UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | |
(Mark One) |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | | For the quarterly period ended September 30, 2008 |
| | | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | | For the transition period from to |
Commission file number 0-50762
DEBUT BROADCASTING CORPORATION, INC.
(Exact name of registrant as specified in its charter)
| | | |
Nevada | | 88-0417389 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1209 16th Ave South, Nashville, TN | 37212 |
(Address of principal executive offices) | (Zip Code) |
(615) 301-0001
(Registrant’s telephone number, including area code)
(Former name, former address, and formal fiscal year if changed since last report)
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of September 30, 2008, there were 19,794,360 shares of common stock issued and outstanding.
| | | Page |
| PART I - FINANCIAL INFORMATION |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| Item 4T. | Controls and Procedures | 21 |
| |
| PART II - OTHER INFORMATION |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
| Item 6. | Exhibits | 23 |
PART I - FINANCIAL INFORMATION
DEBUT BROADCASTING CORPORATION, INC.
| | | September 30, | | December 31, | |
| | | 2008 | | 2007 | |
| ASSETS | | (Unaudited) | | (1) | |
| Current assets | | | | | |
| Cash and cash equivalents | | $ | 70,561 | | $ | 8,643 | |
| Accounts receivable, net | | | 1,396,030 | | | 650,580 | |
| Other current assets | | | 465,844 | | | 45,723 | |
| Total current assets | | | 1,932,435 | | | 704,946 | |
| | | | | | | | |
| Property and equipment, net | | | 777,835 | | | 541,159 | |
| Goodwill | | | 459,280 | | | 79,280 | |
| FCC licenses | | | 1,509,500 | | | 1,037,000 | |
| | | | | | | | |
| Other intangible assets, net | | | 34,012 | | | 13,925 | |
| Total assets | | $ | 4,713,062 | | $ | 2,376,310 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable | | $ | 498,920 | | $ | 339,734 | |
| Accrued expenses and taxes | | | 1,180,127 | | | 339,442 | |
| Notes payable | | | - | | | - | |
| Notes payable to stockholders | | | 750,000 | | | - | |
| Lines of credit | | | 602,262 | | | 239,297 | |
| Current portion of long-term debt | | | 34,451 | | | 85,600 | |
| Total current liabilities | | | 2,814,400 | | | 1,004,073 | |
| | | | | | | | |
| Long-term liabilities | | | | | | | |
| Long-term debt | | | 1,471,298 | | | 601,374 | |
| Total long-term liabilities | | | 1,471,298 | | | 601,374 | |
| | | | | | | | |
| Total liabilities | | | 4,537,059 | | | 1,605,447 | |
| Stockholders' equity | | | | | | | |
| Common stock - $.003 par value, 100,000,000 shares authorized; 19,794,360 shares issued and outstanding | | | 30,383 | | | 30,383 | |
| | | | | | | | |
| Additional paid in capital | | | 3,162,272 | | | 3,162,272 | |
| Accumulated deficit | | | (3,016,651 | ) | | (2,421,792 | ) |
| Total stockholders' equity | | | 176,003 | | | 770,863 | |
| | | | | | | | |
| Total Liabilities & Equity | | $ | 4,713,062 | | $ | 2,376,310 | |
The accompanying notes are an integral part of these financial statements.
(1) Derived from the Company’s audited financial statements from the year ended December 31, 2007.
DEBUT BROADCASTING CORPORATION, INC.
(Unaudited)
| | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | | | (restated) | | | | (restated) | |
| Net Revenue | | $ | 741,074 | | $ | 264,530 | | $ | 1,918,857 | | $ | 528,605 | |
| | | | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | | | |
| Advertising | | | 21,751 | | | 6,580 | | | 174,491 | | | 36,595 | |
| Operating Expense | | | 711,739 | | | 683,003 | | | 2,088,904 | | | 1,234,620 | |
| Depreciation Expense | | | 28,889 | | | 26,611 | | | 94,757 | | | 38,023 | |
| Merger and Acquisition Related Expenses | | | 10,405 | | | 57,634 | | | 11,300 | | | 397,562 | |
| | | | | | | | | | | | | | |
| Total Operating Expenses | | | 772,784 | | | 1,343,567 | | | 2,369,452 | | | 2,276,539 | |
| | | | | | | | | | | | | | |
| Operating Loss | | | (31,711 | ) | | (509,297 | ) | | (450,596 | ) | | (1,178,195 | ) |
| | | | | | | | | | | | | | |
| Other Income and Expense | | | | | | | | | | | | | |
| Interest Income | | | (7,143 | ) | | (8,239 | ) | | (9,542 | ) | | (18,356 | ) |
| Interest Expense | | | 46,200 | | | 23,058 | | | 153,795 | | | 76,132 | |
| | | | | | | | | | | | | | |
| Total Other Income and Expense | | | 39,057 | | | 14,819 | | | 144,253 | | | 57,776 | |
| | | | | | | | | | | | | | |
| Net Loss | | $ | (70,767 | ) | $ | (524,116 | ) | $ | (594,848 | ) | $ | (1,235,971 | ) |
| | | | | | | | | | | | | | |
| Accumulated Deficit at the Beginning of the Period | | | (2,945,025 | ) | | (1,437,052 | ) | | (2,420,944 | ) | | (725,197 | ) |
| | | | | | | | | | | | | | |
| Accumulated Deficit at the End of the Period | | $ | (3,015,792 | ) | $ | (1,961,168 | ) | $ | (3,015,792 | ) | $ | (1,961,168 | ) |
| Loss per common share | | | | | | | | | | | | | |
Basic | | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
| Weighted average number of shares outstanding, basic | | | 19,794,360 | | | 19,794,360 | | | 19,794,360 | | | 19,794,360 | |
The accompanying notes are an integral part of these financial statements.
