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FINAL PROSPECTUS
PURSUANT TO RULE 424(b)(3)
File No. 333-28315
PROSPECTUS
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318,607 SHARES
CHILDREN'S BROADCASTING CORPORATION
COMMON STOCK
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This Prospectus relates to 318,607 shares of Common Stock (the "Shares"),
par value $.02 per share (the "Common Stock"), of Children's Broadcasting
Corporation (the "Company") that may be offered for sale for the account of
certain shareholders of the Company as stated herein under the heading "Selling
Shareholders." Certain of the Shares are issuable upon the exercise of warrants
held by the Selling Shareholders. No period of time has been fixed within which
the Shares may be offered or sold. The Company's Common Stock is traded on the
Nasdaq National Market under the symbol "AAHS." On June 5, 1997, the average of
the high and low prices of the Common Stock on the Nasdaq National Market was
$3.50 per share. Current market quotations are listed in THE WALL STREET
JOURNAL and many other newspapers of general circulation.
The Selling Shareholders have advised the Company that sales of the Shares
by them, or by their pledgees, donees, transferees or other successors in
interest, may be made from time to time in the over-the-counter market, through
negotiated transactions or otherwise at market prices prevailing at the time of
sale or at negotiated prices. The Shares may be sold by one or more of the
following methods: (a) a block trade in which the broker or dealer so engaged
will attempt to sell the Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. Sales may be made
pursuant to this Prospectus to or through broker-dealers who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders or the purchasers of Common Stock for whom such
broker-dealer may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions). One or more supplemental prospectuses will be filed
pursuant to Rule 424 under the Securities Act of 1933, as amended (the
"Securities Act") to describe any material arrangements for the sales of the
Shares when such arrangements are entered into by any of the Selling
Shareholders and any other broker-dealers that participate in the sale of the
Shares.
The Selling Shareholders and any broker-dealers or other persons acting on
their behalf in connection with the sale of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit realized by them on the resale of the Shares as
principals may be deemed to be underwriting commissions under the Securities
Act. As of the date hereof, there are no special selling arrangements between
any broker-dealer or other person and any Selling Shareholder.
The Company will not receive any part of the proceeds of any sales of
Shares pursuant to this Prospectus. Pursuant to the terms of registration
rights granted to the Selling Shareholders, the Company will pay all the
expenses of registering the Shares, except for selling expenses incurred by the
Selling Shareholders in connection with this offering, including any fees and
commissions payable to broker-dealers or other persons, which will be borne by
the Selling Shareholders. In addition, such registration rights provide for
certain other usual and customary terms, including indemnification by the
Company of the Selling Shareholders against certain liabilities arising under
the Securities Act.
THE SHARES INVOLVE CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF
THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS JUNE 6, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. In addition, the
Company's Common Stock is quoted on the NASDAQ National Market System. Reports,
proxy statements and other information concerning the Company can be inspected
and copied at the Public Reference Room of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information, exhibits and undertakings set forth in the
Registration Statement, certain parts of which are omitted as permitted by the
rules and regulations of the Commission. For further information, reference is
hereby made to the Registration Statement which may be inspected and copied in
the manner and at the sources described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company (File No. 0-21534)
with the Commission pursuant to the Exchange Act are incorporated into this
Prospectus by reference:
(a) The Company's Annual Report on Form 10-KSB for the year ended December
31, 1996, filed on March 31, 1997.
(b) The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1997, filed on May 14, 1997.
(c) The Company's Current Report on Form 8-K/A filed on January 31, 1997,
relating to acquisition of the assets of Radio Station WCAR-AM.
(d) The Company's Current Report on Form 8-K/A filed on January 31, 1997,
relating to acquisition of Radio Elizabeth, Inc.
(e) The Company's Current Report on Form 8-K filed on February 3, 1997,
relating to the Company acquiring an AM radio broadcast license and
certain other broadcasting equipment in the Chicago metropolitan area.
(f) The Company's Definitive Schedule 14A (Proxy Statement) filed on April
30, 1997, relating to the Company's Annual Meeting of Shareholders
scheduled for July 16, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering hereunder shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents.
Any statement contained herein or in a document all or any portion of which
is incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed
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to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom this
Prospectus is delivered, upon written or oral request of any such person, a copy
of any or all of the foregoing documents (other than exhibits to such documents
which are not specifically incorporated by reference in such documents).
Written requests for such copies should be directed to the Company at 724 First
Street North, Minneapolis, Minnesota 55401, Attention: Chief Financial Officer.
Telephone requests may be directed to the office of the Chief Financial Officer
of the Company at (612) 338-3300.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION AND
CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION REFORM ACT"),
THAT INVOLVE RISKS AND UNCERTAINTIES. PURCHASERS OF THE COMPANY'S COMMON STOCK
ARE CAUTIONED THAT THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE FACTORS DISCUSSED HEREIN
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Children's Broadcasting Corporation is a full-time national broadcaster
of children's radio programming in the United States. The Company develops,
produces and distributes programming that is entertaining and informative,
and directed to the interests and radio listening patterns of pre-teenage
children and their families. The Company's Aahs World Radio-SM-* format
provides 24-hour programming featuring music, stories, call-in segments,
quizzes and current events features. The programming varies by time of day
in order to attract that component of its prospective audience most likely to
be listening. The programming originates at the Company's flagship station,
WWTC-AM in Minneapolis, Minnesota, and is distributed via satellite to a
network of radio stations around the country.
