2 7/16 1 7/16
Fourth quarter 2 5/16 1 1/8
2001:
First quarter $ 2 1/4 $ 1 1/32
Second quarter 1 27/32 13/16
Third quarter 1 7/32 21/32
Fourth quarter 1 1/32 9/16
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions. The
quotations were derived from the National Quotation Bureau OTC Market Report.
The Company estimates that as of February 27, 2002 there were approximately 900
holders of record of the Common Stock.
Dividends
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain all earnings to finance growth of the
Company's business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Credit Facility with MCG Finance
Corporation prohibits the Company from paying dividends.
8
Unregistered Securities
------------------------
The following unregistered securities have been issued by the Company
during the last three fiscal years:
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
Name of Principal
Title and Amount of Underwriter/
Securities Underwriting
Granted/Exercise Price if Discounts or Name or Class of Persons Consideration
Date of Grant Applicable Commissions who Received Securities Received
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
January 1999 350,000/Options to purchase None/None Employees and board members $ -0-
Common Stock for $3.10 per
share(1)
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
January 1999 350,000/Common Stock None/None Shareholders of Mtek $1,267,000
Technical Services, Inc.
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
January 1999 30,000/Common Stock None/None Options exercised $16,200
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
June 1999 10,100/Common Stock None/None Options exercised $7,700
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
July 1999 12,000/Common Stock None/None Options exercised $6,500
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
July 1999 1,267,493/Common Stock None/None Warrants exercised $1,479,762
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
September 2001 621,500/Options to None/None Employees and board members $ -0-
purchase Common Stock
for $2.00 per share(1)
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
January 2001 547,000/Units with each None/None Private placement $547,000
unit consisting on one
share of Common Stock and
one Warrant to purchase a
share of Common Stock at
$1.50/share
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
March 2001 204,920/Units with each None/None Private placement $204,920
unit consisting on one
share of Common Stock and
one Warrant to purchase a
share of Common Stock at
$1.50/share
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
March 2001 600,000/Units with each None/None Private placement $1,050,000
unit consisting on one
share of Common Stock and
one Warrant to purchase a
share of Common Stock at
$2.00/share
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
April 2001 1,555,000/Options to None/None Issued to employees $-0-
purchase Common Stock for
$1.75 per share(1)
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
April 2001 4,000/Common Stock None/None Shares issued for $4,000*
production services
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
May 2001 130,000/Common Stock None/None Shares issued for Printing $228,000
Services
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
9
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
Name of Principal
Title and Amount of Underwriter/
Securities Underwriting
Granted/Exercise Price if Discounts or Name or Class of Persons Consideration
Date of Grant Applicable Commissions who Received Securities Received
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
June 2001 Option to acquire 4,084,408 None/None Option issued to MCG $2,150,000 (2)
Warrants to purchase Common Finance Corporation
Stock for $1.20 per share pursuant to the Option and
and 765,827 Warrants to Warrant Purchase Agreement
purchase Common Stock for dated June 29, 2001
$3.00 per share
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
June 2001 200,000 Warrants to None/None Warrants issued to the $220,000*
purchase Common Stock for principals at Colebrooke
$1.22 per share Capital, Inc.
-------------------- ----------------------------- -------------------- ----------------------------- ----------------
* Value of consideration estimated.
(1) The options vest and become exercisable in accordance with the Company's
1998 Stock Incentive Plan.
(2) Amount allocated as a result of the MCG Credit Facility transaction.
The above unregistered securities were sold or granted in reliance on an
exemption from the registration requirements of the Securities Act of 1933, as
amended ("Act") under Section 4(2) of the Act and/or Regulation D promulgated
under the Act.
Item 6. 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 for 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
place 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
10
Years Ended November 30, 2001 and 2000
--------------------------------------
The following discussion should be read in conjunction with the audited
financial statements for the years ended November 30, 2001 and 2000 and the
related notes thereto.
OVERVIEW. The Company typically produces programs six to twelve months in
advance of realizing revenues from those programs. In 2001, the Company focused
on producing and acquiring long-form programs which are more costly to produce
but are expected to generate higher advertising revenue. Due to the economic
downturn and the events of September 11, 2001, the Company and the rest of the
industry experienced significantly lower advertising rates. This adversely
affected the Company's gross margin because the higher production costs incurred
early in the year did not lead to higher advertising revenues as expected. In
addition, the Company incurred significant expenses in connection with the
acquisition of GFEC.
REVENUES. Total revenues for 2001 were $13.55 million compared to revenues
of $11.79 million for 2000, representing an increase of $1.76 million, or 14%.
This increase was principally due to the Company's acquisition and development
of programming and sales representation contracts over the past year. The sales
representation contracts enable the Company to sell advertising time on behalf
of an independent third party program producer. In exchange for this service the
Company keeps a commission based upon the advertising time sold within the
program. Thus, through these agreements and new programming there has been an
increase in inventory available for sale by the Company. The Company acquired 19
new programs or services during the 2001 fiscal year. These programs increase
the amount of commercial broadcast inventory the Company has to sell and air in
the top media markets across the country. Not only has the Company been able to
increase its listening audience it has been successful in adding stations in the
top media markets. The combination of more listeners in top markets was expected
to enable the Company to charge more for its commercial broadcast time. However,
due to the economic conditions of 2001 advertising rates dropped significantly.
As a result, the increase in revenues is directly attributable to the increased
volume of commercial inventory available for sale by the Company which was
offset by lower advertising rates. Finally, the Company's wholly owned
subsidiary NBG Solutions, Inc. has increased its revenues from $634,000 in 2000
to $1.26 million in 2001.
DIRECT COSTS. Direct costs for 2001 and 2000 were $11.41 million and $6.75
million, respectively, representing an increase of $4.66 million, or 69%. The
increase is due primarily to the increase in the number of programs and services
the Company currently provides. During 2001, the Company added 19 new programs
or services to its lineup. These additions have lead to the increase in the
total cost of producing the Company's programs. All of the programs added during
the year were long-form programs (at least one hour in length). Long-form
programs are more expensive to produce due to the increased cost of delivery
of the program via satellite or multiple CD distribution as well as extra
telephone charges incurred for caller driven programs. Short-form programs (2 to
3 minutes in length) are distributed on a CD via the mail, a much less expensive
form of distribution. In addition to the higher production costs of long-form
programming, the programs the Company has acquired have high profile hosts such
as Snoop Dogg, Hollywood Hamilton, and Dave Koz. Since these programs air in top
media markets the fee paid to the host is higher. In addition to increasing the
Company's programming lineup, the number of sales representation contracts have
increased as well. Sales representation agreements allow the Company to sell
commercial broadcast time on behalf of a third party program producer. The
Company typically makes guaranteed payments to third-party program producers and
keeps revenues generated from the programs.
11
These guaranteed payments increased 331% in 2001 compared to 2000. Finally, on
June 29, 2001 the Company completed the acquisition of GFEC. Prior to the
acquisition the Company was the sales representation firm for GFEC for all of
the programs except one. As provided for by the sales representation contracts
with GFEC, the Company made non-refundable payments. Due to the cancellation of
certain programs acquired in the GFEC acquisition, the write-off to direct costs
for these non-refundable payments was $687,000.
GROSS MARGIN. Gross margin for 2001 was $2.14 million, a decrease of $2.90
million, or 57%, over 2000. The decrease in gross margin resulted from two
factors. First, direct costs increased because the Company added several long-
form programs with high profile hosts. Second, the economic decline in the third
and fourth quarters and the September 11, 2001 terrorist attacks resulted in an
unexpected drop in advertising rates. The Company increased its programming
lineup and its presence in top media markets, resulting in higher direct costs.
In addition to the increased costs, advertising rates dropped significantly as
the economy weakened. The combination of these events led to the decrease in
gross margin.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in 2001 were $9.92 million, representing an increase of $5.70 million, or 135%
over 2000. The increase was primarily due to: 1) impairment of assets, 2)
increased wages and employee benefits, 3) professional fees, 4) amortization
expense, 5) bad debt expense, and 6) interest expense.
During the fourth quarter 2001, the Company determined that the goodwill
and related covenants not-to-compete from the acquisition of NBG Solutions, Inc.
(formerly M-Tek Technical Services, Inc.) were fully impaired and the Company
wrote off the balance of $510,000. In addition, the Company determined the
carrying value of the goodwill and related intangible assets recognized from the
acquisition of GFEC would not be fully recoverable, and recorded an impairment
charge of $1,600,000. This was based upon management's analysis and the
cancellation of two programs acquired in the GFEC acquisition. Wages and
employee benefits increased by $962,000 as a result of salary increases and
improved benefits provided to employees, including life insurance, disability
insurance, and increased health and medical coverage. Professional fees
increased by $898,000 due to the acquisition of GFEC and the start of a new
investor relations campaign. Amortization expense increased $746,000 as a result
of the goodwill acquired from the acquisition of GFEC. Bad debt expense was
mainly due to one advertising agency going out of business in 2001 and fees
advanced for programs that were cancelled in 2001. Interest expense attributable
to the financing of the GFEC acquisition was $549,000 for the period ended
November 30, 2001.