DEBUT BROADCASTING CORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
| | | Nine Months Ended September 30, | |
| | | 2008 | | 2007 | |
| | | | | | |
| Operating Activities: | | | | | |
| Net Loss | | $ | (594,848 | ) | $ | (1,235,871 | ) |
| | | | | | | | |
| Adjustments to reconcile net loss to net cash | | | | | | | |
| provided by/used in operating activities: | | | | | | | |
| Depreciation and amortization | | | 94,770 | | | 38,023 | |
| Changes in operating assets and liabilities, net effects | | | | | | | |
| of acquisitions | | | | | | | |
| | | | | | | | |
| (Increase) in accounts receivable | | | (687,929 | ) | | (124,072 | ) |
| (Increase) in other current assets | | | (8,325 | ) | | (46,437 | ) |
| Increase in accounts payable | | | 159,186 | | | 102,784 | |
| Increase in accrued expenses and taxes | | | 396,596 | | | 295,962 | |
| | | | | | | | |
| Net cash (used in) operating activities | | | (640,573 | ) | | (969,611 | ) |
| | | | | | | | |
| Investing Activities: | | | | | | | |
| Purchases of property and equipment | | | (280,094 | ) | | (328,518 | ) |
| Acquisition of Shamrock Broadcasting | | | - | | | (300,000 | ) |
| Acquisition of River Broadcasting | | | - | | | (1,037,134 | ) |
| Acquisition of WBBV FM | | | (980,022 | ) | | - | |
| Net cash used in investing activities | | | (1,260,116 | ) | | (1,665,652 | ) |
| | | | | | | | |
| Financing Activities: | | | | | | | |
| Proceeds from issuance of stock warrants | | | 30,865 | | | - | |
| Proceeds from bank credit facility | | | 1,241,304 | | | 30,000 | |
| Proceeds from stockholder notes | | | 750,000 | | | - | |
| Repayment of long-term debt | | | (59,563 | ) | | 48,394 | |
| Proceeds from issuance of common stock | | | - | | | 2,976,497 | |
| | | | | | | | |
| Net cash provided by financing activities | | | 1,962,606 | | | 3,054,891 | |
| | | | | | | | |
| Net increase in cash and cash equivalents | | | 61,918 | | | 419,628 | |
| | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 8,643 | | | 86,112 | |
| | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 70,561 | | $ | 505,740 | |
The accompanying notes are an integral part of these financial statements.
DEBUT BROADCASTING CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Nine Months Ended September 30, | |
| | | 2008 | | 2007 | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid during the period for: | | | | | | | |
| | $ | 137,969 | | $ | 53,074 | |
| Income Taxes | | $ | - | | $ | - | |
| | | | | | | | |
| Schedule of non-cash investing and financing activities: | | | | | | | |
| Issuance of common stock in connection with conversion | | | | | | | |
| of debenture payable | | $ | - | | $ | 100,000 | |
| | | | | | | | |
| Issuance of common stock in connection with conversion | | | | | | | |
| of stockholder notes payable | | $ | - | | $ | 215,158 | |
| | | | | | | | |
| Purchase of assets of WBBV FM and | | | | | | | |
| assumption of liabilities in the acquisition as follows: | | | | | | | |
| Fair value of non-cash tangible assets acquired | | $ | 600,022 | | $ | - | |
| Goodwill | | $ | 380,000 | | $ | - | |
| Cash paid | | $ | (180,022 | ) | $ | - | |
| Liabilities assumed | | $ | (800,000 | ) | $ | - | |
| | | | | | | | |
| Purchase of assets of Shamrock Broadcasting and | | | | | | | |
| assumption of liabilities in the acquisition as follows: | | | | | | | |
| Fair value of non-cash tangible assets acquired | | $ | - | | $ | 310,134 | |
| Cash paid | | $ | - | | $ | (300,000 | ) |
| Liabilities assumed | | $ | - | | $ | (10,134 | ) |
| | | | | | | | |
| Purchase of assets of River Broadcasting and | | | | | | | |
| assumption of liabilities in the acquisition as follows: | | | | | | | |
| Fair value of non-cash tangible assets acquired | | $ | - | | $ | 957,854 | |
| Goodwill | | $ | - | | $ | 79,280 | |
| Cash Paid | | $ | - | | $ | (1,037,134 | ) |
The accompanying notes are an integral part of these financial statements.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 1 - Organization
Debut Broadcasting Corporation, Inc. (the “Company”) is located in Nashville, Tennessee and conducts business from its principal executive office at 1209 16th Avenue South, Nashville, Tennessee 37212. The Company produces and distributes syndicated radio programs to radio stations across the United States and Canada. In addition, the Company owns and operates five radio stations in Mississippi.
The Company maintains radio syndication in Nashville and produces and distributes 15 radio programs, which are broadcast over approximately 1,400 radio station affiliates. These radio programs have an estimated 45 million U.S. listeners per week. In addition to its syndication services, the Company owns and operates a multi-media studio with audio, video and on-line content production capabilities. This facility is located on Music Row in Nashville, Tennessee. The Company also provides marketing, consulting and media buying (advertising) for its radio broadcast station customers in the United States.
On May 17, 2007, the Company consummated a reverse merger with California News Tech, a public company that was organized in Nevada. Media Sentiment, Inc. (“MSI”), a wholly-owned subsidiary of California News Tech, held all of the assets and operations of California News Tech at the date of the merger (see Note 10 - Business Combinations). Pursuant to a Post-Merger Operating Agreement, dated as of May 17, 2007, MSI and the Company agreed to operate as separate businesses after the reverse merger, with neither entity exercising control over the assets or operations of the other.
On June 27, 2007, MSI filed a registration statement with the SEC with respect to the issued and outstanding shares of common stock of MSI for the purpose of completing a spin-off of MSI by transferring all of the shares of common stock of MSI to stockholders of record of California News Tech as of April 20, 2007. The spin-off of MSI was completed during August of 2008.
Note 2 - Basis of Presentation and Interim Results
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2008 are not necessarily indicative of the results that can be expected for the full year. Balance sheet information as of December 31, 2007 was derived from the Company’s audited financial statements for the year ended December 31, 2007.
The condensed consolidated financial statements include the accounts of the Company, and its subsidiaries. The interim financial statements of the Company have been prepared without audit.
Restatements have been made to net revenue and operating expense for the three and nine months ended September 30, 2007. These restatements were made to reflect consistency with all other reporting periods, and have not affected the Company’s total net loss for such periods.