Since the inception of the Company, the primary sources of the Company's
revenue have been from the sale of local advertising and air time and network
revenue. A substantial portion of the Company's local advertising revenue is
derived from Company-owned stations not broadcasting the Aahs World Radio-SM-
format. These stations, which broadcast primarily family-oriented programming
in the Houston, Kansas City, Milwaukee and Minneapolis markets, were acquired by
the Company in 1994. See "Risk Factors -- Development of National Radio
Network."
The Company's growth strategy includes the acquisition of AM radio
broadcast licenses ("RBLs") in the top 15 markets, thereby securing the
network's presence and continuity in those key markets. Pursuant to that
strategy, the Company has acquired RBLs which serve the New York City, Los
Angeles, Chicago, Philadelphia, Detroit and Dallas/Fort Worth markets. During
the year ended December 31, 1996, the Company acquired RBLs covering the New
York City, Philadelphia and Detroit markets. With the January 1997 acquisition
of the RBL and certain other assets of radio station WAUR-AM in the Chicago
market, the Company distributes its programming to markets representing
approximately 40% of the U.S. population and has a presence in the top four
markets and seven of the top ten markets in the U.S.
The Company has engaged investment bankers to explore strategic
alternatives to enhance shareholder value. Such investment bankers have had and
continue to hold discussions with various potential strategic partners with a
view toward entering into a joint venture, sale or merger. There can be no
assurance that the Company will be successful in completing any transaction with
a prospective strategic partner.
The Company was incorporated under the Minnesota Business Corporation Act
on February 7, 1990. All references to the Company herein include its
subsidiaries, unless otherwise noted. The Company's executive office is located
at 724 First Street North, Minneapolis, Minnesota 55401, and its telephone
number is (612) 338-3300. Its World Wide Web site is www.netradioaahs.net.
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* Children's Broadcasting Corporation has applied for a service mark for
Aahs World Radio-SM-.
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BROADCAST STRATEGY
The Company seeks to attract listeners and advertisers to the Aahs World
Radio-SM- programming format by continually refining its content and
expanding the distribution network. Elements of this strategy include (i)
attracting a loyal listenership by maintaining high quality, distinctive
programming directed to its target audience, (ii) reinforcing this loyalty by
creating a brand identity through the creation of characters which are
integrated into its programming, (iii) delivering this listenership base to
national advertisers by expanding its radio network to obtain U.S. population
coverage, and (iv) making opportunistic acquisitions of RBLs in key markets.
The Company derives its revenue primarily from the sale of local and
network time to advertisers. The Company believes that as its coverage of the
U.S. continues to expand, it will be able to sell national advertising time in
greater quantities and at significantly higher rates with no significant
additional operating costs. To a large extent, the Company is already incurring
the production, operating and administrative costs necessary to broadcast the
network to the entire U.S. Incremental costs as the network continues to expand
are expected to be minimal, excluding the costs of any station acquisitions or
local marketing agreements ("LMAs") which the Company may complete or into which
the Company might enter.
Aahs World Radio-SM- is a music-driven format which was developed and is
produced for pre-teens. In addition to this primary target market, the
format has also been strategically designed to appeal to parents and care
givers. This is accomplished through a blend of music, stories, call-in
segments, interactive quiz features, interviews and current events.
Approximately two-thirds of Aahs World Radio-SM- programming consists of
pop-oriented music which is selected for children on the basis of lyric
content, entertainment and/or educational value. Each selection is classified
in one of several music categories and entered into the Company's program
management system to ensure that it airs under designated conditions and only
at designated times. Research conducted by the Company, including focus
groups and analysis of listener feedback, has shown that having music as the
core element of its programming is the best way to attract and retain its
target audience. The Company develops and continually conducts focus groups
and written and telephonic surveys in order to enhance its understanding of
its target audience and ensure that its programming is meeting the demands of
both kids and their parents. Management believes that non-musical
programming is appealing as well and contributes to the "personality" of the
format and to its differentiation from competing formats.
Prior to the Company's development of the Aahs World Radio-SM- format,
there were not any full-time radio formats which targeted the pre-teen
market. It is estimated that over $1.0 billion in advertising dollars is
directed toward children annually, yet only a small percentage of these
advertising dollars are currently spent on radio. The Company believes that
advertisers trying to reach children have not utilized radio due to the lack
of children's programming on the radio. By providing quality programming
which is appealing to both pre-teens and their parents and by pursuing
vigorous sales and marketing efforts, the Company believes it will be able to
attract an increasing portion of the annual advertising dollars aimed at this
previously underserved market segment.