INCOME TAXES. For the year ended November 30, 2001, the Company recorded a
net loss of $8.38 million. The tax benefit resulting from the operating loss was
offset by a valuation allowance since it is uncertain if future taxable income
will be sufficient to utilize any net operating loss carryforward. As a result,
no tax benefit was recognized in 2001. For the year ended November 30, 2000, the
Company reported net income of $826,000. No tax provision was reported in 2000
since a previously recognized valuation allowance was utilized to offset the
full amount of the book tax expense.
NET INCOME AND (LOSS) PER SHARE. Net loss for 2001 was $8.38 million or
$.60 per share (diluted) as compared to net income for 2000 of $826,000 or $.06
per share (diluted). Net loss for 2001 was primarily due to the following
factors: 1) decreased advertising rates from the downturn in the economy and the
events of September 11, 2001; 2) increased costs from the acquisition of GFEC;
3) the acquisition and development of more costly long-form programs with high
profile hosts; 4) the interest expense as a result of the long-term debt from
the acquisition of GFEC; 5) the impairment of assets; and 6) the write off of
bad debt.
12
Earnings per share, which includes the dilutive effects of options and
warrants to purchase common stock, was based on 13,941,529 and 14,617,459
weighted average shares outstanding on November 30, 2001 and 2000, respectively.
Liquidity and Capital Resources
-------------------------------
Historically, the Company has financed its liquidity requirements through
cash flows generated from operations and financing activities. The Company's
working capital at November 30, 2001 was $1.50 million compared to $4.43 million
at November 30, 2000. The decrease in working capital was primarily due to the
reduction of sales representation assets as a result of the acquisition of GFEC
as well as the effects of the decrease in cash and increase in accounts payable.
As of November 30, 2000, the Company had a revolving line of credit with
Western Bank for $500,000. The line of credit was secured by substantially all
of the Company's assets and carried an interest rate equal to the bank's prime
lending rate plus 0.50% (10.00% as of November 30, 2000). The Company's
outstanding balance on the line of credit was repaid on June 29, 2001.
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 a 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 $205,000 from the private placement.
In March of 2001, the Company completed a 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 $1.1 million from the private placement.
On June 29, 2001, the Company acquired Glen Fisher Entertainment
Corporation for approximately $5.3 million in cash. The acquisition was financed
through a $6.2 million credit facility with MCG Finance Corporation ("MCG"). 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 structure 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 November 30,
2001, the variable interest rate equaled 10.591% 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 terms of the credit facility
prohibit the Company from paying dividends or repurchasing its common stock. The
Company was also required by the credit facility to make certain amendments to
the employment agreements for John Holmes and Dean Gavoni. The credit facility
terminates in June 2006 unless prepaid earlier by the Company.
13
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 November 30,
2001, the Company did not meet the minimal operating cash flow covenant in the
credit facility. It subsequently obtained a waiver for the November 30, 2001
measurement period. If the Company is not able to meet future covenants on the
predetermined measurement dates, the lender may 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 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, 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 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, management believes
that its operating cash flows will be sufficient to meet its prospective needs
for working capital. 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 August 2001, the Financial Accounting Standards Board (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 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-
14
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 affect 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, 2003, 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.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125." SFAS No. 140 revises the criteria for accounting for
securitizations and other transfers of financial assets and collateral. In
addition, SFAS No. 140 requires certain additional disclosures. Except for the
new disclosure provisions, which were effective for the year ended November 30,
2000, SFAS No. 140 was effective for the transfer of financial assets occurring
after March 31, 2001. The provisions of SFAS No. 140 did not have a significant
effect on the Company's consolidated financial statements.
15
Item 7. Financial statements
NBG RADIO NETWORK, INC.
----------
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
----------
NOVEMBER 30, 2001 AND 2000
CONTENTS
--------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets F-2 - F-3
Statements of operations F-4 - F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-25
16
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
NBG Radio Network, Inc.
We have audited the accompanying consolidated balance sheets of NBG Radio
Network, Inc. and subsidiaries as of November 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
November 30, 2001 and 2000, 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 of America.
/s/ Moss Adams LLP
Portland, Oregon
February 21, 2002
F-1
NBG RADIO NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30,
2001 2000
------------- ------------
0CURRENT ASSETS
Cash and cash equivalents $ 321,402 $ 854,623
Receivables:
Accounts receivable, net of allowance for doubtful
accounts of $60,000 in 2001 and 2000 3,945,803 3,913,699
Related-party receivables 219,354 82,242
Note receivable - 167,200
Unbilled receivables - 195,739
Barter exchange receivables - 81,881
Sales representation contract agreements, net of
accumulated amortization 402,637 3,190,003
Prepaid expenses and other current assets 31,148 127,558
------------ -------------
Total current assets 4,920,344 8,612,945
------------ -------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 197,183 188,896
GOODWILL, net of amortization 2,911,187 973,505
INTANGIBLE ASSETS, net of amortization 957,093 280,425
OTHER ASSETS 137,500 -
------------ -------------
TOTAL ASSETS $ 9,123,307 $ 10,055,771
============ ==============
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,
2001 2000
------------- ------------
CURRENT LIABILITIES
Line of credit $ - $ 400,000
Accounts payable 1,438,382 581,130
Accrued liabilities 447,531 163,912
Barter exchange payables 29,339 -
Sales representation agreement liabilities 1,203,095 3,039,727
Current portion of long-term debt 300,000 -
------------ -------------
Total current liabilities 3,418,347 4,184,769
------------ -------------
LONG-TERM DEBT 3,929,167 -
COMMITMENTS AND CONTINGENCIES
(Notes 4, 6 and 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares
authorized and unissued - -
Common stock, $.001 par value; 50,000,000 shares
authorized; 14,385,651 and 12,321,831 shares
issued and outstanding at November 30, 2001 and
2000, respectively 14,386 12,322
Additional paid-in capital 11,290,611 6,795,719
Accumulated deficit (9,306,807) (922,926)
Stock subscription receivable (222,397) (14,113)
------------- -------------
Total stockholders' equity 1,775,793 5,871,002
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,123,307 $ 10,005,771
============= =============
See accompanying notes.
F-3
NBG RADIO NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30,
2001 2000
------------- -----------
REVENUES $13,546,176 $11,785,831
DIRECT COSTS 11,410,587 6,749,179
------------- -----------
Gross margin 2,135,589 5,036,652
------------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Wages and employee benefits 3,031,016 2,069,018
Impairment of assets 2,206,909 -
Consulting and professional 1,461,817 563,991
Depreciation and amortization 1,208,587 434,293
Bad debt expense 617,598 180,774
Travel and entertainment 302,105 237,954
Rent 155,419 130,189
Postage and printing 130,604 159,633
Telephone 95,763 106,754
Advertising 57,240 83,156
Office supplies 52,612 65,521
Other expenses 596,209 189,118
------------- -------------
Total general and administrative expenses 9,915,879 4,220,401
------------- -------------
Operating profit (loss) (7,780,290) 816,251
------------- --------------
OTHER INCOME (EXPENSE)
Interest income 7,684 17,722
Interest expense (611,275) (7,861)
------------- -------------
Total other income (expense) (603,591) 9,861
------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (8,383,881) 826,112
PROVISION FOR INCOME TAXES - -
------------- -------------
See accompanying notes.
F-4
NBG RADIO NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30,
2001 2000
------------- -----------
NET INCOME (LOSS) $(8,383,881) $ 826,112
OTHER COMPREHENSIVE INCOME:
Unrealized gains on marketable equity
securities, net of income tax - 31,250
------------- -----------
Comprehensive income (loss) $(8,383,881) $ 857,362
============= ===========
Basic income (loss) per share of common stock $ (0.60) $ 0.07
============= ===========
Diluted income (loss) per share of common stock $ (0.60) $ 0.06
============= ===========
Weighted average number of shares outstanding, basic 13,941,529 12,230,665
============= ===========
Weighted average number of shares outstanding, diluted 13,941,529 14,617,459
============= ===========
See accompanying notes.
F-5
NBG RADIO NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stock Other
Additional Retained Subscription Comprehen-
Common Stock Paid-In Deficit Receivable Sive Total
Capital Income
------------------------ ------------ ------------ ------------ ------------ -----------
Shares Amount
----------- ----------
BALANCE, November 30, 1999 12,160,293 $ 12,160 $ 6,708,411 $(1,749,038) $ (106,013) (31,250) $4,834,270
Exercise of options 161,538 162 87,308 - - - 87,470
Services provided for payment
of subscribed shares - - - - 91,900 - 91,900
Net income for the year - - - 826,112 - - 826,112
Change in unrealized loss on
marketable securities - - - - - 31,250 31,250
----------- ---------- ------------ ------------ ------------ ------------ -----------
BALANCE, November 30, 2000 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 14,385,651 $ 14,386 $11,290,611 $(9,306,807) $ (222,397) $ - $1,775,793
=========== ========== ============ ============ ============ ============ ===========
See accompanying notes.