These interim results do not include the assets, liabilities and operations of the non-controlled subsidiary MSI, of which the Company completed the spin-off during the third quarter of 2008.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures are adequate to make the financial information presented not misleading. These condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2007. All adjustments were of a normal recurring nature unless otherwise disclosed. In the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim period have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
We will require additional capital to execute our plan to grow through the acquisition of radio stations and radio station clusters. We do not presently have sufficient capital to make additional acquisitions. On August 22, 2008, we accepted an acquisition and working capital loan for $500,000 from SunTrust Bank. We intend to raise additional capital over the next six months through equity offerings or by incurring debt.
Accounts Receivable
We use the allowance method for determining the collectability of our accounts receivable. The allowance method recognizes bad debt expense following a review of the individual accounts outstanding in light of the surrounding facts. Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and economic trends. We write off accounts receivable against the allowance when a balance is determined to be uncollectible. Accounts receivable on the consolidated balance sheet is stated net of our allowance for doubtful accounts. The following table shows activity in our allowance for doubtful accounts:
| December 31, 2007 | | $ | 20,299 | |
| Charged to expense | | $ | 24,831 | |
| Deductions | | | ($19,921 | ) |
| March 31, 2008 | | $ | 15,389 | |
| Charged to expense | | $ | 31,301 | |
| Deductions | | | ($39,168 | ) |
| June 30, 2008 | | $ | 20,256 | |
| Charged to expense | | $ | 17,979 | |
| Deductions | | | ($19,907 | ) |
| September 30, 2008 | | $ | 22,184 | |
Revenue and Cost Recognition
The Company recognizes its advertising and programming revenues when the Company’s radio shows air on its contracted radio station affiliates. Generally, the Company is paid by a national advertising agency, which sells the commercial time provided by the affiliate.
As the Company earns its revenue from the national advertising agency, it also recognizes any amounts due to the individual radio programs, which are based on the audience level generated by the specific program. Individual radio programs operate under revenue sharing agreements pursuant to which the Company retains a portion of revenue and disburses a pro rata share of revenue to licensors of any programming which the Company licenses. The relational billing, collections and expenses are disclosed providing transparency to licensors. For individual radio programs that are produced internally by the Company, a similar analysis and calculation is performed to determine the sustained viability of the production concept. Approximately half of the programming produced is wholly-owned by the Company, and the other half is licensed from various programming partners (licensors).
Under generally accepted accounting principles for accrual based accounting, expenses related to individual shows are accrued at the time the radio programs are run and the related revenue is recognized when advertising is billed from the national advertising agency. Disbursements are made monthly to third party producers based on current month collections. Twenty percent of outstanding collections delinquent over 90 days are held as an allowance for doubtful accounts.
Volume growth is achieved in national advertising revenue through the sale of syndicated programming to radio station affiliates. Advertising rates are affected by the overall audience size as determined by national radio ratings. The Company’s overall advertising revenue potential is largely a function of audience size and the quantity of advertising available for sale.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 2 - Basis of Presentation and Interim Results (continued)
Revenue and Cost Recognition (continued)
Consulting projects are generally negotiated at a fixed price per project; however, if the Company utilizes its advertising capacity as part of the consulting project, it will charge the consulting client in the same manner as it charges the affiliated stations described more fully above. Consulting fee income is recognized as time is incurred under the terms of the contract.
Advertising
The Company expenses advertising costs as they are incurred. Total advertising costs of $21,751 and $6,580 are included in the financial statements for the three months ended September 30, 2008 and September 30, 2007, respectively. Total advertising costs of $174,491 and $36,595 are including in the financial statements for the nine months ended September 30, 2008 and September 30, 2007.
Note 3 - Initial Adoption of FIN 48
We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), on May 17, 2007. This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes. We do not believe that the timing of the adoption of FIN 48 has created any material differences in comparability between the nine months ended September 30, 2007 and the nine months ended September 30, 2008.
Note 4 - Loss Per Share
We present basic loss per share on the face of the consolidated statements of operations. As provided by Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, basic income per share is calculated as income available to common stockholders divided by the weighted average number of shares outstanding during the period.
On January 2, 2008, the Company awarded options to purchase 342,055 shares of its common stock to employees and valued contractors. These options were awarded at a strike price of $0.86 per share and vest ratably over five years. The options will be accounted for utilizing the Black-Scholes method of valuation.
On January 21, 2008, the Company issued to Remington Partners, Inc. a warrant to purchase 62,500 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date three years after the date of issuance.
On February 26, 2008, the Company issued to Remington Partners, Inc. a warrant to purchase 125,000 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date three years after the date of issuance.
On March 16, 2008, the Company issued to Holladay Broadcasting of Louisiana, LLC a warrant to purchase 200,000 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date 10 years after the date of issuance.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 4 - Loss Per Share (continued)
On June 18, 2008, the Company issued to Wolcott Squared a warrant to purchase 18,408 shares of Company common stock at an exercise price of $0.3925 per share, with an expiration date of December 17, 2017.
On June 18, 2008, the Company issued to Wolcott Squared a warrant to purchase 22,279 shares of Company common stock at an exercise price of $0.51 per share, with an expiration date of January 31, 2018.
On June 18, 2008, the Company issued to Wolcott Squared a warrant to purchase 5,686 shares of Company common stock at an exercise price of $0.51 per share, with an expiration date of February 29, 2018.
On June 30, 2008, the Company issued to Politis Communications a warrant to purchase 10,254 shares of Company common stock at an exercise price of $0.91 per share, with an expiration date of June 29, 2018.
On June 30, 2008, the Company issued to Rubicon Capital Partners, a warrant to purchase 20,714 shares of Company common stock at an exercise price of $1.05 per share, with an expiration date of June 29, 2018.
On June 30, 2008, the Company issued to Rubicon Capital Partners, a warrant to purchase 1,312 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of June 29, 2018.
On September 22, 2008, the Company issued to a third party a warrant to purchase 18,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of January 31, 2011.
On September 22, 2008, the Company issued to a third party a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of September 30, 2011.
On September 30, 2008, the Company issued to Politis Communications a warrant to purchase 5,495 shares of Company common stock at an exercise price of $0.91 per share, with an expiration date of September 29, 2018.