The Company believes that developing a well-recognized brand identity
will enhance its network's visibility and create opportunities for the
Company to expand beyond the scope of its broadcast operations. The Company
has created characters within its programming, including AAHSIE-TM-, the
Company's animated mascot, which it has integrated into is merchandising and
Internet enterprise. The Company has developed and intends to continue to
develop strategic relationships to assist it in its brand development
efforts, and to allow the Company to exploit business opportunities without
detracting from management's focus upon the Company's core business.
Pursuant to this strategy, the Company has entered into agreements with
NetRadio Network, Inc. ("NetRadio") and Precision Tapes, Inc. which expand
the Company's interactive Internet presence and give Aahs World Radio-SM-
programming Internet distribution worldwide. The Company distributes the
full 24-hour Aahs World Radio-SM- format over the Internet pursuant to an
agreement with NetRadio.
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In November 1995, the Company entered into a joint operations agreement
(the "Operations Agreement") with ABC Radio Networks, Inc. ("ABC") pursuant to
which ABC's affiliate development and national advertising sales staffs would
augment the Company's efforts to market its children's radio format to
broadcasters and advertisers. On July 25, 1996, ABC notified the Company that
ABC would terminate such agreement effective October 24, 1996. Following the
termination by ABC of the Operations Agreement, the Company filed a lawsuit in
the United States District Court for the District of Minnesota against The Walt
Disney Company ("Disney") and ABC for injunctive relief and to recover damages
for their alleged attempts to misappropriate the Company's confidential
information and trade secrets acquired through their strategic relationship with
the Company in order to unfairly compete with the Company in the children's
radio market. On November 18, 1996, ABC and Disney commenced broadcast of
"Radio Disney," a competing format directed toward children age 12 and under in
four markets across the country. See "Risk Factors -- ABC/Disney Litigation"
and " -- Competition."
FOOTHILL FINANCING
The Company entered into an agreement (the "Credit Agreement") with
Foothill Capital Corporation ("Foothill") to address the Company's working
capital requirements through the creation of three credit facilities (the
"Facilities") on November 25, 1996. The Credit Agreement provides the Company
with working capital through (a) a $11,500,000 senior secured term loan (the
"Term Loan") collateralized by the assets of the Company, payable over four
years, (b) a $1,000,000 senior secured reducing/revolving line of credit (the
"Revolving Loan") secured by the Company's accounts receivable, and (c) a
$4,000,000 acquisition facility (the "Acquisition Loan") secured by future
assets acquired by the Company. The Facilities mature on November 26, 2000.
The Company's indebtedness under the Facilities is secured by a first priority
lien on substantially all the assets of the Company and its subsidiaries, by a
pledge of its subsidiaries' stock and by a guaranty of its subsidiaries.
Additionally, the Company granted Foothill a warrant to purchase 50,000 shares
of the Company's Common Stock. The Company was required to pay various service
and commitment fees as are standard within the industry.
Funds available from the Term Loan have been and may in the future be used
for working capital needs and acquisitions, including the purchase of the RBL
and certain other assets of WAUR-AM in the Chicago market. The Revolving Loan
may be used for working capital needs and for acquisitions. Advances are not to
exceed 80% of eligible accounts receivable less certain reserves. The Term Loan
is to be repaid monthly in 42 installments of principal in the amount of 1/54 of
the Term Loan amount beginning in month seven of the Credit Agreement. The
Acquisition Loan is to be repaid monthly based upon a five-year amortization
schedule, commencing on the first month following funding. Interest rates under
the Facilities are payable at the prime rate plus 2.75%. The Credit Agreement
contains a number of restrictive covenants which, among other things, require
the Company to maintain specified financial ratios and impose certain
limitations on the Company with respect to the amount of funding available for
each acquisition under the Acquisition Loan. As of March 31, 1997 and December
31, 1996, the Company was in violation of certain of these restrictive
covenants. Foothill has waived its rights pursuant to these violations.
As of May 14, 1997, approximately $11,746,000 was borrowed pursuant to the
Credit Agreement. These proceeds have been used as follows: $1,700,000 in
connection with the acquisition of an RBL in the Chicago market, $2,900,000 to
retire preferred stock, $1,000,000 to retire debt, $720,000 for capital
expenditures, $400,000 related to loan costs, $860,000 to repay miscellaneous
interest and principal, and approximately $4,166,000 for working capital and
cash reserves.