F-6
NBG RADIO NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (8,383,881) $ 826,112
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Sales representation contract agreement amortization 1,422,138 1,618,681
Depreciation and amortization 1,208,587 434,293
Amortization of discount on long-term debt 179,167 -
Bad debt expense 617,598 180,774
Impairment of assets 2,206,909 -
Services provided in payment of subscribed shares 19,716 91,900
Changes in assets and liabilities:
Net change in barter exchange receivables and payables 14,524 66,255
Accounts receivable (279,763) (2,169,005)
Prepaid expenses and other current assets 96,410 (97,280)
Accounts payable 821,514 401,480
Accrued liabilities 241,619 132,297
Net change in programming contract liabilities (1,011,158) (1,768,957)
------------- -------------
Net cash from operating activities (2,846,620) (283,450)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for investment in subsidiary, net of cash acquired (5,253,689) -
Increase in related-party notes receivable (137,112) (34,780)
Increase in note receivable - (167,200)
Acquisition of property and equipment (64,756) (39,509)
------------- -------------
Net cash from investing activities (5,455,557) (241,489)
------------- -------------
See accompanying notes.
F-6
NBG RADIO NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30,
2001 2000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances (payments) on line of credit (400,000) 400,000
Proceeds from stock options exercised and issuance of
common stock 2,114,956 87,470
Proceeds from the issuance of long-term-debt 6,200,000 -
Net cash received for issuance of common shares 4,000 -
Payments on long-term debt financing fees (150,000) -
------------- -----------
Net cash from financing activities 7,768,956 487,470
------------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS $ (533,221) $ (37,469)
CASH AND CASH EQUIVALENTS, beginning of year 854,623 892,092
------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 321,402 $ 854,623
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 231,031 $ 7,861
============= =============
Cash paid for taxes $ 125,000 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Disposition of marketable equity securities $ - $ 500,000
============= =============
Capitalization of sales representation contract agree-
ments and recognition of related liabilities $ 288,000 $ 3,652,995
============= =============
Acquisition of Glenn Fisher Entertainment Corporation ("GFEC") assets less
liabilities assumed:
Goodwill $ 4,332,443
Identifiable intangibles (contract rights) 1,518,688
Assets 733,287
Liabilities (764,239)
-------------
Investment in GFEC 5,820,179
Non-refunded prepayments on contracts with GFEC
terminated at acquisition (539,754)
-------------
Total cash paid for GFEC $ 5,280,425
=============
Allocated value of warrants issued in debt financing $ 2,150,000
=============
See accompanying notes.
F-8
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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, 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 the
industry in exchange for commercial broadcast time, which the Company sells to
national advertisers.
In June 2001, NBG Radio Network, Inc., completed the acquisition of Glenn Fisher
Entertainment Corporation ("GFEC") (see Note 4), 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. as a wholly-owned subsidiary involved in providing design, installation,
and support for interactive kiosks. Two additional wholly-owned subsidiaries,
NBG Travel Exclusives, Inc., and NBG Interactive, Inc., which have had no
significant activity during 2001 and 2000, are owned by the Company. All
significant intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements.
Substantially all operations of the Company and its subsidiaries are conducted
from the Company's headquarters in Portland, Oregon. The Company's customers are
located throughout the United States. However, five customers accounted for
$12,942,193 or approximately 96% of revenues for the year ended November 30,
2001, and $3,763,682 or approximately 94% of accounts receivable as of November
30, 2001. Similarly, five customers accounted for $10,854,162 or 92% of revenues
for the year ended November 30, 2000, and $3,402,618 or 86% of accounts
receivable as of November 30, 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's estimates and assumptions - Management uses estimates and
assumptions in preparing financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could
vary from the estimates that were assumed in preparing the consolidated
financial statements.
Cash and cash equivalents - The Company considers all highly liquid instruments
purchased with original maturities of less than three months to be cash
equivalents.
F-9
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Concentrations of credit risk - Financial instruments, which potentially subject
the Company to credit risk, consist principally of cash deposits and accounts
receivable. The maximum loss that would have resulted from the excess of deposit
balances over the amounts that would have been covered by federal deposit
insurance coverage totaled $260,759 and $508,253 at November 30, 2001 and 2000,
respectively. Management believes the allowance for doubtful accounts is
sufficient to absorb credit risk associated with outstanding receivable balances
as of November 30, 2001 and 2000.
Barter exchange receivables (payables) - The Company holds barter exchange
accounts with ITEX Corporation, and Illinois Trade Association, enterprises
specializing in the development and maintenance of a barter network for its
participating members. The Company also held limited occupancy rights for
available rooms at vacation and resort hotels for which it provided advertising
services in exchange. Revenues and expenses from these barter exchange
transactions are recognized when services are received or provided. Receivables
are recognized at fair value when services are provided before exchange
merchandise or services are received or used. Liabilities are recognized when
exchange merchandise or services are received or used before services are
provided. In the fourth quarter of 2001, the Company determined the carrying
value of the limited occupancy rights for vacation and resort hotels was not
recoverable, and recorded an impairment charge of $96,696.
Sales representation contract costs - The Company capitalizes the costs
associated with certain noncancellable sales representation contract agreements
when all of the following conditions have been met: (a) the cost of the
agreement to represent a network program is known or reasonably determinable;
(b) the program material has been accepted by the Company, in accordance with
the agreement; and, (c) the program is available for broadcast. Other sales
representation agreements entered into by the Company that require payments
contingent upon the delivery of network programming by a third-party are
generally not capitalized. Capitalized sales representation agreement costs are
being amortized by the straight-line method over the lives of related contract
agreements, which extend from 12 to 36 months. All capitalized amounts are
recorded as current assets since related sales representative services are
deemed to be fulfilled within the Company's current operating cycle. For the
years ended November 30, 2001 and 2000, the Company recognized, in the
statements of operations as direct costs, $1,422,138 and $1,618,681 in expense
related to capitalized sales representation contract costs (see Note 6).
Property and equipment - Property and equipment are stated at cost. Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets, which range from seven to ten years. Maintenance and repairs are
charged to operations when incurred. Betterments and renewals are capitalized.
Depreciation and amortization expenses for the years ending November 30, 2001
and 2000, were $69,520 and $53,326, respectively.
F-10
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Intangible assets - Intangible assets are comprised of purchased goodwill,
contract rights, and covenants not-to-compete. Purchased goodwill represents the
excess of cost over the fair value of net assets acquired by the Company from
business acquisitions in 1996, 1999, and 2001 (see Note 4). Goodwill is being
amortized over a ten-year period using the straight-line method for the
acquisition in 1996 and over a five-year period for the acquisition in 2001.
During the fourth quarter of 2001, the Company determined the goodwill and
related covenants not-to-compete from the acquisition of NBG Solutions, Inc.
(formerly M-Tek Technical Services, Inc.) were fully impaired and wrote off the
remaining balances of each. In addition, the Company determined the carrying
value of the goodwill and related intangible assets recognized from the
acquisition of GFEC would not be fully recoverable and recorded an impairment
charge of $1,600,000 in 2001. For the years ending November 30, 2001 and 2000,
the Company recognized expenses from the amortization of intangible assets of
$1,126,568 and $380,967, respectively, and charged operations for intangible
asset impairments of $2,110,213 in 2001. The measurement of impairment was
primarily based upon a calculation of estimated undiscounted expected cash flows
arising from the business unit or segment to which the impaired asset was
assigned.
Revenue recognition - The Company recognizes revenue from the sale of
advertising, music, and radio programs when the buyer has made an unconditional
commitment to secure air time through the Company's national network and the
Company has fulfilled its commitment to provide radio advertising during the
secured time. 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.
Income taxes - The Company follows the asset and liability method of accounting
for income taxes whereby deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Marketing and advertising costs - All costs relating to marketing and
advertising are expensed in the year incurred. Amounts expensed for the years
ended November 30, 2001 and 2000, were $57,240 and $83,156, respectively.
Stock option plan - The Company applies Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plan. Accordingly, no compensation expense has
been recognized for its stock-based incentive plan. Had compensation cost for
the Company's stock option plan been determined based upon the fair value at
grant date for awards under the plan consistent with methodology prescribed
under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," additional compensation expense would have been
recognized as described in Note 12.
F-11
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Income (loss) per share of common stock - Basic income (loss) per share of
common stock is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted income (loss) per common share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Certain stock option
grants were excluded from the diluted loss per share computation, as their
effect would be antidilutive.
Recently issued accounting standards - In August 2001, the Financial Accounting
Standards Board (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 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 affect 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, 2003, 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.
F-12
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125." SFAS No. 140 revises the criteria for accounting for
securitizations and other transfers of financial assets and collateral. In
addition, SFAS No. 140 requires certain additional disclosures. Except for the
new disclosure provisions, which were effective for the year ended November 30,
2000, SFAS No. 140 was effective for the transfer of financial assets occurring
after March 31, 2001. The provisions of SFAS No. 140 did not have a significant
effect on the Company's consolidated financial statements.
Reclassification - Certain 2000 amounts have been reclassified for consistency
with the current year presentation.
NOTE 3 - 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 and had incurred additional losses in other years
since its inception in 1996 such that, as of November 30, 2001, the Company had
recorded an accumulated deficit of $9,306,807. 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.
F-13
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 4 - 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 liablilities 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 provide for monthly payments of $16,667 to
Fisher for the three-year period covered by the agreement.
F-14
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 4 - ACQUISITION OF GLENN FISHER ENTERTAINMENT CORPORATION - (continued)
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 years ended
December 31, 2001 and 2000, with the statements of operations of the Company for
the years ended November 30, 2001 and 2000, respectively. 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.