Warrants are accounted for under the guidelines of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”).
As of September 30, 2008, all warrants include registration rights, but have not yet been registered. The Company revalues warrants quarterly utilizing the Black-Scholes method.
All shares of common stock and prices have been restated in the accompanying consolidated financial statements and notes to give effect to the reverse merger of the Company with California News Tech. Therefore, the calculation of income per share is based on the number of shares of Company common stock outstanding assuming the reverse merger was completed on January 1, 2006.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 5 - Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment are computed using the straight-line method based upon estimated lives of assets ranging between three to 30 years. Property and equipment are summarized as follows:
| | | Estimated
Useful Life | | September 30,
2008 | | December 31,
2007 | |
| Land | | | | | $ | 49,500 | | $ | 49,500 | |
| Buildings and building improvements | | | 5 - 10 years | | | 135,298 | | | 71,810 | |
| Towers and studio equipment | | | 5 - 30 years | | | 360,313 | | | 314,666 | |
| Furniture, fixtures and equipment | | | 3 - 7 years | | | 270,440 | | | 150,515 | |
| Automotive | | | 3 - 5 years | | | 187,391 | | | 101,858 | |
| | | | | | | | | | | |
| Accumulated depreciation | | | | | | (225,108 | ) | | (147,190 | ) |
| Property and equipment, net | | | | | $ | 777,835 | | $ | 541,159 | |
Of the $777,835 in net property and equipment as of September 30, 2008, $35,000 was added through the acquisition of WBBV FM during the third quarter of 2008 including equipment purchases to support the acquired station.
Note 6 - Lines of Credit
On May 3, 2002 and amended on April 26, 2004, the Company entered into an unsecured promissory note establishing a revolving line of credit with the Bank of America for $75,000. The note requires monthly interest payments and the interest rate is based on the bank’s prime rate, which was 6.5% at September 30, 2008. The note matures on May 3, 2009. The balance of the line of credit at both September 30, 2008 and 2007 was $75,000.
The Company signed a promissory note and established a revolving line of credit on February 27, 2004 for $200,000 with Regions Bank to refinance existing debt. The note matures on December 31, 2008, and requires monthly interest payments accruing at an initial rate of 7.58% and a current rate of 4.73875% at September 30, 2008. The rate is subject to monthly changes based on an independent index plus 2.25%.
The note is secured by personal guarantee of certain officers of the Company and all inventory, chattel paper, accounts, equipment and general intangibles existing or purchased after the signing of the related agreement. The principal balance of the note at September 30, 2008 and 2007 was $200,123 and $165,375, respectively.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 7 - Notes Payable to Stockholders
On January 21, 2008 the Company issued to Remington Partners, Inc. warrants to purchase 62,500 shares of Company common stock in exchange for a loan in the amount of $250,000 with a $2,000 loan origination fee and interest of 18% per annum due monthly. The promissory note plus any accrued interest is payable on January 31, 2009.
On February 26, 2008 the Company issued to Remington Partners, Inc. warrants to purchase 125,000 shares of Company common stock in exchange for a loan in the amount of $500,000, with a $2,000 loan origination fee and interest of 18% per annum due monthly. The promissory note plus any accrued interest is payable on February 28, 2009.
Total interest expense associated with the stockholder loans for the three months ended September 30, 2008 and 2007 was $33,334 and $0 respectively. As of September 30, 2008 all accrued interest associated with the stockholder loans was paid out with a corresponding balance of $0. Total interest expense associated with the stockholder loans was $81,170 and $6,680 for the nine months ended September 30, 2008 and 2007.
Note 8 - Loans Payable
Regions Bank Loan
On August 15, 2006, the Company signed a promissory note with Regions Bank for $300,000 with an initial interest rate of 7.58% and a current rate of 4.7375% as of September 30, 2008. The loan is secured by all inventory, chattel paper, accounts, equipment and general intangibles of the Company. The loan matures August 30, 2011 and is payable in monthly installments of $6,058, including variable interest at 2.25% points per annum over the London Interbank Offered Rate for the applicable index period.
Total interest expense on the Regions Bank loan for the three months ended September 30, 2008 and 2007 was $2,363 and $5,006, respectively. Total interest expense for the nine months ended September 30 2008 and 2007 was $8,487 and $15,453, respectively. The balance of the loan at September 30, 2008 was $190,790 of which $11,733 was classified as current portion of long-term debt. The balance of the loan at September 30, 2007 was $245,239, of which $55,787 was classified as current portion of long-term debt.
Citadel Communications Loan
On August 28, 2002, the Company signed an unsecured promissory note with Citadel Communications for $430,415. The loan has no maturity date and accrues interest at a rate of 12%. The note was amended in April, 2003 requiring interest only payments indefinitely. Total interest expense on the Citadel Communications loan for each of the three months ended September 30, 2008 and 2007 was $10,428. The balance of the loan at both September 30, 2008 and 2007 was $347,491.
Vehicle Loans
On August 28, 2007, the Company signed a direct purchase money loan and security agreement with DaimlerChrysler for the purchase of two vehicles for $50,068 with an effective interest rate of 7.3%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $1,011.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 8 - Loans Payable (continued)
On September 25, 2007, the Company signed a retail installment sale contract with GMAC for the purchase of two vehicles for $47,498 with an effective interest rate of 5.0%. The corresponding promissory note is to be paid over a three-year period with a monthly payment of $1,424. The purchased vehicles are used in conjunction with the radio broadcast operations.
On May 1, 2008, the Company signed a retail installment sale contract with Daimler Chrysler Financial Services for the purchase of a vehicle for $23,137 with an effective interest rate of 7.49%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $463. The purchased vehicle is used in conjunction with the radio broadcast operations.
On May 15, 2008, the Company signed a retail installment sale contract with Daimler Chrysler Financial Services for the purchase of a vehicle for $19,303 with an effective interest rate of 11.25%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $367. The purchased vehicle is used in conjunction with the radio broadcast operations.
On May 30, 2008, the Company signed a retail installment sale contract with GMAC for the purchase of a vehicle for $25,256 with an effective interest rate of 9.5%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $530. The purchased vehicle is used in conjunction with the radio broadcast operations.