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
WHEN USED BELOW AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, THE WORDS "BELIEVES," "ANTICIPATES" AND
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING
STATEMENTS," AS DEFINED IN THE LITIGATION REFORM ACT. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED. POTENTIAL PURCHASERS OF THE COMPANY'S
COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
ACQUISITIONS. One of the Company's strategies used to expand its
national network of radio stations broadcasting Aahs World Radio-SM- is to
acquire RBLs in key markets. To date, the Company has acquired 13 RBLs, 12
of which are currently owned and operated. The Company has acquired RBLs
through the acquisition of securities or assets of radio stations and intends
to continue to acquire RBLs in the future. Unless the acquisition is of an
existing affiliate, the Company will generally convert an acquired RBL to the
Aahs World Radio-SM-format. Although the Company believes it has identified
a number of potential acquisitions, there can be no assurance that the
Company will be successful in acquiring additional RBLs. The Company expects
to face competition in acquiring additional RBLs as it seeks to build its
national radio network. In the event the Company is unable to continue to
acquire RBLs, the Company may not achieve market penetration levels required
by major advertisers and the Company's ability to attract national
advertising and maximize the rates charged for advertising and air time could
be materially adversely affected. See "--Development of National Radio
Network."
COMPANY DEVELOPMENT; HISTORY OF OPERATING LOSSES. Since inception, the
Company has experienced substantial net losses as a result of its efforts to
develop its national radio network. The Company is continuing to develop its
radio network and is generally subject to the risks attendant to a new or
emerging business venture. The Company has incurred net losses since its
inception in 1990 and has not generated positive cash flow sufficient to fund
its ongoing operations. For the two years ended December 31, 1995 and 1996, and
the three months ended March 31, 1997, the Company incurred net losses of
$6,108,000, $9,868,000 and $2,780,000 respectively. The Company has not
generated positive cash flow from operations and has had frequent working
capital shortages. The Company expects to continue to incur operating losses
throughout 1997 and that it will continue to experience negative cash flow from
operations. Working capital requirements have been met by short-term borrowings
from investors, including affiliates of the Company, and from the proceeds of
public offerings of the Company's Common Stock, and through the use of the
Facilities. The Company continues to seek additional sources of financing for
its working capital needs and for acquisitions. If the Company should be unable
to obtain working capital when required, its operations and prospects would be
materially and adversely affected. In connection with their audit reports on
the Company's financial statements as of and for the years ended December 31,
1995 and 1996, Ernst & Young LLP and BDO Seidman, LLP, the Company's independent
auditors as of such dates, expressed substantial doubt about the Company's
ability to continue as a going concern because of recurring losses and negative
cash flow from operations. As of March 31, 1997, the Company had an accumulated
deficit of $29,084,000 and had used approximately $19,979,000 of cash to fund
its losses. See "Prospectus Summary -- Foothill Financing."
The Company raised a total of $12,500,000 of capital through the Credit
Agreement with Foothill in November 1996. Additionally, as a part of the Credit
Agreement the Company may borrow an additional $4,000,000 to acquire future
assets. The Company believes the Credit Agreement will meet the working capital
needs of the Company and provide adequate resources for acquisitions until the
fall of 1997. Beyond the fall of 1997, the Company's ability to obtain funding
to meet its future capital requirements will depend upon a number of factors
including, but not limited to, (i) the ability of the Company to generate cash
flow from operations, (ii) the acceptance of the Company's children's radio
format, (iii) the relative profitability of the
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format on a local and national basis and (iv) the general availability of debt
and equity financing to the Company. The Company continues to seek additional
sources for its working capital and long-term capital requirements, including
debt and equity financing and strategic partnership activities.
SUBSTANTIAL LEVERAGE; ADDITIONAL FINANCING REQUIREMENTS. As of March 31,
1997, the Company's consolidated indebtedness approximated 51% of the sum of its
shareholders' equity and consolidated indebtedness, assuming full funding under
the Facilities, which occurred on April 23, 1997. Based on current interest
rates, the debt service obligations associated with the Credit Agreement
necessitate payments of principal and interest of approximately $3,000,000 in
1997. Further, substantially all assets of the Company serve to secure this
loan. This degree of leverage increases the Company's vulnerability to adverse
general economic and broadcasting industry conditions and to increased
competitive pressures, including pressure from better capitalized competitors.
Issuance of additional debt, including the Debt Securities, would increase this
degree of leverage and the Company's vulnerability to such market conditions.
In the event that the Company should default on its obligations under the Credit
Agreement, all or substantially all of its assets would be at risk. There can
be no assurance that the Company will be able to repay or refinance such
indebtedness when due, or that the Company would be able to sell all or any
portion of its assets or raise additional capital to make required payments on
maturing indebtedness. Furthermore, the Company was in violation of certain
covenants contained in the Credit Agreement as of March 31, 1997 and December
31, 1996. An inability to make payments when due or to comply with covenants
and restrictions associated with such indebtedness could give Foothill the right
to foreclose on properties securing payment obligations, which would have a
material adverse effect upon the Company. Foothill has waived its rights
pursuant to the aforementioned covenant violations. Part of the Company's
strategy for development and expansion of its network includes acquiring RBLs
and/or operating radio properties in key U.S. markets. It is the Company's
desire to purchase RBLs in each of the top 15 markets; however, there can be no
assurance that the Company will be able to complete suitable acquisitions on
terms favorable or acceptable to the Company. In the event the Company purchases
additional RBLs, the limitations on the Credit Agreement may require the Company
to seek additional financing for acquisitions and to fund future operations.