Years ended November 30,
--------------------------------------------------------------------------
2001 2001 2000 2000
Historical Pro Forma Historical Pro Forma
----------------- ----------------- ----------------- -----------------
Revenues $ 13,546,176 $ 13,570,401 $ 11,785,831 $ 12,035,269
Net income (loss) $ (8,383,881) $ (10,469,355) $ 826,112 $ (2,246,982)
Earnings (loss) per $ (0.60) $ (0.75) $ 0.06 $ (0.18)
share(diluted)
NOTE 5 - BARTER EXCHANGE RECEIVABLES (PAYABLES)
As of November 30, 2001 and 2000, barter exchange receivables (payables)
consisted of the following:
2001 2000
----------- -----------
Resort room occupancy rights exchanged for
advertising services $ - $ 96,696
Barter exchange transaction account balances (29,339) (14,815)
----------- -----------
$ (29,339) $ 81,881
=========== ===========
NOTE 6 - SALES REPRESENTATION AGREEMENTS
During 2000 and 2001, the Company entered into several noncancelable contractual
agreements with third parties through which it became the exclusive
representative for advertising sales involving nationally syndicated talk-radio
programs. Each of the agreements, which extend from 12 to 36 months, either
provides for monthly payments to the program producer, or minimum monthly
payments to the program producer plus the sharing of revenues that exceed
established, aggregate monthly payment amounts. Under these sales representation
agreements, the Company made aggregate payments to the program producers of
$1,011,158, and $1,768,957 for the years ended November 30, 2001 and 2000,
respectively.
F-15
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 6 - SALES REPRESENTATION AGREEMENTS - (continued)
During 2000 and 2001, the Company did not meet the levels of revenues from
advertising sales that require revenue sharing and, therefore, did not make any
revenue sharing payments, which range from 50% to 75% of revenues or gross
receipts as defined.
In addition to the noncancelable contracts described above, the Company has
also entered into other sales representation agreements with third-party
producers of radio network programming and related services. Since the Company's
performance and obligations under these agreements are contingent upon the
delivery of network programming or related services by a third-party, costs for
these contract agreements have not been capitalized. For the years ended
November 30, 2001 and 2000, expenses recognized pursuant to these sales
representation agreements were $4,172,983 and $2,063,086, respectively. However,
cash payments to the third-party producers of the programming are made up to as
many as 105 days following the broadcast month of underlying programs.
The following table summarizes, as of November 30, 2001, the Company's minimum
annual cash payments due to third-party program producers pursuant to its sales
representation agreements and contracts. The schedule does not include any
amounts that may become payable in accordance with revenue sharing arrangements
contained in the agreements or payments on agreements which are strictly based
on the sharing of a percentage of revenues.
Total Sales
Representation
Capitalized Other Agreement
Contracts Contracts Commitments
----------- ----------- --------------
2002 $ 99,163 $ 3,049,420 $ 3,148,583
2003 8,333 1,031,227 1,039,560
------------ ----------- --------------
$ 107,496 $ 4,080,647 $ 4,188,143
============ =========== ==============
F-16
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at November 30, 2001 and 2000:
2001 2000
---------- ----------
Office equipment 19,151 $ 19,151
Studio equipment 224,386 221,393
Office furniture 117,799 98,483
Leasehold improvements 11,310 11,310
Satellite receivers 55,498 -
---------- ----------
428,144 350,337
Less accumulated depreciation and amortization (230,961) (161,441)
---------- ----------
$ 197,183 $ 188,896
========== ==========
NOTE 8 - REVOLVING LINE OF CREDIT
As of November 30, 2000, the Company had a revolving line of credit with a
financial institution for $500,000. Outstanding borrowings of $400,000 at
November 30, 2000, were secured by substantially all assets of the Company. The
line of credit, which expired on July 15, 2001, carried an interest rate at the
bank's prime lending rate plus .50% (10.00% at November 30, 2000). The revolving
line of credit was paid in full with a portion of the proceeds from the $6.2
million credit facility described below.
NOTE 9 - LONG-TERM DEBT
The Company acquired GFEC by purchasing the outstanding stock held by its
founder and sole shareholder, Glenn Fisher. The acquisition was financed through
a $6.2 million credit facility with MCG, which bears interest at LIBOR plus 8%
(10.591% at November 30, 2001) and provides for deferred interest compounding
monthly at an annual rate of 3%. Interest is paid quarterly with the exception
of deferred interest, which is due at the earlier of the maturity of the note
payable, payment in full of the outstanding obligations, or acceleration of the
obligations. The credit facility also contains certain affirmative and negative
covenants involving 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. As of November 30, 2001, the Company did not meet the
minimum operating cash flow covenant, for which a waiver was obtained for the
November 30, 2001 measurement period. The Company's compliance with monthly
covenants is generally measured on a quarterly basis.
F-17
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT - (continued)
The credit facility is secured by all of the assets of the Company, including
stock of the Company's subsidiaries, and is structured to allow for the
possibility of additional funding of up to $10 million to finance future
strategic acquisitions. In exchange for $6.2 million, NBG and GFEC issued MCG a
note payable with a face value of $6.2 million and a warrant to acquire NBG
common stock. The fair market value of the warrant was estimated to be $2.15
million on the date of issuance, which was allocated to stockholders' equity.
Proceeds from the debt financing were utilized as follows:
MCG credit facility $ 6,200,000
Acquisition price for GFEC
common stock $ (5,000,000)
Pre-payments by NBG 300,000
--------------
Paid to GFEC for acquisition $ (4,700,000)
Pay-off of NBG line of credit (500,000)
Loan Fees (150,000)
Financing fees and costs (233,700)
--------------
(5,583,700)
-------------
Net cash to NBG $ 616,300
=============
Aggregate maturities of the note payable are as follows:
Principal Amortization
Payments of Discount
-------------- -------------
2002 $ 300,000 $ 429,996
2003 1,050,000 429,996
2004 1,500,000 429,996
2005 1,950,000 429,996
2006 1,400,000 250,849
-------------- -------------
6,200,000 $ 1,970,833
=============
Less unamortized discount allocated to warrants (1,970,833)
--------------
4,229,167
F-18
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Current portion of long-term debt (300,000)
--------------
Long-term debt $ 3,929,167
==============
NOTE 9 - LONG-TERM DEBT - (continued)
As part of the consideration for the credit facility, the Company issued to MCG
an option to acquire warrants for the purchase of shares of common stock of the
Company. To exercise the option, MCG must agree to forego collection of one-half
of the amount of deferred interest accrued under the agreement. The option is
exercisable immediately and will expire upon the termination of the credit
facility. If the option 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 upon
exercise of the option and will expire on June 30, 2011.
For the year ended November 30, 2001, interest expense related to the financing,
including deferred interest, was $370,323. Interest expense recognized for the
amortization of the discount allocated to common stock warrants was $179,167 for
the year ended November 30, 2001. The Company has elected to amortize the
discount allocated to common stock warrants on a straight-line basis, which
approximates the effective-interest method.
NOTE 10 - PROVISION FOR INCOME TAXES
The provision for income taxes consisted of the following for the years ended
November 30, 2001 and 2000:
2001 2000
-------------- --------------
Current $ - $ -
Deferred tax benefit (expense) 3,153,457 (228,218)
Change in valuation allowance (3,153,457) 228,218
-------------- --------------
Provision for income taxes $ - $ -
============== ==============
F-19
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES - (continued)
Deferred tax assets (liabilities) are comprised of the following at November 30,
2001 and 2000:
2001 2000
------------- -------------
Deferred tax assets
Allowance for doubtful accounts $ 22,649 $ 22,649
Net operating loss carryforward 2,185,491 129,193
Contribution carryforward 5,515 5,327
Amortization of goodwill 872,127 58,112
Amortization of covenant not-to-compete 413,663 133,073
------------- -------------
3,499,445 348,354
Deferred tax liabilities
Book tax depreciation differences (14,040) (16,406)
Valuation allowance (3,485,405) (331,948)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
The Company has net operating loss and contribution carryforwards of
approximately $5,770,000 available to offset future income tax liabilities.
These carryforwards will expire over various periods beginning in 2017 if not
utilized earlier to offset taxable income.
Management of the Company has provided a valuation allowance to offset existing
deferred tax assets as of November 30, 2001 and 2000. The valuation allowance is
provided because it is uncertain, based on historical operating results, if the
carryforwards will be utilized prior to their expiration.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease commitments - The Company rents its office space and certain office
equipment under operating lease agreements. The following summarizes the
Company's lease commitments for succeeding years:
Years ending November 30, 2002 $ 152,167
2003 46,824
2004 2,793
-----------
$ 201,785
===========
Rental expense was $155,419 in 2001 and $130,189 in 2000.
F-20
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES - (continued)
Employment Agreements - The Company has entered into various employment
agreements with its executive officers. Under the agreements, the employees are
entitled to annual salary increases, incentive compensation and all customary
benefits established by the Company. The employment agreements with the
Company's President and its Executive Vice President each provide that in the
event that the officer is terminated or resigns following a "change in control"
(as defined in the employment agreements), the Company will pay the officer an
amount equal to his base salary, currently $350,000, at the time of his
termination or resignation. The employment agreements with the Company's
President and Executive Vice President also provide that if either officer is
terminated without cause and for reasons other than a change in control, then
the Company must provide the officer with severance pay equal to 75% of his base
salary, payable in twelve equal monthly installments.