Total interest expense on the vehicle loans for the quarter ended September 30, 2008 and 2007 was $2,286 and $0, respectively. Total interest expense on the vehicle loans for the nine months ended September 30, 2008 and 2007 was $3,107 and $0, respectively. The principal balance of the vehicle loans as of September 30, 2008 and 2007 was $132,232 and $97,566, respectively. At September 30, 2008, $7,268 was classified as the current portion of the loans.
Capital Lease
On December 5, 2007, the Company entered into a capital lease arrangement with National City Media Finance to acquire studio equipment for $15,009 with a fixed interest rate of 7.5%. The lease term is for three years with monthly payments of $464, with a $1 buyout option at the end of the lease term.
Total interest expense on studio equipment for the quarters ended September 30, 2008 and 2007 was $175 and $0, respectively. Total interest expense on studio equipment for the nine months ended September 30, 2008 and 2007 was $710 and $0, respectively. The principal balance of the capital lease as of September 30, 2008 and 2007 was $6,237 and $0, respectively. At September 30, 2008, $1,316 was classified as the current portion of the lease.
Note 9 - Stockholders’ Equity
In connection with the reverse merger on May 17, 2007, all shares of common stock of Debut Broadcasting (as hereinafter defined) outstanding prior to the merger were exchanged for 10,000,000 shares of Company common stock (See Note 10. Business Combinations).
In addition, in connection with the reverse merger, the Company completed a private placement of 6,000,000 shares of Company common stock at $0.50 per share. The transaction was recorded net of financing costs of $23,502.
Finally, in connection with the reverse merger, the Company converted notes payable to stockholders in the amount of $215,158 into 430,316 shares of Company common stock at $0.50 per share.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 9 - Stockholders’ Equity (continued)
The pre-merger stockholders of the Company maintained 364,044 shares of Company common stock.
On May 21, 2007, $100,000 of convertible debentures issued on May 15, 2007 were converted into 3,000,000 shares of Company common stock.
Note 10 - Business Combinations
California News Tech
On May 17, 2007, the Company entered into an Agreement and Plan of Merger with California News Tech, a public company that was incorporated in Nevada. The merger was accounted for as a reverse merger using the purchase method of accounting. Accordingly, the acquisition has been treated as an acquisition of California News Tech by the Company. MSI held all of the assets and operations of California News Tech at the date of the reverse merger.
As part of the reverse merger, each share of common stock of Debut Broadcasting, Inc., a Tennessee corporation formerly known as The Marketing Group (“Debut Broadcasting”), issued and outstanding immediately prior to the closing of the reverse merger was converted into the right to receive one share of common stock. As a result, the stockholders of Debut Broadcasting received 10,000,000 newly issued shares of common stock.
Also as part of the reverse merger, the Company issued 6,430,316 shares of Company common stock to investors as a result of closing a private offering that was exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933. The shares were issued for a combination of cash and debt reduction.
On June 27, 2007, MSI filed a registration statement with the Securities and Exchange Commission with respect to the issued and outstanding shares of common stock of MSI for the purpose of completing a spin-off of MSI by transferring all of the shares of common stock of MSI to stockholders of record of California News Tech as of April 20, 2007. The Company completed the spin-off of MSI during August of 2008.
As part of the reverse merger, the Company also entered into a Post-Merger Operating Agreement in which the Company and MSI agreed to operate their respective businesses separately and the Company specifically agreed that it would not interfere in any manner with the operations of MSI, have any rights to use, acquire or otherwise operate any of the assets or intellectual property of MSI or create any liabilities for which MSI would be obligated. In addition, MSI agreed that it would not interfere in any manner with the operations of the Company, have any rights to use, acquire or otherwise operate any of the assets or intellectual property of the Company or create any liabilities for which the Company would be obligated.
Moreover, as part of this Post-Merger Operating Agreement, the Company agreed that if for any reason California News Tech is unable to register the MSI shares, the Company would sell its MSI shares to the Company’s former president and director, Marian Munz, for $1.00. As a consequence, MSI has and will continue to operate completely separate from the Company effective as of the date of the reverse merger.
In addition, at the time of the reverse merger, the Company was released from certain liabilities to its former president and director, Mr. Munz, and his spouse; however, these liabilities continued as the sole responsibility of MSI in the form of two separate convertible promissory notes. These notes remain outstanding but, if converted under their terms into shares of MSI common stock, would represent over an 80% interest and full voting control over MSI.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note 10 - Business Combinations (continued)
As a result, the Company considers MSI a non-controlled subsidiary and has not included any operating results, cash flow analysis or assets and liabilities of MSI in its consolidated financial statements.
Shamrock Broadcasting, Inc.
On June 7, 2007, the Company acquired two radio broadcast stations identified as WNLA FM 105.5 MHz and WNLA AM 1380 kHz in Indianola, Mississippi, from Shamrock Broadcasting, Inc., including all of the facilities, equipment, licenses and intellectual property necessary to operate these stations, in exchange for $300,000. In a separate agreement, the Company purchased the accounts receivable of Shamrock Broadcasting through issuance of a $10,134 promissory note payable in equal installments made in each of three months following completion of the transaction.
The purchase price was allocated as follows:
| Description | | Amount | |
| | | | |
| Accounts receivable | | $ | 10,134 | |
| Land | | | 14,500 | |
| Buildings and structures | | | 13,500 | |
| Equipment | | | 30,000 | |
| FCC licenses | | | 237,000 | |
| Non-compete agreement | | | 5,000 | |
| Liabilities assumed | | | (10,134 | ) |
| Total | | $ | 300,000 | |
River Broadcasting Company
On June 19, 2007, the Company acquired three radio broadcast stations identified as WIQQ FM 102.3 MHz in Leland, Mississippi, WBAQ FM 97.9 MHz and WNIX AM 1330 kHz in Greenville, MS, from River Broadcasting Company, including all of the facilities, equipment, licenses and intellectual property necessary to operate these stations, in exchange for $1,037,134. In September 2007, the Company identified a $14,280 liability that was not recorded as of the closing date of the transaction. This was recorded as an adjustment to goodwill.