There can be no assurance that such additional financing will be available to
the Company when required, or if available, that it would be on terms acceptable
or favorable to the Company. Additional financing could require the sale of
equity securities, which could result in significant dilution to the Company's
shareholders.
DEVELOPMENT OF NATIONAL RADIO NETWORK. Since late 1992, the Company has
been developing a network of affiliated and owned or operated radio stations to
carry its satellite-transmitted programming to domestic radio markets. The
Company's affiliation agreements have terms varying from one to three years.
There can be no assurance that the Company will be able to retain existing
affiliates or attract additional affiliates. Since the inception of the
network, the Company has gained and lost affiliates. As of May 14, 1997, the
Company had 30 affiliates. In cases where the Company deems it appropriate, it
intends to seek affiliates by entering into affiliation agreements or LMAs,
through which third-party owned stations broker broadcast time to the Company,
or by acquiring stations in key markets. In addition, the Company could
encounter substantial delays, expenses or other unforeseen difficulties in
completing the establishment of its network in the major markets. The Company
also risks the potential loss of strategic alliances which it has developed in
connection with its strategy to develop the Company's brand, to assist in growth
of the Company's network, and to pursue related business opportunities.
Furthermore, the signal of the Company's affiliates and of its owned and
operated stations may not cover households in certain portions of the markets in
which such stations broadcast. In addition, the Company's management has
limited experience in the development or operation of a national radio network.
The success and viability of the Company's network will depend upon its
ability to generate substantial revenue from network advertisers. For the
year ended December 31, 1996, and the quarter ended March 31, 1997, the
Company's network generated revenue totaling $1,594,000 and $206,000,
respectively. Since the inception of the Company, the primary sources of the
Company's revenue have been from the sale of local advertising and air time
and network revenue. A substantial portion of the Company's local
advertising revenue is derived from Company-owned stations not broadcasting
the Aahs World Radio-SM- format. For the
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years ended December 31, 1995 and 1996, and the quarter ended March 31, 1997,
approximately 42%, 38% and 40%, respectively, of the Company's revenue was
derived from its radio stations which do not carry the Aahs World
Radio-SM-format: KTEK-AM, Houston, Texas, KCNW-AM, Kansas City, Kansas,
WZER-AM, Milwaukee, Wisconsin and KYCR-AM, Minneapolis, Minnesota. For the
years ended December 31, 1995 and 1996, and the quarter ended March 31, 1997,
the Company derived approximately 13%, 12% and 14%, respectively, of its
revenue from KTEK-AM; approximately 9%, 9% and 8%, respectively, of its
revenue from KCNW-AM; approximately 11%, 8% and 8%, respectively, of its
revenue from WZER-AM; and approximately 9%, 9% and 10%, respectively, of its
revenue from KYCR-AM. If the Company converts any of these stations to the
Aahs World Radio-SM- format, its revenue may be negatively affected until a
new advertising base is developed for the Aahs World Radio-SM- format in
those markets. No assurance can be given that the Company will be able to
acquire additional stations in major markets or to increase the number of
network affiliates to a level which would enable it to increase network
advertising, even if desired additional acquisitions are made or affiliate
relationships are created, or that the Company will be able to generate
sufficient advertising revenue to operate profitably in the future.
One of the Company's primary methods of expansion has been to acquire RBLs
through the acquisition of assets of broadcasters in such major markets as New
York City, Los Angeles, Chicago, Philadelphia, Detroit and Dallas/Fort Worth.
The Company's expansion strategy is to acquire additional RBLs which would
enable it to broadcast in each of the top 15 U.S. markets. Such strategy is
designed to achieve market penetration levels required by major advertisers who
may be reluctant or unwilling to purchase advertising time until the Company's
geographic penetration is extended. The Company believes additional market
penetration will improve its ability to maximize the rates charged for
advertising and air time.
ACCEPTANCE OF RADIO FORMAT. The Company produces and distributes a 24-hour
children's radio format. There can be no assurance that the Company's
programming will gain acceptance by listeners and advertisers. In addition, the
Company's primary target audience is not rated by a recognized radio rating
service, such as Arbitron. Such ratings are generally used by potential
advertisers in making advertising decisions. The Company is working with
research companies to attempt to develop such ratings for the pre-teen market.
However, there can be no assurance that such ratings can be developed or that
the Company will be able to attract additional national advertisers.