Legal contingencies - From time to time, the Company may be party to various
legal actions and complaints arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel, there are no
current matters expected to have a material adverse effect on the financial
condition of the Company.
NOTE 12 - STOCKHOLDER TRANSACTIONS
Preferred stock - The Company has authorized 5,000,000 shares of $0.001 par
value preferred stock, which can be issued in one or more series for such
consideration and on such terms as the Board of Directors determines in its sole
discretion, without further authorization by the Company's stockholders. In
addition, the Board of Directors, at their sole discretion, can designate the
preferences, conversion rights, dividend rights, voting rights, redemption
prices, maturity dates, and all other matters related to the rights of preferred
stock shareholders. As of November 30, 2001, no preferred shares had been
issued.
F-21
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDER TRANSACTIONS - (continued)
Private placement offerings and stock warrants - During the year ended November
30, 2001, the Company completed three private placement offerings, the proceeds
from which supported operating activities of the Company. In each private
placement offering, units were offered at stipulated prices providing an
investor one share of common stock and one warrant for the purchase of an
additional share of common stock, subject to certain restrictions. All warrants
acquired became exercisable immediately. The following summarizes the
significant elements of the three private placement offerings:
Warrant
Units Offered Unit Price Capital Acquired Warrant Price Expiration Date
-------------- ---------- ----------------- -------------- ----------------
547,000 $ 1.00 $ 547,000 $ 1.50 January 19, 2003
204,920 $ 1.00 204,920 $ 1.50 March 5, 2003
600,000 $ 1.75 1,050,000 $ 2.00 March 31, 2003
-------------- ----------------
1,351,920 $ 1,801,920
============== ================
In June 2001, the Company issued 200,000 warrants for the purchase of common
shares to principals at Colebrooke Capital, Inc., an investment banker. The
warrants were issued as partial compensation for the services rendered to the
Company by Colebrooke Capital, Inc., during the acquisition of GFEC and the
negotiation of the Company's credit facility with MCG. The warrants are
exercisable immediately and will expire on June 29, 2006. The exercise price for
the warrants is $1.22 per share, the fair market value of the warrants at the
time of issuance.
The following summarizes stockholder warrant transactions in 2001 and 2000,
excluding options to acquire warrants offered to MCG Finance Corporation:
Price
Per
Shares Share
--------- ----------
Warrants outstanding, November 30, 1999 750,000 $ 0.83
Warrants granted in 2000 - $ -
Warrants exercised in 2000 - $ -
Warrants expired in 2000 - $ -
---------
750,000 $ .83
F-22
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDER TRANSACTIONS - (continued)
Price
Per
Shares Share
--------- ----------
Warrants granted in 2001 1,551,920 $ 1.66
Warrants exercised in 2001 - $ -
Warrants expired in 2001 - $ -
---------
Warrants outstanding, November 30, 2001 2,301,920 $ 1.39
=========
Stock option plan - The Company has adopted a 1998 Stock Incentive Plan for
employees, officers, and directors of the Company. The plan, as amended,
provides for the issuance of qualified and nonqualified options for up to
3,500,000 shares of common stock of the Company. Grants of stock options under
the plan are approved by the Company's Board of Directors, which also determines
the exercise price, vesting requirements, and term for exercise of all options.
The following table summarizes stock option transactions in 2001 and 2000:
Weighted
Average
Option
Shares Price
--------- ----------
Stock options outstanding, November 30, 1999 2,476,400 $ 1.27
Stock options granted in 2000 - $ -
Stock options exercised in 2000 (161,538) $ 0.54
Stock options expired in 2000 (61,962) $ 1.07
---------
Stock options outstanding and exercisable,
November 30, 2000 2,252,900 $ 1.32
Stock options granted in 2001 1,555,000 $ 1.75
Stock options exercised in 2001 (577,900) $ 0.54
Stock options forfeited and expired in 2001 (435,000) $ 0.54
---------
Stock options outstanding and exercisable,
November 30, 2001 2,295,000 $ 1.53
=========
F-23
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDER TRANSACTIONS - (continued)
The fair value of each option granted during 2001 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: (1) no dividend yield; (2) expected volatility of 99.74%; (3)
risk-free rate of 3.74%; and (4) expected life of three years. The
weighted-average grant-date fair value for options granted in 2001 was $0.83.
For common stock options outstanding at November 30, 2001, the range of exercise
prices was $0.54 to $2.00, and the average remaining contractual life was
approximately 3 years.
The fair value of each warrant granted during 2001 is also estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) no dividend yield; (2) expected volatility of 99.74%; (3)
risk-free rate of 3.74%; and (4) expected life equal to the life of the warrant.
The weighted-average grant-date fair value for warrants granted in 2001 was
$0.87. For warrants outstanding at November 30, 2001, the range of exercise
prices was $1.22 to $2.00, and the average contractual life was approximately
2.4 years.
Had compensation cost for the Company's 2001 grants for stock-based compensation
plans been determined consistent with SFAS No. 123, the Company's net loss, and
net loss per common share for November 30, 2001, would approximate the following
pro forma amounts. No stock options or warrants were granted in 2000.
2001
As Reported Pro Forma
------------ --------------
Net loss $(8,383,881) $ (10,314,504)
Basic and diluted loss per common share $ (0.60) $ (0.74)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996, and additional awards in future years are anticipated.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company maintains a SARSEP savings plan for its employees. Under this plan
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length of service requirements. The Company
currently has no policy to match employee contributions.
F-24
NBG RADIO NETWORK, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SEGMENT INFORMATION
Based on the criteria established by Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
the Company operates in two principal business segments. In accordance with SFAS
No. 131, the Company is required to describe its reportable segments and provide
data that is consistent with the data made available to the Company's management
to assess performance and make decisions.
The Company's two reportable segments based on products and services are the
radio advertising and interactive kiosk segments. The products and services
offered by each segment are further discussed in Note 1. Substantially all
depreciation and amortization is related to the radio advertising segment. With
the exception of wages and salary expense and certain other general and
administrative expenses, the Company does not allocate all operating costs to
the interactive kiosks segment, as management does not use this information to
measure the performance of the operating segment. Management does not believe
that allocating these other operating expenses is material in evaluating the
segment's performance. Information from internal management reports may differ
from the amounts reported under generally accepted accounting principles.
Summarized information by segment for 2001 and 2000, as excerpted from internal
management reports, is as follows:
2001 2000
-------------- -------------
Revenues:
Radio advertising $ 12,283,820 $ 11,152,185
Interactive kiosks 1,262,356 633,646
-------------- -------------
Total $ 13,546,176 $ 11,785,831
============== =============
Net income (loss):
Radio advertising $ (7,926,064) $ 1,092,324
Interactive kiosks (457,817) (266,212)
-------------- -------------
Total $ (8,383,881) $ 826,112
============== =============
Assets:
Radio advertising $ 8,952,191 $ 8,446,577
Interactive kiosks 171,116 1,609,194
-------------- -------------
Total $ 9,123,307 $ 10,055,771
============== =============
F-25
Item 8. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
---------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
--------------------------------------------------
Set forth below is certain information concerning each person who was an
executive officer or a director of the Company as of February 1, 2002. All
officers and directors hold office until their respective successors are elected
and qualified, or until their earlier resignation or removal.
Directors
Name Position Age
John A. Holmes, III President, Chief Executive Officer,
and Chairman of the Board 31
Peter Jacobsen Director 48
Dick Versace Director 47
Ernie A. Capobianco Director 45
The directors are elected annually at the annual shareholders meeting and
serve until re-elected at the next annual shareholders meeting. All of the
directors were elected to their current term in office on July 27, 2001.
John A. Holmes, age 31, has been President, CEO, and Chairman of the Board
since January 30, 1998. Prior to that, Mr. Holmes served as the General Manager
of the Company since its inception in March of 1996. Before joining the Company,
Mr. Holmes worked in radio syndication with IMS from August 1993 until May 1996.
Previously, he worked for KMOV-CBS TV as a sports producer from January 1991
through May 1993. From June, 1990 until December of 1990, Mr. Holmes worked for
Radio Personalities, Inc. where he was Executive Producer for short form radio
programs - "Offsides with Dan Dierdorf" and "Talkin' Roundball with Dick
Vitale."
Peter Jacobsen, age 48, has been a director with the Company since January
30, 1998. He is currently the host of one of the Company's short form features,
"Teein' It Up with Peter Jacobsen." Mr. Jacobsen, a member of the PGA Tour, has
multiple PGA Tour wins and has participated on two Ryder Cup teams. He has also
been an on course commentator for ABC and ESPN.
Dick Versace, age 47, has been a director with the Company since 1997. Mr.
Versace is currently the President and Director of Operations for the Memphis
Grizzlies of the National Basketball Association ("NBA"). Mr. Versace has
coached basketball at all levels, high school, college, and the NBA. Most
recently he coached in the NBA with the Milwaukee Bucks. Prior to taking the
position with the Bucks, Mr. Versace was a television studio host and color
analyst for TNT on the Turner Broadcasting Network.
Ernie A. Capobianco, age 45, has been a director of the Company since
April 10, 2001. He is currently the Chief Financial Officer for Square One,
Inc., a national advertising firm in Dallas, Texas, where he worked for at least
the last five years.