The purchase price was allocated as follows:
| Description | | Amount | |
| | | | |
| Accounts receivable | | $ | 37,134 | |
| Land | | | 35,000 | |
| Buildings and structures | | | 50,000 | |
| Equipment | | | 25,000 | |
| FCC licenses | | | 800,000 | |
| Non-compete agreement | | | 25,000 | |
| Goodwill | | | 79,280 | |
| Liabilities assumed | | | (14,280 | ) |
| Total | | $ | 1,037,134 | |
We reported our acquisition of these five radio stations on a Form 8-K filed June 22, 2007.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
WBBV FM
On August 27, 2008, the Company acquired a radio broadcast station from Holladay Broadcasting of Louisiana, LLC identified as WBBV FM 101.3 MHz in Vicksburg, Mississippi, including all of the facilities, equipment, licenses and intellectual property necessary to operate this station, in exchange for $180,022.
The purchase price was allocated as follows:
| Description | | Amount | |
| | | | |
| Accounts receivable | | $ | 57,522 | |
| Land | | | 0.00 | |
| Buildings and structures | | | 25,000 | |
| Equipment | | | 10,000 | |
| FCC licenses | | | 472,500 | |
| Non-compete agreement | | | 35,000 | |
| Goodwill | | | 380,000 | |
| Liabilities assumed | | | (800,000 | ) |
| Total | | $ | 180,022 | |
Holladay Broadcasting Company
On March 16, 2008, the Company entered into a Local Marketing Agreement for a radio broadcast station identified as KLSM FM 105.5 MHz in Tallulah, Louisiana with Holladay Broadcasting Company, including all of the facilities, equipment, licenses and intellectual property necessary to operate this station. The Company maintains the station including all revenues and expenses. Holladay Broadcasting Company has retained ownership of all assets and liabilities of the station as of March 16, 2008.
Grace Media Company
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements may be identified by reference to a future-period(s) or by the use of forward-looking terminology, such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “intend,” “could,” “would,” or “plan” or future or conditional verb tenses, and variations or negatives of such terms.
These forward-looking statements include, without limitation, the basis of presentation of our financial statements, charges to consulting clients, the impact of recent accounting pronouncements, the separate operations of MSI, the impact of radio station acquisitions, radio advertising growth, pending acquisitions, the future use of Black-Scholes method of valuation, market trends, our need for additional capital, our ability to raise capital through debt and equity financing, the terms of any financing the we may obtain, the incurrence of accounting and legal fees in connection with acquisitions and the effectiveness of our disclosure controls and procedures.
We caution you not to place undue reliance on the forward-looking statements contained in this report, in that actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors include, but are not limited to, our ability to provide and market competitive service and products, our ability to diversify revenue, our ability to attract, train and retain qualified personnel, our ability to operate and integrate new technology, changes in consumer preference, changes in our operating or expansion strategy, changes in economic conditions, fluctuation in prevailing interest rates, our ability to identify and effectively integrate potential acquisitions, FCC and government approval of potential acquisition, our inability to renew one or more of our broadcast licenses, our ability to manage growth and effectively serve an expanding customer and market base, geographic concentrations of our assets and susceptibility to economic downturns in that area, availability of and costs associated with maintaining and/or obtaining adequate and timely sources of capital and liquidity, our ability to compete with other companies that produce and distribute syndicated radio programs and/or own radio stations, shifts in populations and other demographics, changes in governmental regulations, laws and regulations as the affect companies that produce and distribute syndicated radio programs and/or own radio stations, industry conditions, the popularity of radio as a broadcasting and advertising medium, cancellation, disruption or postponements of advertising schedules in response to national or world events, our lack of control over MSI, possible adverse ruling, judgments, settlements, and other outcomes of pending or threatened litigation, other factors generally understood to affect the financial condition or results of companies that produce and distribute syndicated radio programs and/or own radio stations and other factors detailed from time to time in our press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this report.
Overview
A Radio Advertising Bureau report issued in September 2008 indicated that local advertisers, the largest advertisers which are served in small markets, decreased their overall advertising by 10% during the third quarter. Despite this report, we realized growth in our markets while the industry as a whole declined. Management believes that local market advertisers and automotive dealerships are advertising more in our markets in order to compete during the economic slowdown. Non-broadcast radio revenue (“non-spot revenue”) remained steady during the third quarter of 2008. Our rural market focus allows us to capitalize on the growth in local markets and non-spot revenue as we participate as active members in the communities in which we operate. For the nine months ended September 30, 2008, combined net revenue from radio, multi-media, media purchasing and syndication increased 263% compared to the same period in 2007.
Our management team remains focused on our strategy of pursuing growth through acquisition. However, acquisitions are closely evaluated to ensure that they will generate stockholder value and our management is committed to completing only those acquisitions that it believes will increase our share price.
Results of Operations
For the Three Months Ended September 30, 2008 and 2007
We generated $741,074 in net revenue for the quarter ended September 30, 2008, an increase of $476,544 or 180%, compared to $264,530 for the quarter ended September 30, 2007. Approximately $220,000 of the increase relates to improved performance in our Greenville, Mississippi radio stations and the acquisition of WBBV, FM in Vicksburg, Mississippi. The remainder of the increase is attributable to growth in our core syndication revenue.
Advertising expense was $21,751 for the quarter ended September 30, 2008, an increase of $15,171 or 230%, compared to $6,580 for the quarter ended September 30, 2007. This increase is partially attributable to a public relations contract that we entered into with Politis Communications during the quarter ended September 30, 2008. Of the advertising expense, $5,000 was a non-cash expenditure evidenced by the issuance of warrants to purchase shares of our common stock.
Operating expense was $711,739 for the quarter ended September 30, 2008, an increase of $28,736 or 4%, compared to $683,003 for the quarter ended September 30, 2007. The increase in operating expense is attributable to the newly acquired Mississippi radio station, WBBV FM.
Depreciation and amortization expense was $28,889 for the quarter ended September 30, 2008, an increase of $2,278, or 8.6%, compared to $26,611 for the quarter ended September 30, 2007. The primary reason for the increase relates to certain assets purchased to keep equipment and facilities at our radio stations current.