RISKS RELATED TO ACQUISITION OF RADIO ELIZABETH. On June 4, 1996, the
Company acquired all of the issued and outstanding stock of Radio Elizabeth,
Inc. ("REI"), which holds a Federal Communications Commission ("FCC") license
for WJDM-AM Radio Station licensed to Elizabeth, New Jersey on the 1530 kHz
frequency. REI, in addition to its license for operation on 1530 kHz,
presently has issued to it a special temporary authorization ("STA") for
operation on 1660 kHz at 10 kw power, which provides coverage of a
significant portion of the New York City market. WJDM has been broadcasting
the Company's Aahs World Radio-SM-programming in the nation's largest city
radio market since February 1, 1996, over its 1660 kHz frequency. The STA
frequency is located in a portion of the spectrum referred to as the expanded
band ("Expanded Band") recently allocated by the FCC and assigned to certain
AM broadcasters in order to implement Congressional policy. REI and other
Expanded Band licensees are expected to be allowed to operate on both their
original frequencies and the Expanded Band frequencies for a period of five
years, after which time the licensee must elect which frequency on which it
will continue broadcasting. Most radio receivers produced prior to 1990
cannot receive Expanded Band frequencies. There can be no assurance that REI
will ever receive a permanent license to an Expanded Band frequency, and
failure to obtain such a license would leave the Company broadcasting from
only the existing licensed frequency, which at 1 kw power does not cover the
New York City market, thereby resulting in a substantial diminution of the
value of the Company's investment in REI.
ABC/DISNEY LITIGATION. In November 1995, the Company entered into an
Operations Agreement with ABC pursuant to which ABC's affiliate development and
national advertising sales staffs would augment the Company's efforts to market
its children's radio format to broadcasters and advertisers. On July 25, 1996,
ABC notified the Company that ABC would terminate such agreement effective
October 24, 1996. Following
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<PAGE>
the termination by ABC of the Operations Agreement, the Company filed a lawsuit
in the United States District Court for the District of Minnesota against Disney
and ABC for injunctive relief and to recover damages for their alleged attempts
to misappropriate the Company's confidential information and trade secrets
acquired through their strategic relationship with the Company in order to
unfairly compete with the Company in the children's radio market. As a result
of the termination by ABC of its Operations Agreement with the Company, the
Company has had to rebuild its own affiliate development and national
advertising sales staff and is in the process of rebuilding that capability.
The Company has commenced rebuilding of its national sales and affiliate
development organizations and has hired eight individuals to staff its national
sales and affiliate development departments. The Company expects to have its
national sales and affiliate development programs in place during the first half
of 1997. The Company is, however, unable to determine the full impact of
damages it has sustained as a result of the actions by ABC, which are the basis
of the Company's claims in the ABC/Disney litigation. Further, there can be no
assurance that the Company will be able to rebuild its national sales and
affiliate development organizations or that it will prevail in the ABC/Disney
litigation or recover any of the damages sought. Such litigation is costly to
the Company and legal fees and costs associated with the litigation have reduced
and may continue to reduce the Company's working capital. Further, the Company
has issued and may in the future issue securities to finance the litigation
which could result in substantial dilution to the Company's existing
shareholders. In November 1996, the Company registered 200,000 shares of Common
Stock on behalf of its litigation counsel.
COMPETITION. The Company currently derives the majority of its revenue
from the sale of local radio advertising time on its owned and operated stations
to advertisers in their respective metropolitan markets and faces substantial
competition from other radio and television stations as well as other media in
those markets. Factors contributing to the Company's ability to attract local
advertisers include the success of a station in attracting listeners and the
perceived quality of the Company's programming. There can be no assurance that
the Company can successfully compete for listeners and advertising revenues with
other radio and television networks and other entertainment organizations. The
Company may also experience competition from developing technologies in the
radio industry.
In addition to the Company's current competition for local advertising, the
Company also competes for network advertising. On information and belief,
Disney has commenced broadcasting of its own children's radio programming in
four U.S. markets, thereby entering into direct competition with the Company.
Further, other entertainment organizations, including but not limited to radio
syndicators and radio stations, many of which have greater resources than the
Company, could develop a children's radio format similar to Aahs World RadioSM.
Although radio stations must be licensed by the FCC, there are no significant
impediments to the entry of new competitors into the Company's markets. While
the Company continues to seek protection for its original programming, where
appropriate, under applicable copyright and trademark laws, the Aahs World
RadioSM format can be and has been imitated by others seeking to enter the
children's radio field.
VOLATILITY OF MARKET PRICE OF COMMON STOCK. The market price of the
Company's Common Stock has been subject to significant fluctuations in response
to numerous factors, including variations in the annual or quarterly financial
results of the Company or its competitors, changes by financial research
analysts in their estimates of the earnings of the Company or its competitors,
conditions in the economy in general or in the radio industry in particular,
unfavorable publicity or changes in applicable laws and regulations (or judicial
or administrative interpretations thereof) affecting the Company or the radio
industry. During fiscal year 1996, the market price of the Company's Common
Stock ranged from a high of $14.00 on January 31 and February 22, 1996 to a low
of $3.25 on November 20, 1996. During the first four months of 1997, the
Company's Common Stock has ranged from $6.63 on January 13, 1997 to $3.19 on
April 7, 1997. There can be no assurance that purchasers of the Company's
Common Stock can sell such stock at or above the prices at which it was
purchased.
IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. As of May 14,
1997, the Company had 6,031,501 shares of Common Stock outstanding and had
warrants and options outstanding to purchase an
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<PAGE>
additional 2,634,213 shares of Common Stock exercisable at prices ranging from
$2.00 to $13.80 per share. Between July 1996 and February 1997, the Company
registered 3,234,277 shares of Common Stock for secondary offerings. The sale
of such shares, the Common Stock offered pursuant to this Prospectus, and the
sale of additional Common Stock which may become eligible for sale in the public
market from time to time upon exercise of warrants and stock options could have
the effect of depressing the market prices for the Company's Common Stock.
RELIANCE ON CURRENT MANAGEMENT. The Company is dependent on the management
services of its current management team. If the Company were to lose the
services of these individuals, its business could be adversely affected. Most
of the members of the Company's current senior management team are not subject
to employment contracts with the Company. The Company does not maintain
insurance on the lives of its key employees.
POTENTIAL CONFLICTS OF INTEREST. The Company leases certain broadcast and
office facilities from its President, Christopher T. Dahl, and another director,
Richard W. Perkins, and the WWTC and KYCR radio transmission tower site from Mr.
Dahl. The Company also shares with Community Airwaves Corporation ("CAC"), a
corporation owned by the Company's President, Christopher T. Dahl, a director,
Richard W. Perkins, and a shareholder, Russell Cowles II, certain management
services which are provided by another entity, Radio Management Corporation,
owned by Messrs. Dahl, Perkins and Cowles. The management services consist of
administrative, legal and accounting services. Such arrangements present
potential conflicts of interest in connection with the pricing of services
provided. In addition, CAC may acquire interests in additional stations. Such
ownership could, under current FCC regulations, limit the markets in which the
Company could acquire additional RBLs. In addition, the Company has entered
into an agreement with CAC whereby the Company is required to obtain the consent
of CAC for any acquisition of an FM station or of an AM station located outside
the largest 125 U.S. markets.
FCC REGULATION. Although the RBLs of the stations owned by the Company are
already granted, the continuation of any RBL acquired by the Company depends
upon its compliance with the laws, rules and regulations of the FCC. The FCC
can revoke licenses for serious misconduct, subject to the right to an
evidentiary hearing, or it may fail to renew a license or impose monetary fines
for breach of its rules. Neither the Company nor CAC has ever been denied any
FCC license or renewal, or had a fine imposed by the FCC. In recent years, a
number of competing applications and formal and informal objections have been
filed with respect to broadcast renewal applications. Even though the vast
majority of all license renewal applications are granted, and under the
Telecommunication Act of 1996 (the "1996 Act") competing applications in license
renewal proceedings are no longer allowed, there can be no assurance that
renewal of the Company's licenses will be granted. Furthermore, approvals are
required for the transfer of ownership. Three directors and attributable
shareholders of the Company have interests in AM and FM radio stations unrelated
to the Company. Under current FCC regulations, these interests are attributed
to the Company and may limit the markets in which the Company can acquire
stations. The 1996 Act eliminated the limit upon the number of stations that
can be under common ownership or control nationally. Local ownership was
substantially relaxed according to market size. See "Risk Factors -- Risks
Related to Acquisition of Radio Elizabeth."
ANTI-TAKEOVER PROVISIONS. The Board of Directors, without any action by
the Company's shareholders, has the authority to issue the remaining
undesignated and unissued authorized shares and to fix the powers, preferences,
rights and limitations of such shares or any class or series thereof, without
shareholder approval. Persons acquiring such shares could have preferential
rights with respect to voting, liquidation, dissolution or dividends over
existing shareholders. The Company is subject to certain provisions of the
Minnesota Business Corporation Act which limit the voting rights of shares
acquired in "control share acquisitions" and restrict certain "business
combinations." Such provisions, as well as the ability to issue undesignated
shares, could have the effect of deterring or delaying a takeover or other
change in control of the Company, deny shareholders the receipt of a premium on
their Common Stock and depress the market price of the Company's Common Stock.
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<PAGE>
CONTROL BY PRINCIPAL SHAREHOLDERS. Approximately 24% of the Company's
outstanding Common Stock is beneficially owned by the Company's current
officers and directors. Accordingly, such persons may be able to significantly
influence the Company's business and affairs. This concentration of ownership
may have the effect of delaying, deferring or preventing a change in control of
the Company.
NO ASSURANCE AS TO LIQUIDITY ON THE NASDAQ NATIONAL MARKET SYSTEM. The
Common Stock is currently listed on the Nasdaq National Market System. There
can be no assurance that the Common Stock will be actively traded on such market
or that, if active trading does develop, it will be sustained.
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends since
its inception and does not anticipate paying cash dividends in the foreseeable
future. The Company presently expects to retain its earnings to finance the
development and expansion of its business. The declaration or payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.