17
Executive Officers
------------------
The names and business backgrounds of executive officers of the Company
who are not directors of the Company are:
Name Position Age
John J. Brumfield Chief Financial Officer and Secretary 34
Oliver J. Holmes Vice President/Operations 29
Dean R. Gavoni Executive Vice President 31
John J. Brumfield, age 34, has been CFO since January 30, 1998. From
December 1996 to January 1998, he was the Controller for the Company. From
February 1996 to September 1996, he was a staff accountant for ITEX Corporation.
From September of 1994 until February 1996, Mr. Brumfield was a professional
golfer. Prior to that, he worked for the public accounting firm of Bogumil,
Holzgang & Associates as a staff accountant from July 1991 to September 1994.
Oliver J. Holmes, age 29, has been Vice President of Operations since
February 22, 2001. Prior to that time Mr. Holmes was Vice President of Affiliate
Relations for the Company since January 30, 1998. Mr. Holmes has been manager of
the Affiliate Relations department since July 1996. Prior to working for the
Company, Mr. Holmes managed Underwater Safari's dive shop in the Virgin Islands.
Prior to that, he worked in affiliate relations for Radio Personalities, Inc.,
an independent radio syndicator.
Dean R. Gavoni, age 31, has been Executive Vice President of the Company
since June 7, 2000. Prior to that Mr. Gavoni was Vice President of Sales for the
Company since January 30, 1998. Mr. Gavoni has been the national sales manager
since July 1996. Prior to working for the Company, Mr. Gavoni worked in radio
syndication with IMS. Before that, he worked in marketing and sales for
Anheiser-Busch and on many political campaigns in the state of Illinois.
Family Relationships
--------------------
John A. Holmes, III, President and CEO is the older brother of the Vice
President of Operations, Oliver J. Holmes. Emily Holmes, spouse of President and
CEO John Holmes, also works for the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock, are required to file certain reports,
within specified time periods, indicating their holdings of and transactions in
the common stock and derivative securities. Based solely on written
representations made to the Company and the Company's review of Forms 3, 4, and
5 furnished to the Company pursuant to Section 16 of the Securities Exchange
Act, the Company believes all required Forms 3, 4 and 5 were filed on time,
except that the following forms have not been filed but will be filed shortly:
Description of Number of
Name Form Transactions
John A. Holmes, III Form 5 2
Dean R. Gavoni Form 5 2
John J. Brumfield Form 5 2
Oliver J. Holmes Form 5 2
Peter Jacobsen Form 5 1
Dick Versace Form 5 1
David J. Thibeau Form 5 1
Christopher J. Miller Form 5 1
18
Item 10. Executive Compensation
The following table sets forth all cash compensation, including bonuses
and deferred compensation, paid for the years ended November 30, 2001, 2000, and
1999 by the Company to its President and Chief Executive Officer and all other
executive officers with an annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------- ------------------------------------------
Awards Payouts
------------ ----------------- ----------- -------------
Name and Restricted Securities
Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
($) ($) ($) (f) (#) ($) ($)
(a) (b) (c) (d) (e) (g) (h) (i)
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
John A. Holmes, 2001 350,000 $124,167 $-0- $-0- -0- $-0- $-0-
III, President 2000 256,628 $131,628 $-0- $-0- -0- $-0- $-0-
and CEO 1999 113,306 $ -0- $-0- $-0- 270,000 $-0- $-0-
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
Dean R. Gavoni, 2001 350,000 $-0- $ 24,234 (1) $-0- 400,000 $-0- $-0-
Executive Vice 2000 40,000 $-0- $193,299 (1) $-0- -0- $-0- $-0-
President 1999 30,810 $-0- $ 76,985 (1) $-0- 60,000 $-0- $-0-
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
John J. 2001 100,000 $ 69,830 $-0- $-0- 400,000 $-0- $-0-
Brumfield, 2000 55,000 $ 43,344 $-0- $-0- -0- $-0- $-0-
CFO 1999 45,000 $ 17,567 $-0- $-0- 70,000 $-0- $-0-
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
Christopher J. 2001 143,885 $-0- $-0- $-0- -0- $-0- $-0-
Miller, 2000 70,000 $-0- $-0- $-0- -0- $-0- $-0-
Former CEO 1999 100,000 $-0- $-0- $-0- -0- $-0- $-0-
-NBG
Solutions *
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
David J. 2001 111,385 $-0- $-0- $-0- -0- $-0- $-0-
Thibeau, 2000 96,250 $-0- $-0- $-0- -0- $-0- $-0-
Former CTO 1999 100,000 $-0- $-0- $-0- -0- $-0- $-0-
-NBG
Solutions *
------------------ ------- ---------- ----------- ---------------- ------------ ----------------- ----------- -------------
* No longer employed by the Company.
(1) - Sales commissions paid.
19
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
----------------------------- -------------------------- -------------------- --------------- ------------------------
Number Of Securities Percent Of Total
Underlying Options/SARs Options/SARs
Granted (#) Granted To Exercise or
(b) (1) Employees In Base Price
Name Fiscal Year ($/Sh) Expiration Date
(a) (c) (d) (e)
----------------------------- -------------------------- -------------------- --------------- ------------------------
John A. Holmes, III, 500,000 32% $1.75 5-10-06
President and CEO
----------------------------- -------------------------- -------------------- --------------- ------------------------
Dean R. Gavoni, Executive 400,000 26% $1.75 5-10-06
Vice President
----------------------------- -------------------------- -------------------- --------------- ------------------------
John J. Brumfield, CFO 400,000 26% $1.75 5-10-06
----------------------------- -------------------------- -------------------- --------------- ------------------------
Christopher J. Miller, 1,000 .1% $1.75 5-10-06
Former CEO - NBG Solutions
----------------------------- -------------------------- -------------------- --------------- ------------------------
David J. Thibeau, Former 1,000 .1% $1.75 5-10-06
CTO - NBG Solutions
----------------------------- -------------------------- -------------------- --------------- ------------------------
(1) All options became fully vested and exercisable on June 1, 2001.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
------------------------------------ ------------------- -------------------- -------------------- -------------------
Number Of
Unexercised Value Of
Securities Unexercised
Underlying In-The-Money
Options/SARs At Option/SARs At
Shares Acquired FY-End (#) FY-End ($)
On Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
------------------------------------ ------------------- -------------------- -------------------- -------------------
John A. Holmes, III, President and 73,000 $72,376 1,177,000/0 $105,820/$-0-
CEO
------------------------------------ ------------------- -------------------- -------------------- -------------------
Dean R. Gavoni, Executive Vice 180,000 $179,039 460,000/0 $-0-/$-0-
President
------------------------------------ ------------------- -------------------- -------------------- -------------------
John J. Brumfield, CFO 50,000 $49,644 570,000/0 $26,000/$-0-
------------------------------------ ------------------- -------------------- -------------------- -------------------
Christopher J. Miller, Former CEO -0- $-0- 0/0 $-0-/$-0-
- NBG Solutions
------------------------------------ ------------------- -------------------- -------------------- -------------------
David J. Thibeau, Former CTO - NBG -0- $-0- 0/0 $-0-/$-0-
Solutions
------------------------------------ ------------------- -------------------- -------------------- -------------------
20
Employment Agreements
John A. Holmes, III
On July 1, 2001, the Company amended and restated its employment
contract with John A. Holmes, III. The amended and restated agreement expires on
December 31, 2004. Mr. Holmes will receive a base salary equal to $350,000,
which will be increased annually at the rate of the Consumer Price Index unless
a larger increase is approved by the Company's board of directors. Mr. Holmes
will receive an additional 10% increase in his base salary if the Company
achieves certain revenue targets for the fiscal years ending in 2002 and 2003.
In addition to his base salary, Mr. Holmes may qualify for additional
compensation depending on the Company's financial performance. Mr. Holmes has
the right to terminate the employment agreement at any time without reason upon
three months' prior written notice. The Company may terminate Mr. Holmes for
cause without notice. The Company may also terminate Mr. Holmes without cause,
at any time, and without reason upon three months' prior written notice or
payment in lieu of notice equaling three months' compensation. If Mr. Holmes
employment is terminated without cause following a "change in control" (as
defined in the employment agreement), the Company will pay Mr. Holmes an amount
equal to one year's base salary. If the Company terminates Mr. Holmes without
cause and for reasons other than a change in control, then it must provide Mr.
Holmes with one-year severance pay equal to 75% of his base salary, payable in
12 equal monthly installments.
Dean R. Gavoni
On July 1, 2001, the Company amended and restated its employment
contract with Dean R. Gavoni. The amended and restated agreement expires on
December 31, 2004. Mr. Gavoni will receive a base salary equal to $350,000,
which will be increased annually at the rate of the Consumer Price Index unless
a larger increase is approved by the Company's board of directors. Mr. Gavoni
will receive an additional 10% increase in his base salary if the Company
achieves certain revenue targets for the fiscal years ending in 2002 and 2003.