During the quarter ended September 30, 2008, we recorded $10,405 in non-recurring merger and acquisition related expenses in connection with the acquisition of WBBV FM. During the quarter ended September 30, 2007, we recorded $57,634 in connection with the reverse merger with California News Tech and the acquisitions of Shamrock Broadcasting Company and River Broadcasting Company.
Interest expense was $46,200 for the quarter ended September 30, 2008, an increase of $23,142 or 100% compared to $23,058 for the quarter ended September 30, 2007. The primary source of the increase was interest payments associated with the two term loans from Remington Partners, Inc. An additional increase in interest expense was attributable to vehicles we lease for radio station operations.
Interest income was $7,143 for the quarter ended September 30, 2008, a decrease of 1,096 or 13% compared to $8,239 for the quarter ended September 30, 2007. The primary sources of interest income for the quarter ended September 30, 2008 were finance charges assessed to customers in response to the slowed collection cycle.
As a result of the foregoing revenue and expenses, our overall net loss for the three-month period ending September 30, 2008 and September 30, 2007 was $70,767 and $524,116, respectively.
For the Nine Months Ended September 30, 2008 and 2007
We generated $1,918,857 in net revenue for the nine months ended September 30, 2008, an increase of $1,390,252, or 263%, compared to $528,605 for the nine months ended September 30, 2007. Approximately $713,000 of this increase relates to the six Mississippi radio station acquisitions, and approximately $677,000 of the increase relates to the core syndication business.
Advertising expense was $174,491 for the nine months ended September 30, 2008 an increase of $137,896 or 377% compared to $36,595 for the nine months ended September 30, 2007. This increase is partially attributable to a public relations contract that we entered into with Politis Communications. Additionally contributing to the increase were contracts that we entered into with Agoracom for investor relations services, as well as public relations contracts with Dutton Associates and Rubicon Capital Partners. Of the advertising expense, $35,739 was a non-cash expenditure evidenced by the issuance of warrants to purchase shares of our common stock.
Operating expense was $2,088,904 for the nine months ended September 30, 2008, an increase of $854,284 or 69%, compared to $1,234,620 for the nine months ended September 30, 2007. Of the total increase in operating expenses, $570,551 related to the Mississippi radio acquisitions that began operations at the end of the second quarter of 2007. Additional reasons for the increase in operating expenses relate to $332,817 in costs associated with our public trading status.
Depreciation and amortization expense was $94,757 for the nine months ended September 30, 2008, an increase of $56,734 or 149% compared to $36,595 for the nine months ended September 30, 2007. The primary reason for the increase relates to the assets acquired as part of the Shamrock Broadcasting, Inc. and River Broadcasting Company acquisitions.
During the nine months ended September 30, 2008, we recorded $11,300 in non-recurring merger and acquisition related expenses in connection with the acquisition of WBBV FM. During the nine months ended September 30, 2007 we recorded $339,928 in non-recurring merger and acquisition related expenses in connection with the reverse merger with California News Tech.
Interest expense was $153,795 for the nine months ended September 30, 2008, an increase of $77,663 or 102% compared to $76,132 for the nine months ended September 30, 2007. The primary source of the increase was interest payments associated with the two term loans from Remington Partners, Inc. An additional increase in interest expense was attributable to the vehicles that have been financed for the radio station operations.
Interest income was $9,542 for the nine months ended September 30, 2008, a decrease of $8,814 or 48% compared to $18,356 for the nine months ended September 30, 2007. The primary cause of the decrease is a decreased balance in an interest earning investment account in 2008.
As a result of the foregoing revenue and expenses, our overall net loss for the nine-month period ending September 30, 2008 and September 30, 2007 was $594,848 and $1,235,971, respectively.
Financial Condition
Accounts receivable, net of allowance for doubtful accounts was $1,396,030 at September 30, 2008, an increase of $745,180 or 114% compared to $650,580 at December 31, 2007. The combination of our sales growth in syndication revenues and local radio advertising, combined with a slower collection cycle resulting from the economic downturn has contributed to the increase in the accounts receivable balance.
Other current assets were $465,844 at September 30, 2008, an increase of $420,121 compared to $45,723 at December 31, 2007 related to the issuance of 12 warrants to purchase shares of our common stock. In accordance with SFAS 133, we recorded an associated asset and liability for the issuance of warrants, which will be adjusted quarterly using the Black-Scholes method of derivative valuation.
In the first and second quarters of 2008, we relocated our studio and offices in Greenville, Mississippi to a new office location. All leasehold improvements at the prior office location were fully depreciated at December 31, 2007. During the third quarter of 2008, we acquired the radio broadcast station identified as WBBV FM. As a result of the move and the acquisition, we acquired additional fixed assets, increasing our property and equipment, net of depreciation, to $777,835 compared to $541,159 at December 31, 2007.
Accounts payable at September 30, 2008 was $498,920, an increase of $159,186 or 47% compared to $339,734 at December 31, 2008. This increase in accounts payable is attributable to additional liabilities associated with the acquisition of WBBV FM in Vicksburg, Mississippi and the local marketing agreements with KLSM FM in Tallulah, Louisiana and WQBC in Vicksburg, Mississippi.
Accrued expenses and taxes at September 30, 2008 were $1,180,127, an increase of $840,685 from December 31, 2007. Approximately half of this increase is related to the separate issuance of 12 warrants to purchase shares of our common stock. In accordance with SFAS 133, we recorded an associated asset and liability for the issuance of warrants, which will be adjusted quarterly using the Black-Scholes method of derivative valuation. The remaining increase in accrued expenses and taxes is predominantly an accrual for revenue sharing among our syndication affiliates. This accrued expense was directly associated with the increase in accounts receivable.
In January and February of 2008, we exercised two loans with Remington Partners, Inc. for a total of $750,000 in notes payable to stockholders. As a result, our notes payable to stockholders were $750,000 at September 30, 2008 compared to $0 at December 31, 2007.