The declaration or payment by the Company of dividends is also subject to the
Company's Credit Agreement with Foothill. Without Foothill's prior written
consent, the Company cannot declare or pay any cash dividends.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the name
of each Selling Shareholder, certain beneficial ownership information with
respect to the Selling Shareholders, and the number of Shares that may be sold
from time to time by each pursuant to this Prospectus. There can be no
assurance that the shares offered hereby will be sold.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED SHARES OWNED UPON OWNED UPON
PRIOR TO OFFERED COMPLETION OF THE COMPLETION OF THE
SELLING SHAREHOLDER OFFERING HEREBY OFFERING OFFERING
- -------------------------------- ------------ ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Metro National Title Company 268,607 268,607 0 0
Foothill Capital Corporation 50,000 50,000 0 0
</TABLE>
This Prospectus includes 268,607 shares owned by Metro National Title
Company for ultimate benefit of Bonneville International Corporation and
Bonneville Holding Company (collectively, "Bonneville"), which may be deemed
beneficial owners of such shares. Such shares were issued in connection with
Bonneville's sale to the Company of the RBL and certain related assets of
Radio Station KIDR(AM), Phoenix, Arizona. Metro National Exchange Services,
Inc., a subsidiary of Metro National Title Company, is acting as a "qualified
intermediary" to allow Bonneville International Corporation to obtain certain
permitted tax benefits pursuant to Section 1031 of the Internal Revenue Code.
This Prospectus also includes 50,000 shares, issuable pursuant to a warrant,
owned by Foothill.
The Company has agreed to bear all expenses (other than selling commissions
and fees) in connection with the registration and sale of the Shares being
offered by the Selling Shareholders in over-the-counter market transactions or
in negotiated transactions. See "Plan of Distribution." The Company has filed
with the Commission a Registration Statement on Form S-3 under the Securities
Act with respect to the resale of the Shares from time to time in
over-the-counter market transactions or in negotiated transactions. This
Prospectus forms a part of such Registration Statement.
USE OF PROCEEDS
The Shares offered hereby will be sold by the Selling Shareholders. The
Company will not receive any of the proceeds from the sale of the Shares by the
Selling Shareholders. See "Selling Shareholders."
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered by the Selling Shareholders from
time to time. The Company will receive no proceeds from the sale of the Shares.
Sales may be effected by the Selling Shareholders in transactions on The Nasdaq
Stock Market, in negotiated transactions, or in a combination of such methods of
sale, at prices relating to prevailing market prices or at negotiated prices.
The Selling Shareholders may effect such transactions by selling the Shares to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts or commissions from the Selling Shareholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions).
The Selling Shareholders and any persons who participate in the sale of the
Shares from time to time, may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act. Any commissions paid or discounts or
concessions allowed to any such persons and any profits received on resale of
the Shares, may be deemed to be underwriting compensation under the Securities
Act.
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<PAGE>
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available.
The Company has agreed to indemnify the Selling Shareholders and their
control persons with respect to certain liabilities in connection with the sale
of the Shares pursuant to this Prospectus, including liabilities under the
Securities Act and the Exchange Act. In addition, the Selling Shareholders have
agreed to indemnify the Company, its directors, officers, agents and control
persons against certain liabilities incurred as a result of information provided
by the Selling Shareholders for use in this Prospectus. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
LEGAL MATTERS
The validity of the Shares offered hereby and certain legal matters
pertaining to the Company, including matters incorporated herein by reference
relating to the regulation of the Company by the FCC and related matters, were
passed upon on behalf of the Company by Lance W. Riley, Esq., Secretary and
General Counsel to the Company.
EXPERTS
The consolidated financial statements as of December 31, 1996 of Children's
Broadcasting Corporation, incorporated by reference in this Prospectus have been
audited by BDO Seidman, LLP, independent certified public accountants, as set
forth in their reports thereon (which contain an explanatory paragraph with
respect to substantial doubt about the Company's ability to continue as a going
concern and management's plans described in Note 2 to the consolidated financial
statements). Such consolidated financial statements are incorporated by
reference herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements as of December 31, 1995 of Children's
Broadcasting Corporation, incorporated by reference in this Prospectus have been
audited by Ernst & Young LLP, independent certified public accountants, as set
forth in their reports thereon (which contain an explanatory paragraph with
respect to substantial doubt about the Company's ability to continue as a going
concern and management's plans described in Note 2 to the consolidated financial
statements). Such consolidated financial statements are incorporated by
reference herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of Radio Elizabeth, Inc. for the eleven months
ended March 31, 1996 and 1995 and for the years ended April 30, 1993, 1994 and
1995, incorporated by reference in this Prospectus have been audited by Smolin,
Lupin & Co., P.A., Certified Public Accountants, independent auditors, as set
forth in their report thereon. Such financial statements are incorporated by
reference herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of Wolpin Broadcasting Company as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, incorporated by reference in this Prospectus, have been audited by
Kleiman, Carney & Greenbaum, Certified Public Accountants, independent auditors,
as set forth in their report thereon. Such financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATE OF ANY DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES, OR AN OFFER OR SOLICITATION IN ANY STATE TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
--------------------
TABLE OF CONTENTS
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PAGE
Available Information . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents
by Reference. . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selling Shareholders. . . . . . . . . . . . . . . . . . . . . . 13
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 13
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . 13
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . 14
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
318,607 SHARES
CHILDREN'S BROADCASTING
CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
JUNE 6, 1997
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