In addition to his base salary, Mr. Gavoni may qualify for additional
compensation depending on the Company's financial performance. Mr. Gavoni has
the right to terminate the employment agreement at any time without reason upon
three months' prior written notice. The Company may terminate Mr. Gavoni for
cause without notice. The Company may also terminate Mr. Gavoni without cause,
at any time, and without reason upon three months' prior written notice or
payment in lieu of notice equaling three months' compensation. If Mr. Gavoni's
employment is terminated without cause following a "change in control" (as
defined in the employment agreement), the Company will pay Mr. Gavoni an amount
equal to one year's base salary. If the Company terminates Mr. Gavoni without
cause and for reasons other than a change in control, then it must provide Mr.
Gavoni with one-year severance pay equal to 75% of his base salary, payable in
12 equal monthly installments.
John J. Brumfield
On January 1, 2001, the Company entered into a three-year employment
agreement with John J. Brumfield. Under this agreement, Mr. Brumfield will
receive a base salary of $99,999.99 in 2001, $110,000.00 in 2002, and
$120,000.00 in 2003. In addition to his base salary, Mr. Brumfield is also
eligible to receive certain monthly bonuses, which could increase Mr.
Brumfield's annual compensation by as much as $120,000. Mr. Brumfield may
terminate the employment agreement at any time and without cause after providing
the Company with 30-days written notice. The Company may terminate Mr.
Brumfield's employment, without cause, after giving him either: (1) 30-days
written notice, or (2) a payment equal to 180 days of his base compensation. The
Company may also terminate Mr. Brumfield, for cause, without notice or payment
of compensation in lieu of giving notice.
21
Director Compensation
---------------------
Directors of the Company are not currently compensated for their
services other than as provided in the Stock Incentive Plan described below.
However, Directors are reimbursed for all reasonable expenses incurred on behalf
of the Company.
Stock Incentive Plan
The Company established the NBG Radio Network, Inc. 1998 Stock
Incentive Plan in 1998 and amended the plan in 2001 to increase the number of
shares available for issue (the "Plan"). The purpose of the Plan is to attract
and retain the services of (1) selected employees, officers and directors of the
Company or of any subsidiary of the Company and (2) selected non-employee
agents, consultants, advisors, persons involved in the sale or distribution of
the Company's products and independent contractors of the Company or any
subsidiary. The Plan has not been submitted to a vote of the stockholders of the
Company.
The Plan provides for the grant of options to qualified directors,
employees (including officers), independent contractors and consultants of the
Company to purchase an aggregate of 3,500,000 shares of Common Stock. The Plan
is currently administered by the Board of Directors, which determines, among
other things, the persons to be granted options under the Plan, the number of
shares subject to each option and the option price.
The Plan allows the Company to grant the following types of awards: (i)
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended ("ISO's"); (ii) options other than ISOs ("Non-Statutory
Stock Options"); (iii) stock bonuses; (iv) stock appreciation rights ("SAR's")
in tandem with ISO's or Non-Statutory Stock Options; (vi) cash bonus rights;
(vii) performance units; and (viii) foreign qualified awards at any time within
10 years from the date the Plan was adopted.
The exercise price of ISO's and SAR's granted in tandem with ISO's, if
any, will be the fair market value of the shares of Common Stock, determined as
specified in the Plan, covered by such option on the date such option is
granted. If at the time an ISO is granted the optionee holds more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, the purchase price of such options will be one hundred ten percent
(110%) of the fair market value of the shares of Common Stock covered by such
option on the date such option is granted. The exercise price of Non-Statutory
Stock Options and SAR's granted in tandem with Non-Statutory Stock Options will
be determined by the Board of Directors at the time of grant and may be any
amount determined by the Board of Directors.
Each ISO and, unless otherwise determined by the Board of Directors,
each other option granted under the Plan by its terms will be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of law,
except (i) to an optionee's family member by gift or domestic relations order;
or (ii) by will or by the laws of descent and distribution of the state or
country of the optionee's domicile at the time of death.
Non-Statutory Stock Options will have a term fixed by the Board of
Directors. ISOs will have a term of no more than ten years, except that ISOs
granted to an optionee owning more than 10% of the outstanding Common Stock will
have a term of no more than five years and must be granted to and exercised by
employees of the Company (including officers).
In April 2001, the Company granted Non-Statutory Options under the Plan
to non-employee directors in the following amounts:
Peter Jacobsen 20,000
Dick Versace 20,000
The exercise price for the options is $1.75 per share and the options
will expire in May 2006, if not exercised earlier. All stock options became
exercisable upon the date of grant.
22
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of common stock of the Company as of November 30, 2001 as
to (i) each person who is known by the Company to own beneficially 5% or more of
the outstanding shares of the Company's common stock, (ii) each named executive
officer and (iii) all directors and officers as a group. The persons named in
the table have sole voting and investment power with respect to all shares shown
as beneficially owned by them, subject to community property laws where
applicable and to the information contained in the footnotes to the table.
------------------------------------ ----------------------- ----------------
Name and Address of Beneficial Amount and Nature of
Owner Beneficial Ownership
Percent of Class
------------------------------------ ----------------------- ----------------
John A. Holmes, III 1,458,564 (1) 9.4%
3728 SW Hillside Drive, Portland,
OR 97221
Peter Jacobsen 187,000 (2) 1.3%
8700 SW Nimbus Avenue #B,
Beaverton, OR 97008
Dick Versace 192,000 (3) 1.3%
733 East Maywood Peoria, IL 61603
Ernie Capobianco 30,000 *
7249 South Janmar
Dallas, TX 75230
John J. Brumfield 851,223 (4) 5.7%
5383 Southwood Drive
Lake Oswego, OR 97035
Dean R. Gavoni 706,412 (5) 4.7%
3503 SW Gale
Portland, OR 97201
Christopher J. Miller 318,000 (6) 2.2%
11510 SW Military Court
Portland, OR 97219
David J. Thibeau 292,100 (7) 2.0%
132 Del Prado
Lake Oswego, OR 97035
Directors and executive officers 4,435,780 (8) 25.6%
as a group (9 persons)
MCG Capital Corporation 4,850,235 (9) 25.2%
1100 Wilson Blvd.
Arlington, VA 22209
Jim Schilling 1,374,000 (10) 9.1%
20455 South End Rd.
Oregon City, OR 97045
Gary Henin 1,200,000 (11) 8.2%
3385 Quail Ridge Court
West Linn, OR 97068
* Less than 1%
23
(1) Represents 248,732 common shares, 1,177,000 options without performance or
vesting restrictions, and 32,832 warrants.
(2) Represents 87,000 common shares and 100,000 options without performance or
vesting restrictions.
(3) Represents 152,000 common shares and 40,000 options without performance or
vesting restrictions.
(4) Represents 258,664 common shares, 570,000 options without performance or
vesting restrictions, and 22,559 warrants.
(5) Represents 164,873 common shares, 460,000 options without performance or
vesting restrictions, and 81,539 options.
(6) Represents 175,000 common shares held directly, 43,000 common shares held
in trust for the benefit of his children, and the right to receive 100,000
common shares from the Company in connection with his termination of
employment.
(7) Represents 192,100 common shares and the right to receive 100,000 common
shares from the Company in connection with his termination of employment.
(8) Represents 1,473,860 common shares, 2,757,000 options without performance
or vesting restrictions, and 204,920 warrants.
(9) Represents 4,850,235 warrants based on Schedule 13D filed on july 11, 2001.
(10) Represents 687,000 common shares and 687,000 warrants, according to the
records of the Company.
(11) Represents 875,000 common shares and 325,000 warrants, according to the
records of the Company.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
On January 25, 1999, the Company completed its acquisition of M-Tek
Technical Services, Inc., a kiosk integration company providing customized
technical solutions, bar coding, and distribution channels. In the acquisition,
the Company acquired assets and assumed certain liabilities of M-Tek Technical
Services, Inc. for the purchase price of $1,367,000. The purchase price
consisted of $100,000 in cash and 350,000 shares (175,000 shares of Common Stock
to each of Messrs. Miller and Thibeau). As a result of the acquisition, Mr.
Miller became the Chief Operating Officer of NBG Solutions, Inc., a subsidiary
of the Company was appointed to the Board of Directors of the Company, and was
granted options to purchase 175,000 shares of Common Stock at $3.10 per share.
In addition, Mr. Thibeau became Vice President/Chief Technology Officer of NBG
Solutions, Inc. and was granted options to purchase 175,000 shares of Common
Stock at $3.10 per share. In connection with the termination of employment of
Mr. Miller and Mr. Thibeau, the Company paid each of them $28,000 and agreed to
issue each of them 100,000 common shares in April 2002.
On June 29, 2001, the Company entered into a $6.2 million credit
facility with MCG. MCG is a beneficial owner of more than 5% of the Company's
common stock as a result of the transactions relating to the credit facility.
The credit facility and the related transactions are described in Item 6 -
Management's Discussion and Analysis or Plan of Operation.
On June 30, 2001, the Company made loans to officers as follows: John
A. Holmes, III, President and CEO - $100,000; Dean R. Gavoni, Executive Vice
President - $90,000; and Oliver J. Holmes, Vice President of Operations -
$15,000. The loans were made pursuant to promissory notes with identical terms.
The notes carry an interest rate of 6% and are payable in ten equal annual
installments of principal and interest starting July 1, 2002. John J. Brumfield,
CFO, also signed a promissory note but no funds have been advanced to Mr.
Brumfield. All of these notes were assigned to MCG as additional collateral for
the credit facility.