Liquidity and Capital Resources
As of September 30, 2008, we had current assets in the amount of $1,932,435 and current liabilities in the amount of $2,814,400. This resulted in a working capital deficit in the amount of $881,965. We will require additional capital to execute our plan to grow through the acquisition of radio stations and radio station clusters. We do not presently have sufficient capital to make additional acquisitions. Our board of directors has given management the approval to seek reasonable and necessary debt and equity financing during the fourth quarter ended December 31, 2008. We intend to raise additional capital over the next six months through equity offerings or by incurring debt.
We made our initial radio station acquisitions without taking on any additional debt financing. However, we did incur debt financing in connection with the acquisition of WBBV FM. Debt financing may also be advisable and attractive as we contemplate future additional acquisitions.
Although we are unable to predict the precise terms of any financing until the time that such financing is actually obtained, it is likely that any such financing will fit within the following parameters:
• None of the indebtedness to which the properties would be subject will be
recourse to the stockholders, although some or all of the indebtedness may be recourse to
us. However, each obligation will be secured by a first lien and/or second lien security
interest in the financed property. It is probable that all of our properties will be subject to
substantial security interests.
• We expect any indebtedness will be first repaid with the operating revenues of the
properties. Operating revenues will first be applied to the payment of interest, principal
amortization (if any), and principal on primary indebtedness. Next, operating revenues
will be applied to interest on and principal of any subordinate financing.
• Each of these financing arrangements may be subject to acceleration in the event of
default, including non-payment, insolvency, or the sale of a property. Upon an acceleration,
if we are unable to effect an immediate refinancing, we may lose one or more of our properties by foreclosure.
While financing may initially be available only on a radio station by radio station basis, we may eventually seek to refinance all of our properties in one non-recourse loan which will, in all likelihood, be secured by all of our properties.
In connection with acquisitions, dispositions and financing, we expect to incur appropriate accounting and legal fees.
Recent Events
Pending Acquisitions
During the fourth quarter of 2007, we signed letters of intent to purchase seven additional radio stations in two markets. During the third quarter of 2008, we finalized the acquisition of one of these stations, WBBV FM. An additional station, KLSM FM was placed under a local marketing agreement on March 16, 2008.
On August 22, 2008, we placed WQBC AM under a local marketing agreement. We have not yet signed a letter of intent to purchase this station.
These markets complement the geography of our existing radio stations and will create a super-regional cluster™ resulting in an anticipated reduction in operating costs of up to 17% incrementally. We anticipate signing asset purchase agreements, and filing for FCC license transfers for the six additional stations during the fourth quarter of 2008 and first quarter of 2009. Management believes that these acquisitions, if completed, will represent overall growth in radio operations of 140% year over year.
Off Balance Sheet Arrangements
As of September 30, 2008, there were no off balance sheet arrangements.
Critical Accounting Policies
Revenue and Cost Recognition
We recognize advertising and programming revenues when our radio programs air with our contracted radio station affiliates. Generally, we are paid by a national advertising agency, which sells the commercial time provided by the affiliate.
We earn revenue from the national advertising agency, we also recognize any amounts attributable to the individual radio programs, which are based on the audience level generated by the specific program. Expenses are accrued at the time the radio programs are run.
Consulting projects are generally negotiated at a fixed price per project; however, if we utilize our advertising capacity as part of the consulting project, we will charge the consulting client in the same manner as the affiliated stations described more fully above. Consulting fee income is recognized as time is incurred under the terms of the contract.
Advertising
We expense advertising costs as they are incurred.
Accounting Pronouncements
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), on May 17, 2007. This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2008. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Mr. Steve Ludwig, and our Chief Financial Officer, Ms. Sariah Hopkins. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2008, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Disclosure Controls and Procedures
Our management does not expect that our disclosure controls and procedures will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II - OTHER INFORMATION
On September 22, 2008, we issued to a third party a warrant to purchase 18,000 shares of our common stock at an exercise price of $0.50 per share, with an expiration date of January 31, 2011. The consideration we received for this warrant was legal services.
On September 22, 2008, we issued to a third party a warrant to purchase 27,000 shares of our common stock at an exercise price of $0.50 per share, with an expiration date of September 30, 2011. The consideration we received for this warrant was legal services.
On September 30, 2008, we issued to Politis Communications a warrant to purchase 5,495 shares of our common stock at an exercise price of $0.91 per share, with an expiration date of September 29, 2018. The consideration received for this warrant was public relations services rendered by Politis Communications.
We revalue warrants quarterly utilizing the Black-Scholes method.
All of these warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
Item 6. Exhibits
Exhibit Number | | Description of Exhibit |
| 10.1 | | Time Brokerage Agreement with Grace Media International, dated as of August 15, 2008 (incorporated herein by reference to exhibit 10.1 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.2 | | Commercial Note, dated August 22, 2008, issued to SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.1 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.3 | | Security Agreement, dated August 22 2008, issued to SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.2 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.4 | | Collateral Letter, dated August 22 2008, from SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.3 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.5 | | Promissory Note, dated August 31, 2008, issued to Holladay Broadcasting Company of Louisiana, LLC (incorporated herein by reference to exhibit 10.2 of our Current Report on Form 8-K, filed on September 9, 2008). |
| 31.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | DEBUT BROADCASTING CORPORATION, INC. |
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| November 13, 2008 | | /s/ Sariah Hopkins |
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| | Sariah Hopkins Chief Financial Officer |
INDEX TO EXHIBITS
Exhibit Number | | Description of Exhibit |
| 10.1 | | Time Brokerage Agreement with Grace Media International, dated as of August 15, 2008 (incorporated herein by reference to exhibit 10.1 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.2 | | Commercial Note, dated August 22, 2008, issued to SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.1 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.3 | | Security Agreement, dated August 22 2008, issued to SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.2 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.4 | | Collateral Letter, dated August 22 2008, from SunTrust Banks, Inc. (incorporated herein by reference to exhibit 10.3 of our Current Report on Form 8-K, filed on August 28, 2008). |
| 10.5 | | Promissory Note, dated August 31, 2008, issued to Holladay Broadcasting Company of Louisiana, LLC (incorporated herein by reference to exhibit 10.2 of our Current Report on Form 8-K, filed on September 9, 2008). |
| 31.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