Item 13. Exhibits and Reports on Form 8-K
------------------------------------------
(a ) The following exhibits are filed as part of this report:
Exhibit
Number Description of Exhibit
2.1. Stock Purchase Agreement dated October 6, 2000 among NBG Radio
Network, Inc., Glenn Fisher Entertainment Corporation, and Glenn
Fisher (including First Amendment to Stock Purchase Agreement
dated October 25, 2000 and Sixth Amendment to Stock Purchase
Agreement dated June 29, 2001) (filed as an exhibit to the
Company's Form 8-K filed on July 13, 2001).
3.1 Restated Articles of Incorporation, as amended (filed as an
exhibit to the Company's Form 10-KSB/A-1 filed on June 1, 2001).
24
3.2 Amended and Restated Bylaws of the Company (filed as an exhibit to
the Company's Form 10-QSB filed on October 15, 1999
4.1 Form of Common Stock Certificate (filed as an exhibit to the
Company's Form 10-KSB filed on March 2, 1999).
4.2 Form of Warrants - Private Placement #1 (filed as an exhibit to
the Company's Form 10-KSB/A filed on June 4, 1999).
4.3 Option and Warrant Purchase Agreement dated June 29, 2001 between
MCG Finance Corporation and NBG Radio Network, Inc. (filed as an
exhibit to Schedule 13D filed by MCG Finance Corporation on July
11, 2001).
4.4 Warrant Agreement by and between NBG Radio Network, Inc. and Sean
Kenlon dated June 29, 2001 (filed as an exhibit to the Company's
Form 10-QSB filed on October 15, 2001).
4.5 Warrant Agreement by and between NBG Radio Network, Inc. and
Patrick Flanagan dated June 29, 2001 (filed as an exhibit to the
Company's Form 10-QSB filed on October 15, 2001).
4.6 Warrant Agreement by and between NBG Radio Network, Inc. and
Dakota Trust c/o Jay Landesman and Stephen R. Field, Trustees
dated June 29, 2001 (filed as an exhibit to the Company's Form
10-QSB filed on October 15, 2001).
10.1 Credit Facility Agreement dated June 29, 2001 between MCG Finance
Corporation and NBG Radio Network, Inc., including each of its
direct and indirect subsidiaries (filed as an exhibit to Schedule
13D filed by MCG Finance Corporation on July 11, 2001).
10.2 Master Security Agreement, Collateral Assignment and Equity Pledge
dated June 29, 2001 by NBG Radio Network, Inc. and Glenn Fisher
Entertainment Corporation in favor of MCG Finance Corporation
(filed as an exhibit to Schedule 13D filed by MCG Finance
Corporation on July 11, 2001).
10.3 Intellectual Property Security Agreement dated June 29, 2001 by
NBG Radio Network, Inc. in favor of MCG Finance Corporation (filed
as an exhibit to the Company's Form 10-QSB filed on October 15,
2001).
10.4 Intellectual Property Agreement dated June 29, 2001 by Glenn
Fisher Entertainment Corporation in favor of MCG Finance
Corporation (filed as an exhibit to the Company's Form 10-QSB
filed on October 15, 2001).
10.5 Amended and Restated Employment Agreement between John A. Holmes,
III and NBG Radio Network, Inc. dated July 1, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.6 Amended and Restated Employment Agreement between Dean R. Gavoni
and NBG Radio Network, Inc. dated July 1, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.7 Employment Agreement of John J. Brumfield dated January 1, 2001.*
10.8 Employment Agreement of Oliver J. Holmes dated January 1, 2001.*
10.9 1998 Stock Incentive Plan* (filed as an exhibit to the Company's
Form 10-QSB/A filed on November 12, 1999).
10.10 Promissory Note and Collateral Assignment by John A. Holmes III in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.11 Promissory Note and Collateral Assignment by Dean R. Gavoni in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
25
10.12 Promissory Note and Collateral Assignment by John J. Brumfield in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.13 Promissory Note and Collateral Assignment by Oliver J. Holmes in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.14 Consulting Agreement between Glenn Fisher Entertainment
Corporation and Glenn Fisher dated June 29, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
21 Subsidiaries of the Registrant
23.1 Consent of Moss Adams LLP, Certified Public Accountants
* Management contract or compensatory plan.
(b) No reports on Form 8-K were required to be filed during the last quarter
of the period covered by this report.
26
SIGNATURES
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: February 28, 2002 By: /s/ John A. Holmes, III
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John A. Holmes, III, Chief Executive Officer
and President
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
Company and in the capacities and on the dates indicated.
Date: February 28, 2002 By: /s/ John A. Holmes, III
----------------------------------------------
John A. Holmes, III, Chairman, Board of
Directors; Chief Executive Officer
and President (Principal Executive Officer)
Date: February 28, 2002 By: /s/ John J. Brumfield
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John J. Brumfield, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
Date: February 28, 2002 By: /s/ Peter Jacobsen
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Peter Jacobsen, Director
Date: February 28, 2002 By: /s/ Dick Versace
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Dick Versace, Director
Date: February 28, 2002 By: /s/ Ernie Capobianco
----------------------------------------------
Ernie Capobianco, Director
27
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1. Stock Purchase Agreement dated October 6, 2000 among NBG Radio
Network, Inc., Glenn Fisher Entertainment Corporation, and Glenn
Fisher (including First Amendment to Stock Purchase Agreement
dated October 25, 2000 and Sixth Amendment to Stock Purchase
Agreement dated June 29, 2001) (filed as an exhibit to the
Company's Form 8-K filed on July 13, 2001).
3.1 Restated Articles of Incorporation, as amended (filed as an
exhibit to the Company's Form 10-KSB/A-1 filed on June 1, 2001).
3.2 Amended and Restated Bylaws of the Company (filed as an exhibit to
the Company's Form 10-QSB filed on October 15, 1999
4.1 Form of Common Stock Certificate (filed as an exhibit to the
Company's Form 10-KSB filed on March 2, 1999).
4.2 Form of Warrants - Private Placement #1 (filed as an exhibit to
the Company's Form 10-KSB/A filed on June 4, 1999).
4.3 Option and Warrant Purchase Agreement dated June 29, 2001 between
MCG Finance Corporation and NBG Radio Network, Inc. (filed as an
exhibit to Schedule 13D filed by MCG Finance Corporation on July
11, 2001).
4.4 Warrant Agreement by and between NBG Radio Network, Inc. and Sean
Kenlon dated June 29, 2001 (filed as an exhibit to the Company's
Form 10-QSB filed on October 15, 2001).
4.5 Warrant Agreement by and between NBG Radio Network, Inc. and
Patrick Flanagan dated June 29, 2001 (filed as an exhibit to the
Company's Form 10-QSB filed on October 15, 2001).
4.6 Warrant Agreement by and between NBG Radio Network, Inc. and
Dakota Trust c/o Jay Landesman and Stephen R. Field, Trustees
dated June 29, 2001 (filed as an exhibit to the Company's Form
10-QSB filed on October 15, 2001).
10.1 Credit Facility Agreement dated June 29, 2001 between MCG Finance
Corporation and NBG Radio Network, Inc., including each of its
direct and indirect subsidiaries (filed as an exhibit to Schedule
13D filed by MCG Finance Corporation on July 11, 2001).
10.2 Master Security Agreement, Collateral Assignment and Equity Pledge
dated June 29, 2001 by NBG Radio Network, Inc. and Glenn Fisher
Entertainment Corporation in favor of MCG Finance Corporation
(filed as an exhibit to Schedule 13D filed by MCG Finance
Corporation on July 11, 2001).
10.3 Intellectual Property Security Agreement dated June 29, 2001 by
NBG Radio Network, Inc. in favor of MCG Finance Corporation (filed
as an exhibit to the Company's Form 10-QSB filed on October 15,
2001).
10.4 Intellectual Property Agreement dated June 29, 2001 by Glenn
Fisher Entertainment Corporation in favor of MCG Finance
Corporation (filed as an exhibit to the Company's Form 10-QSB
filed on October 15, 2001).
10.5 Amended and Restated Employment Agreement between John A. Holmes,
III and NBG Radio Network, Inc. dated July 1, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.6 Amended and Restated Employment Agreement between Dean R. Gavoni
and NBG Radio Network, Inc. dated July 1, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
28
10.7 Employment Agreement of John J. Brumfield dated January 1, 2001.*
10.8 Employment Agreement of Oliver J. Holmes dated January 1, 2001.*
10.9 1998 Stock Incentive Plan* (filed as an exhibit to the Company's
Form 10-QSB/A filed on November 12, 1999).
10.10 Promissory Note and Collateral Assignment by John A. Holmes III in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.11 Promissory Note and Collateral Assignment by Dean R. Gavoni in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.12 Promissory Note and Collateral Assignment by John J. Brumfield in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.13 Promissory Note and Collateral Assignment by Oliver J. Holmes in
favor of NBG Radio Network, Inc. dated June 30, 2001 (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
10.14 Consulting Agreement between Glenn Fisher Entertainment
Corporation and Glenn Fisher dated June 29, 2001* (filed as an
exhibit to the Company's Form 10-QSB filed on October 15, 2001).
21 Subsidiaries of the Registrant
23.1 Consent of Moss Adams LLP, Certified Public Accountants
29